Crypto's Identity Crisis: What Are We Actually Betting On?

Transcript

So, welcome everyone. We're going to be talking about crypto's identity crisis. So, can we maybe quickly warm up here and if you can put your hand up if you think that crypto has a identity crisis right now? Okay, maybe like 20% of the room. So, it's going to be interesting. Uh I'm joined by Calvin Santiago and Rajeev uh and we're going to be talking about if we do have an identity crisis in crypto, how things have changed since the previous markets. Uh so, I want to maybe kick off just a quick question for everyone.

How are things different now compared to what they were before? Like what's like one of the most defining things that are different now than than 4 or 5 years ago? >> Well, I think for me 4 or 5 years ago, I think crypto was very much in the spotlight, right? Everyone was talking about crypto, looking at crypto. And then obviously AI came along and that's I think stolen quite a bit of the mind share and to some extent some of the capital as well, right? I think that's probably the biggest shift in the last few years. >> Well, I think I think you have a greater disparity. Uh 2017, you could have write a white paper, uh put a credible figure behind it and raise huge sums of money.

Uh now I think what you have protocols that are cranking out fees and then you have 90% of crypto that doesn't produce fees and I think that divide it's hard to sell a narrative and that that's really the market has lost its patience for just narratives without fundamentals. >> Yeah, I think dispersion has been like a common theme people have been talking about um uh people have gotten a lot more uh a lot smarter about like what is working, what isn't working, what uh potentially could work um and uh I think this bleeds through both on liquid token investing and and venture investing.

>> One more quick question for everyone on the panel and then we're going to go into deeper discussions, but what is one thing in crypto right now that you think is like under invested and it's something that you're bullish on more than the average person? >> I I think one area that we've been quite focused on is the whole cybersecurity area just because, you know, if you look at the last four to five months, you know, we've had an extraordinary amount of hacks or hacking incidents and um obviously with AI getting more powerful by the day, that just intensifies the the risk for the whole industry. And I think in order for the industry to continue growing for institutional capital to be deployed in size, you know, we need the you know, get the security of these smart contracts as well as, you know,

the off-chain processes to a level that's much, much higher. >> Uh I'm going to cheat, so I'll give two quick. One like a forward-deployed organization to take this into the enterprise like Main Street businesses using stable coins. Like you need an organization to deploy like a Palantir style for crypto. >> Yeah. >> Um and and I guess the other one is insurance, which is tied to what you do. Like especially it's difficult cuz yields are low on chain, so you can't really sell an insurance product and there's a lot of correlation, but smart contract risk I I think it's greater now and Lindy is not a thing when you have it very performant models that can hack these systems.

>> Um sort of in a like similar but different vein, um I think the ability for um AI agents worms to use durable file file storage or data availability systems to coordinate. Um especially sort of as they get shut down sort of within internal orgs is both like a very scary thing, but uh a very plausible future. >> Rajiv, we uh we talked about AI a little bit over the um right before the panel started and you're based in SF. Um how has AI shaped what you guys do now?

Like how has it impacted the work that you do and and are you starting to invest a little bit more into the AI sector as well? >> Yeah, I mean AI is really interesting for a bunch of different reasons. It's changed a little bit of like how we work internally. It's changing the way that companies are built. Um historically uh companies have needed to hire a lot of people at very early stages to complete a lot of functions. Um now sort of the leverage that you're getting from a lot of these models and agents, you might not necessarily need to spend as much sort of on head counts and can kind of focus companies a little bit better. Um we are still investing in crypto. Uh being in San Francisco, we get access and see a lot of very exciting um uh opportunities in AI and robotics and

we've been slowly sort of dipping our toes in the water there. >> Talent basically coming more to AI, you know, back 5 years ago you had a really talented 23-year-old founder, it was almost an obvious choice. Let's go to crypto, build something that can be successful relatively quickly. It seems like that is changing a bit that now a lot of the talented younger guys are gravitating towards where the money is going, which in this case is AI. Have you guys seen that as well? >> Yeah, I think from our standpoint we definitely have seen fewer deals on the in in the early stage side of things.

Um now we're not entirely sure whether that's because of the the brain drain or talent drain as you mentioned. It's probably a function also of the fact that the fundraising environment up until recently has been very very tough. >> There's less capital. And therefore um fewer you know, startups being born. Um always happens at this point in the cycle. But um yeah, we we we definitely have seen deal flow uh drop off quite significantly. I'd say probably by the magnitude of you know, 50 60%. Um on our on our side we're also slow to deploy as well. Um so we're being more selective. Uh Um,

and at the same time seeing few opportunities. So, that's where the uh early stage space looks like at the moment and uh things are quite slow. >> Yeah, so I've done two crypto So, I invest just my own capital after I left Verify. I've done two or maybe three crypto deals this year. Uh, compared to 2022, 23, 24, 25, I was doing a deal a week. >> And I was like, "Surely it's a skill issue." Uh, cuz you know, I'm more critical about crypto, so people may not want me on the cap table, but I've gone out and compared this to other funds and I think they're all seeing the same thing. Um, I just uh for me, the most noticeable thing is I think the smartest guys are

just totally captivated by AI. Yeah, and the crypto miners, they all pivoted to AI. It's just really hard, man. It's a AI's like a wave that is uh three orders of magnitude bigger than the crypto wave. >> For like the really young, talented, um college grad, um working in AI is a much higher status thing than working in crypto. And a lot of the decision-making that uh people tend to make sort of early on in their career is both like what sets them up for up for a good life, but also like what would their will their peers respect. That being said, like the main metric that we've been tracking internally is like what is like the flow of potential

outlier founders, and like I think that's different than potentially number of deals done. And that number we don't think has materially shrunk. It's just that there just weren't that many to begin with. >> Has Hyperliquid changed the investment scheme a little bit from the perspective of like, you know, no investors? Obviously, then people could buy on the secondary. It seems like liquid markets and liquid funds are now more popular than they were 4 or 5 years ago. How has hyper liquid affected what you guys do on a daily basis? Santiago maybe. >> Yeah, I mean what's interesting and you could have been here 3 years ago and token I would have said the same thing which is there's way more opportunity in the public markets cuz, you know, if if you think about there's

like a hundred billion plus that was deployed in crypto venture. Cuz it's easier to underwrite, right? >> You talk to foundations, LPs, they love the venture aspect. But uh there's way less capital sophisticated capital in the public markets. And I think that's also true and just generally outside of crypto. Like Nvidia, you could have invested in Nvidia like 4 years ago and done like a 14X. Like, you know, that that's a remarkable return. Tons of liquidity, super well telegraphed. So my point here is I think the public markets both in crypto and in the stock market allow you to have venture like returns cuz the outcomes are just getting larger and larger and arguably they carry way less risk than

early stage investing which to your point, you know, it's like 80-90% failure rate. >> I think it's like um I think it's a combination of like I I would say more than the lack of investors it's more like hyper liquid was a product that was working and like, you know, made made sense and like there was both a story behind it, there were fundamentals behind it and I think sort of you have seen over the last couple of years and and last year in particular sort of like a movement of capital from maybe a bunch of things that weren't working into things that either are working or have like a real credible path to working. So I think looking at it through that lens like I think people have known this for a while but, you know, you're you're either some form of money or you need to build a real

business and there's nothing really in between. >> Yeah, I think um there are two sort of factors, right? One is we we had 10 10. All right, we had 10 10 and I think that was a really bad event for crypto. Um definitely killed or decimated a lot of um early stage projects and just made the whole crypto environment a lot more difficult. Affected the returns from liquid funds. It definitely affected returns from venture funds and just everything got killed basically, right? After 10 10.

And then and then and if that was not tough enough, obviously we've had this equitable market that's lasted, you know, for the last couple of years and and this year markets have gone even crazier, right? And so and then what we've seen from because we run multiple funds and what we've seen um is that, you know, even even when we're beating uh the crypto in indices, the clients don't care, right? Because there's opportunity cost for them to allocate capital to crypto. Yeah. Uh because they can get returns so much easier in the equity public markets. but I think a lot of people have also been saying that the equity markets and AI in general, you know, there's a big bubble forming. So uh we'll see how things evolve but over

the coming sort of months and you know, maybe there'll be a shift at some point again. Um you know, there was obviously a lot of uh money that quickly flowed into crypto when we had the bond market intervention recently. And uh people talk about a debasement trade and that certainly has shifted attention back to crypto a little bit, but overall I would say we're still sort of in the very early days of of uh the interest coming back to crypto. Yeah. >> I think all of you guys on the panel deal with LPs and capital allocators. So I'm curious going back to the identity crisis that we were talking about.

Crypto arguably has underperformed over the last year compared compared to stocks, collectibles, commodities, really a lot of different asset classes. How are LPs reacting to that? Like is there still interest to be allocated to crypto venture or crypto in general or has that changed over the last couple of years? >> I think for individual LPs, um the interest has waned quite significantly. I think for institutional LPs, um you know, because of the regulations that are coming and and um they also see that other financial institutions are putting capital to work.

So, I think family offices, um uh and the large allocators um are all looking to crypto. So, at some point they will deploy. The question is what is the right time for for that capital to come in. So, on the institutional side, I'm still quite optimistic. >> Like 2021 was a terrible vintage for venture, not just in crypto. So So, like you're still overcoming that. And I think if you weren't invested in like SpaceX, all your LPs are like, "Why am I paying you 220?" So, I think you've seen a shift in institutional money just going through SPV secondary market. Just They'd like to invest in a single deal, not necessarily in a fund. So, that trend is not just in crypto, I feel like. I'm I'm removed in this game cuz I just manage my own, but but I do think talking to

funds, you're seeing a only a handful of funds raise. Like Paradigm raised, I think a 10 What is it? $10 billion $5 billion $10 million fund. A16z's raised a big fund. everyone else really struggling. Really needs to show DPI. And there's not much DPI to show for. Um cuz cuz cuz you did some terrible investments in 2021. Or I should say investments that haven't panned out. Uh maybe at some point will, but it's difficult. >> Yeah, I'll have like maybe a I I I have like both an optimistic and pessimistic take here. Like on the pessimistic side, like, you know, if you are an LP that wants exposure to crypto, you can probably just buy like IBIT now. Like in

the past, like maybe you couldn't have hold held crypto and chose to invest in a fund who may or may not do liquid stuff and or venture. Um now, you know, you likely have the ability to hold um securities and and you can get some exposure that way. So, I think that's that's one thing. Secondly, like yes, there definitely are there there definitely is a vintage where people don't have much to show for, and I think that impacts the ability for people to raise. Um on the more optimistic side, like um some funds I think have put up like pretty reasonable numbers. Uh you also can look at the numbers relative to potentially like what uh generalist web two funds kind of look like, and you would be somewhat surprised at like what those typically look like as well. And uh that being said, I think like a lot of LPs still

want some crypto exposure. It's just a matter of like right-sizing what that exposure looks like, and then how much of that looks like um uh putting putting money into like active liquid managers versus like venture versus like potential potential like uh assets they'll just hold like Bitcoin. >> We've seen like the largest exchanges like Coinbase, even Binance, and other exchanges now going really branching out of crypto, like listing a lot of a lot of stocks, commodities, uh pre-IPO tokens, IPOs selling IPOs directly.

Is that a trend that you you think is going to sustain over the next few years where, you know, these companies have to branch out of crypto to be to be more relevant and and attract more audiences outside of just crypto, or is that just because bear market was so brutal that these companies had to adjust? >> I I think so. So, I'm an investor in Backpack. I think it's by far has built the best tech for tokenized um stocks. Um and and I and in many ways it's funny because in the early days of DeFi we're saying, "Okay, let's we're going to work towards building Wall Street." I think Wall Street's becoming more like crypto, um and I think you're going to see that like markets moving from what is it uh not 24/7 365, but

just expanding the number of hours. What's happening with tokenized stocks is very promising, I think. So, my prediction is over the next call it 5 10 years, the as a percentage like the aggregate volume in crypto will grow only if it comes from non crypto native assets. So I I think if you if you don't if you don't see like volume the percentage of volume that like 80% of it should come from tokenized stocks or real world If that doesn't happen I think the the pie just the aggregate volume that gets transacted on chain is not going to grow much.

Um and I think you know that's why people get excited with hyperliquid right? Like hyperliquid after hip three you saw commodities like obviously oil and silver and copper. Now you have price discovery on some of larger IPOs. So I think that bodes really well for crypto where eventually just call this fintech you know? >> Yeah, I think in general um I think about uh financial services sort of like a grocery store. If you have a grocery store and you only have like 10 items in the grocery store it's a pretty bad grocery store. If you have a grocery store without a produce section it's a pretty bad grocery store. A lot of these entities aim to serve um the full customer life cycle and um it's just taking time both to get the regulatory

stuff figured out for the technology to be there for them to be able to tokenize um and they would like to eat more of their existing customer businesses. >> I mean I think a lot of it is um also returns driven right? Um a lot of the demand for tokenized equity obviously came from people in crypto who were not able to make money just trading crypto wanting that exposure right? And the same thing with gold obviously in earlier in the year um oil and other assets. Um interestingly you know I spoke to one of the um tokenize uh tokenization platforms and they were doing a lot of these uh money market products.

And when I asked them who are you actually targeting? Who are your target customers? Um it wasn't the traditional financial institutions that they were targeting. They were targeting all these uh large crypto foundations. They just wanted a higher return in a tokenized format, right? So, I think a lot of it is going to depend also on where returns for the various asset class go in terms of where the attention and volume and capital is going to be directed to. >> Santiago, you had a thesis um that you can buy underpriced companies and then make them more efficient and make them function a little bit more on chain.

Has that thesis changed over the last couple of years or are you still very bullish on that idea? >> So, no, we actually pivoted earlier this year. We spent over a year looking at many different sectors where we said, "Oh, let's apply deep in or integrate stable coins into a business or use some form of crypto technology to make that business more efficient." The conclusion that we came at is you can certainly integrate it. It's useful technology. It doesn't release as much value as something like AI. Uh you know, for instance, so so we pivoted away from that and and we said, "Okay, let's" I'm talking mostly professional services businesses, Main Street businesses. That's not to say, of course, you know, businesses like prediction markets and exchanges are

vastly profitable, right? Uh but the businesses that we wanted to acquire, it just wasn't enough to justify making an investment. So, we of course look at AI and we see huge amounts of potential to make those businesses just more efficient. but that's not a dig on crypto. Most of the time when I say that, it's like, "Oh, you've totally like think that crypto's not useful." On the contrary, I think it's quite useful. It just, you know, if a business is using a stable coin, they may save something on the margin, but it's not Yeah. It's not It's not a reason to buy that business in its own right, if that makes sense.

>> Yeah. Um so, overall, like AI, we all agree is moving incredibly fast. New models are dropping faster and faster. The newest models like Opus 5.5 or the new chat GPT models, they're incredible. Getting better and better and better. Do you think that eventually this super quick progress will have some impact on demand in crypto itself? Like do you think that eventually because of the growth of AI and AI agents getting smarter and be able to operate by themselves and do so many things without really human input, will that create some demand on those agents wanting to hold crypto or wanting to trade with crypto or wanting to interact with it somehow? Like do you guys think there's

any impact from that? >> I mean, yeah, I kind of this is a bit of a black pill take that I that I said earlier, but like you can imagine like a rogue agent like needs a way to fund itself and you know, crypto is like a very nice test bed eventually find out security exploits and potentially getting garner resources. You can imagine like an agent swarm wanting to use like this permissionless distributed censorship resistant technology to coordinate at scale. Um, that being said, like we also think there are interesting opportunities to help, you know, with like financing capex build out, like leveraging like the existing pool of stable coins that already exist and stuff like that.

That's a little bit more optimistic. I think AI is definitely having an impact, you know, I see definitely a lot of things can be automated, right? And so you know, from a startup standpoint um, it'll be easier and faster to scale, right? Whether you're sort of uh building a crypto application or or something else, right? Um, definitely uh faster to scale, maybe need less capital as well. Um, I'll say from the standpoint of uh investing, uh for funds like us, we're also experimenting with um our own sort of um AI agent analysts who can do a lot of research that uh our human analysts currently do.

Uh not quite as good yet, but they're they're almost on par, right? And then we're also studying the have the AI the the have the AI able to pitch ideas, and eventually we will also start to allocate some capital for the AI to start trading and and and see how P&L performs and fine-tune the the model um accordingly. So, yeah, I think it will have an impact across the board. >> So, yes and no, I guess cuz a lot of times you hear agents are going to want to use stable coins, and I just don't buy that.

But And it depends on the use case. Like if you're if you're trading with a counterparty, you want instant settlement. If you're buying a flight, you don't care. So, I I guess like I'd just be cautious with a narrative that like agents are going to want to prefer crypto rails. I don't think that's the case necessarily. Um but I do think where this gets interesting is, broadly my thesis for investing, not just I don't make the distinction between crypto and AI. I'm just like, who stands to benefit the most and who stands to bene- like to really get impaired?

Businesses, particularly in finance or insurance, that have benefited on human laziness and obfuscation and friction, have made a really nice business for themselves. Put an example, an insurance company or an airline. >> If you miss your flight, a flight's delayed, they're sort of banking on the fact that, you know, you're entitled to $600 in the EU, but only a very small percentage of people actually go through and file the claim and follow up. They make it hard for you to cancel your subscription or file the claim.

That gets really challenged when you have an agent that doesn't sleep and is just super persistent and long horizon. And basically has access to a computer. And so, I think the the upshot here both crypto and AI is, when you think about a world where is a large part of the money is being moved by agents in some capacity. They likely will go to a system that is more fair, more open, more transparent, assuming that these systems are actually secure, because that's my biggest issue with crypto right now is North Korea's got really good at hacking this stuff, and agents rogue agents or can you know it's a it's a honeypot, and and that

makes me quite nervous when I think about smart contracts. >> We're running out of time, so I have one closing question for everyone on the panel, which is if you could give one advice to the audience in like what they should be focusing on when it comes to research or interesting area that's perhaps under talked about or under developed in crypto or even outside of crypto, what would it be and why? >> I think it's a I've stumbled obviously crypto's a little out of favor, maybe token prices are up. I've I've stumbled a lot of people that have been in crypto for a while and say I'm a crypto investor.

>> And they sort of like handicap themselves and they don't think they can invest in other stuff because they don't have an edge. To that I would say really get get yourself out of that mindset. It's like you're an investor first and foremost. Now, the interesting thing is if you've been in crypto, I think you're arguably more equipped to thrive in traditional markets because again to my earlier point, traditional markets are more momentum driven, very fast paced, and it especially with AI, it requires an understanding of the tech that in crypto you've had to have that appreciation for, so I think uh I would just encourage people to get out of that mindset of just crypto or just AI. It's like no, you're if you're curious, you can do well and branch out of your core competency.

>> I would say um rather than name any specific token or send vertical, I'd say be very open-minded, right? Because I think the people have already obviously um observed that a lot of these projects that are obvious winners or have been obvious winners, the The ones in the privacy space, the ones in the back space, for instance, um have been, I guess, uh if not over allocated to, but they're sort of become consensus views, right? And there are many parts of crypto where um people have either forgotten those areas or uh ignored them completely, right? And and and and one area, for instance, is uh in NFTs, right? Where we have

recently started to see some activity um after, you know, all of these NFT asset prices have corrected by about 95, 99%. So, I think some value uh will emerge in some of these forgotten areas. Um and we just have to be nimble and and and, you know, um be looking at these into these different areas. >> I would echo everything Santiago said. Don't limit yourself in any way. Um be open-minded, be flexible. Um I think people have talked a lot about dispersion when it comes to like potential returns.

And uh I think obviously projects with more of a fundamental or narrative basis have done a lot better. I would say that something I think a lot of people probably under index on is the dispersion of like management teams and or core contributors to projects. If you spend 15 minutes um watching interviews with people or reading about the work that they're doing, seeing if they're actually like making progress, um there's a lot of alpha there. So, dig into it. >> Thanks everyone for listening. Thank you so much for the panelists. Uh we're done here, so appreciate it.