Death of Crypto Venture? Rethinking Crypto Fund Strategies | Tushar Jain & Ray Hindi

Transcript

it's almost like macro it's so self-referential that it becomes impossible to predict right like because everyone in the world thinks that rates are going to go down you know six months from now well that changes the Behavior now such that that belief itself is stimulatory and then that reduces the probability that rates go down six months from now for example now I'm not a macro guy but just to draw that comparison like there are these Capital Market systems that are inherently chaotic and you can't go and bring a pattern matching approach to an inherently chaotic system hey everyone we all know blockchain is changing the world but who's actually driving it I'm excited to invite you to the sixth edition of Meridian a web 3 conference

hosted by the Stellar development foundation in London from October 15th through 17th get early bird tickets at meridian. stellar.org with code block Works pod special thanks to Stellar for sponsoring us now let's get into today's episode hey everyone Jason here have you ever wanted to play casino games with your friends right from your couch I'm excited to tell you about my prize the first multiplayer online casino where you can play chat and win together when you make your first deposit of $10 or more you'll get $20 for free head on over to my prize.com invite Empire to get started this episode is brought to you by Avalanche

Avalanche is a leading network of blockchains giving some of the world's largest financial institutions new use cases and business models while leveraging completely customizable infrastructure check them out it's core. apppp slcover you can explore avalanche's subnet ecosystem at core. appd Discover of playing around earlier today really cool hey everyone Jason here before we dive into today's episode I wanted to tell you about your wallet's new best friend Harpy Harpy guards your digital assets 24/7 blocking sketchy transaction before they even happened but that's not the best part it's totally free secure your wallet for free at harvey. Empire Link in the description

now let's get into today's episode Although our guest this week is a managing partner of a registered investment adviser nothing in this podcast should be considered an offer of multi- coins investment advisory services or should otherwise be confused for investment tax legal or other Financial advice all right everyone welcome back to Empire we are here with uh tar Jane co-founder and managing partner of multicoin tar I'm going to skip the intro for you because I think everybody knows you at this point uh and also new guest on the show Ray Hindi uh Ray is the co-founder of L1 digital um one of the biggest fund to funds in crypto as well as they do a lot of uh actually um I think in recent years Ray you can fill

us in on this starting to do more and more Venture Investments as well direct Venture Investments so Ray welcome to the show tar welcome back my friend thanks for having me great to be here thank you very happy to see Ray I'd love to pick on you um for this first actually would love to hear both your guys's take on this there's a topic that Santi and I have been discussing a little bit that we we've kind of grazed over it which is we're at the point in the cycle where funds should be raising uh funds are raising and funds should be announcing if you look back at the last several years just based on where we're at in the cycle um where funds are at in their life cycle you we're kind of at the stage where this summer and into the fall you should be seeing funds

announcing we just raised 300 million we just raised 500 million it feels eerily quiet right now and I think some of the chatter are behind the scenes is look I know everyone's excited about crypto on crypto Twitter but behind the scenes talking to the allocators there's still not as much appetite and so funds are uh still maybe struggling to raise as much as they as they wanted to um Ray can you just give us a look inside what is happening in the fund man manager raising ecosystem and what's it like when you know what what what's happening Inside the Mind of an allocator here when they're talking to some of these funds like a multicoin or poly chain or Paradigm or folks like that yeah I'd say uh that generally um I would say that there's a lot of

improvement in terms of uh interest by allocators um and when I say Improvement um so in Switzerland for example we've never had more interest from Pension funds as ever before um so even you know uh compared to 2021 so the the quality of investor or investor interest has is much higher than in the past but that doesn't translate into flows yet uh so they're learning about the space they're interested you get invited to institutional uh to to present to institutions all the time uh more than ever before and I would say uh on a global basis what we see in terms of um you know uh funds uh

assets being raised by funds I would say that VCS are quietly raising because they're unable to reach their targets and they're reducing them over time and they're taking longer to to um to uh achieve their final closes uh because the interest is is uh much lower than in the past and in addition there's a lot a lot of competition on the VC side so yes we we're focused on very large measures there that will be able to raise anyway they'll raise much less than in the past in my opinion unless the environment changes significantly but also you've got a lot of emerging measures that are hitting the market at the same time and

the competition is is really Fierce um within that stack T sure what's happening with the fund managers so I think so one maybe data point I'd call out is Paradigm raised an $850 million I think it was fund three they announced it a month or two ago see seems like a big raise but that's actually down from their I think it was a$2 and5 billion doll fund two right so they've went from a$2 half billion doll fund two in 2021 down to 850 million what's happening inside uh these fund these fundrais conversations for for the different funds yeah I can't comment you know specifically about Paradigm because I you know I don't know this the specific details there but I can say more

generally there's there's a perception that if a manager goes and raises a much smaller fund for a subsequent fund that that is a sign of weakness that something went wrong and so you don't see managers itching to announce a new smaller fund because the perception of that is not very positive however the market conditions have changed a lot of managers took advantage of the capital markets opportunity in 2021 to raise really large funds also the capital markets uh had enough uh deployment opportunity at the time there there was enough opportunity to deploy money into

deals in 21 in order to justify raising those funds now a lot of those deals aren't going to work out because the prices were too high and you know we can discuss that separately but a manager's job is to try and match the demand for Capital with the supply of capital and at 2021 activity levels were at alltime High highs never seen levels anything like that ever before and now I think you see managers raising funds but they don't want to go out there and say well I raised a fund that's half the size because it makes them you know maybe not look as strong as they want to look even if that is the rational thing to do because that's how much Capital you can

responsibly deploy uh and I think you know the best managers are aiming to deploy Capital responsibly not just get AUM as big as possible H what do you think like talking about the supply and demand of capital like where are we in the supply and demand balance right now I think it's different for different markets uh for Venture I think we have an over supply of capital and and not enough demand for that Capital uh you can see this by just how competitive The Venture landscape is that Ry was just mentioning uh we are seeing new emerging managers usually starting out with you know smaller funds who are competing for

seed deals uh and then you're seeing the bigger managers being forced really to go and deploy into higher valuation later stage deals that they might not you know really love as much but they have to do something right um and on the public market side I think we have an under supply of capital for you know the seven years that we've been running multicoin we are now seeing the greatest dispersion in Returns on the public markets that we've ever seen we are seeing that you know high quality names are trading differently than low quality names everything is not as correlated as it used to be uh and that to me tells me

that there's more opportunity for active management strategies on the liquid side but there are very few large liquid managers out there greatest dispersion in crypto history meaning historically it used to be BTC would move everything would move the same right BT and there was just higher beta on some of the longtail of assets but now maybe one day BTC goes down eth is flat and I don't know pick pick your pick your other coin goes up is that is that what you're talking about with dispersion there exactly uh an example is uh you know the recent selloff in BTC driven by the German government sales uh

where if that had happened a few years ago I would have expected that all of the higher beta assets would be down dramatically more than BTC however if you look at you know what the price action actually was this time around that was not the case you didn't see you know sold down 50% or something uh in reaction to BTC being down 15 uh so I think what we're seeing is that dispersion that is leading to more of an opportunity for active managers who are picking names maybe I can approach it in a different way um so when we started looking at the space in 2018 your

typical the liquid side wasn't very interesting because of what tar is mentioning as in the universe of assets was more restricted and typically your your typical hedge fund portfolio um that you had to p 2 and 204 look as you know your long BTC eth and privacy coins that was at the time in 2018 was very difficult to find a manager that would differentiate from that uh that consensus portfolio uh since you know 2020 after Defi and and after six years the universe has expanded substantially and so today on the liquid side you can really when you look through all those measures you have

many different risk premasol to and so the supply of tradable assets out there the universe is way richer more interesting and enables you to build a portfolio across managers that that is way more robust so that supply of liquid assets is very interesting it's it's nearly the the flip side of the VC Supply demand so it makes it really really interesting H Ray maybe we can actually just go down that rabbit hole for a sec um tell me tell me about the evolution of crypto C can you just say more about the evolution of crypto funds because what it sounds like I'm hearing from you is look there's been Venture Venture funds have dominated and I saw a metric somewhere uh I think it was on crypto Twitter I'm

sure um the other day where it's like 90 I'm going to make up this number a little bit 97% of the capital deployed today in crypto is is Venture 3% is liquid uh in in traditional Capital markets that number is flipped it's all it's all liquid and a small amount of venture so the Andre and Union score ventures of the world there's actually a very small amount of capital there and the real capital is in the public markets tell me about the evolution of crypto funds and like what you think will happen uh with this uh with yeah with with with the liquid funds coming to Market yeah so so I'll start and tar correct me if I'm wrong on on some of the uh items because tar has been in the market longer uh but essentially when

when we started uh I remember well in uh we started looking at the space in 2015 between 2015 and 2017 there wasn't much to do outside of BTC so it wasn't interesting for us but things became interesting uh at the beginning of 2018 and so we launched our first fund which is the liquid fund of funds uh in November 2018 and those were the main vehicles that were available uh if you looked at the Blue Chip managers within the space uh they had open-ended structures they did some um uh Venture Investments That were structured through Side Pockets that made a lot of sense um you know those would become liquid after a few years uh and re-entered into the

liquid pocket of the fund so it all made sense and in fact when we started looking at Venture at the time and thinking hey should we uh start venturing into Venture uh the the reason why we wanted to do that uh was because we serve institution investors and the first reaction of institution investors at the time was hey we don't get crypto we we like the space but would' like to have exposure to companies that service the space so service companies and at the time as you know we needed to deal with security we needed to build crypto Capital markets through robust exchanges market makers Etc so you had you needed to invest in

service providers within the space and I still remember that in around 2019 um we were struggling to find high quality Venture funds out there there weren't a lot of them but then you had that wave of Institutional Investor that had a preference for Equity Service uh companies that you know companies that service the space because they uh understand the equity uh structure um and so a lot of flows came into Venture funds and obviously the uh a lot of managers started launching uh Venture funds just pause you here as like a snapshot into the market back in 2018 2019 the hottest companies were not uh you know arbitrum and salana and and

celestian these protocols it was bitgo and fire blocks and an and copper and it was traditional it was this nice Middle Ground between Hey look it's a it's actually structured as a traditional company you're getting the equity there's no token there's never going to be a token but but it's in crypto um and so exactly and it was easier to sell this to an Institutional Investor but seriously at the time there weren't enough Venture funds doing that like you you would struggle to build a portfolio and so that Supply demand was you know was there was an issue in that Supply demand the demand for Capital no Venture funds and you know that recalibrated itself over the next few years so 2020 2021 and especially 2022 as well where

you know Consultants started pushing for Venture funds because the only way you can raise capital from institutional investors is supposedly some Consultants out there say that you can protect investors by putting them into a venture fund that way they don't have to sell at the bottom which I believe it's is not uh is is unfair to to be honest and uh and this is why you have massive flows of capitals and a of capital and a lot of funds launching as VC funds because the capital was there to invest in them now the opportunities in the you know I think we have have a lot of companies that provide security to the space we have a lot of mature exchanges out there

we have have a lot of market makers uh and and there are exceptions where some managers launched their VC funds to fund decentralized networks so never went down the equity route um those exceptions are very scarce and those were the most attractive ones to be to be honest but today the opportunity in to fund companies that provide uh specific ific services to the space is no longer as attractive as it used to be and so I believe that this whole uh Supply demand Dynamic will flip towards uh the liquid side so let me can I try to categorize it and then T I want want you to jump in so it feels like okay early managers were just allocating

to like there was the panta Bitcoin fund they're taking two and 20 on basically Bitcoin so that's like first evolution of of crypto Venture next evolution is uh they say okay we want to go raise Capital there's no appetite to invest any tokens this is like post Ico era none of these companies seem like reputable we can never get a pension to invest in them so we're going to do this nice Middle Ground of like what I'd call CI Anchorage and bitgo and circle and coinbase and folks like that okay cool that pulls Capital into crypto Venture then some of the smartest crypto Venture folks and Ray I know you guys were I think an early investor in tar in multicoin fund one like funds like multicoin said look we we've got the capital for Venture but really the returns are not going to come from these

what I'd call CI companies they're going to to come from the protocols um so that's maybe stage three is these Venture funds investing in the protocols they make a lot of money obviously multi coin's done very well and maybe now we're starting to enter the the fourth Evolution which is there's too much money in that crypto Venture pocket now investing in protocols now maybe some of the alpha is in the the public uh tokens and so we're going to see start to see an influx of uh liquid uh liquid fund managers is that a fair categorization of like the four stages absolutely yeah absolutely so the exceptions always outperform so you mentioned the exceptions the consent so whenever you have a lot of capital moving into a specific strategy performance is average the exceptions always outperform and um

and you know the the the expectation is this will happen as soon as uh the the difference in performance becomes really apparent uh and especially as soon as um traditional investors realize in bulk that lick Alpha actually uh uh exists in liquid crypto which doesn't exist in liquid markets anymore that's how they think so a traditional investor whenever he thinks okay active passive Management on the liquids a liquid my liquid exposure is going to be passive uh passive exposure and as soon as I'm going to think active I'm thinking PE and VC and that's why they thought about

the same uh they they thought about the same way for for blockchain and crypto in addition you have less Mark to Market you don't have to discuss with your IC all the time and exit positions you go in and you don't come out I mean that's the feature it's interesting for for them but as soon as they realize that Alpha exists in liquid crypto and the the and they need that liquidity and I can describe how a Swiss pension fund thinks about that liquidity it it's going to become really attractive for them tar did you wanna yeah I want to chime in here about um the this Market Evolution around crypto venture to liquid strategies I think for a lot of

allocators you have to look at how the allocator is actually structured uh and they have a separate team for Venture versus liquid uh and the risk profiles of those teams are very different and so what happens is it's the Venture people at the big allocators who are interested in crypto uh and not necessarily the public markets teams at those big allocators but those Venture uh allocators at those institutions are looking for closed end funds and they want you as a manager to fit into the template of what they are authorized to go do which is going to be a closed in 10-year vehicle you know

minimal Recycling and some of those basic Venture terms uh but that then creates this Distortion in the market and you know Ray said something a moment ago that I want to harp on because I think it's really critical when it comes to Capital markets it is not enough to be right you need to be right about something everyone else is wrong about when something is consensus you are not going to outperform by following consensus and so today the consensus amongst the large allocators due to these structural reasons that I just described is putting Capital into Venture funds and not into liquid funds and I think

that has created the supply glut of capital on the Venture side which is going to mean that the liquid side outperforms because it's non-consensus and there is more opportunity there just you have less competition Capital markets are all about competition it's not it's not just about you know how great your brand is or how smart you are it's also really the primary determinant is how much competition do you have and then what is your entry price and that is probably the most important factor for returns more than anything else and so looking for the non-consensus piece I think is critical you guys think that there will ever be appetite for the maybe a two-part question here will there be

appetite for the CI companies again and I think CI maybe of 2018 and 2019 was it was all Market structure companies I would guess I actually kind of hate this word of CI it's just like investing in the equity of companies where there's no expectation of a token uh 2018 2019 that is uh the custodians and Prime Brokers and uh folks like that do you think that there'll ever be appetite for that and will it end up being the maybe the consumer companies or what what what does that look like so I have some thoughts here two things that that I want to say the first thing is I think we need to see the IPO window for crypto companies open up again and you know hopefully that

happens with you know a change in regulators and just making the environment a little bit friendlier for these crypto companies because can you can you say why that's so important because I think that a lot of people don't understand that and is someone operating who's operated a company with no token for seven years in crypto like it's it's a point that Mike and I talk about a lot like why is this IPO window opening up so so so important for for crypto and how does the IPO Market kind of flow back to series D and Series E uh C and and things like that maybe just expand on that yeah absolutely when a company goes public the investors and Founders and employees are now able to access Public Market liquidity when the company's private you just own the

shares they're worth something on paper but you can't really transact with them easily unless you know you're SpaceX or something or you know open AI one of the really big giants that people do want to transact in and so because it's a liquid you can't show any returns to your investors for a venture fund like you're not going to have any DPI because you can't distribute a liquid private shares it doesn't work and so if you can't show any DPI it's going to be harder for you to raise subsequent funds and harder to raise more Capital to then go deploy back into that strategy so if you were a fund that invested in a lot of crypto Equity like companies building in crypto and you haven't had any real liquidity

events well it's hard to go back to your LPS and say hey like this strategy is doing so well please give me some more Capital to keep on doing this you need to give them proof that it's doing well and the proof that LPS really care about is DPI like that's that's the proof is in the pudding like you know there there's no there's no paper marks right like sometimes people look at paper marks but uh you know you really have to look at DPI and just to say by the way the Divergence between Venture funds that did equ it let's say 2019 vintages roughly 2018 2019 Venture funds that did Equity mostly equity and Venture funds that did mostly decentralized networks I mean the first one has no DPI right and

the the second one has on average we're talking about minimum six 6X uh sorry um three and a half to 4X DPI so and the performances divers Divergence is is massive so for them to raise their next fund it's it's really difficult to compete with some of those exceptions does that make sense 100% yeah I mean if you think about some of the big companies like you could have invested in circle circle in their seed round Kraken in their seed round bitgo in their seed round you would have zero returns you would have zero return zero returns now maybe you did some secondaries or whatever but uh you know the the the the the gargantuan returns that you should have uh have been locked

up right yeah I mean there were some were able to do some secondaries but those again are exceptions second yeah like like it's very difficult I think of a fund like a blockchain capital right they're like the first Fund in crypto they've done a lot of amazing token deals right the IG of the world and stuff like that but also they I think they were the seed investor in I think they might have led the first ever round in Kraken like Kraken should be there a couple companies that like will probably hit the IPO Market if maybe we have a change in administration there's like Kraken Circle some folks like that like I imagine blockchain capital is sitting there waiting for Kraken to IPO and like that's a that could be a bill I don't

know how much Equity they have maybe that's a billion dollar unlock for them um which then means they can return Capital to their original LPs which means they have more success raising again it it's it starts this flow of innovation uh Innovation Capital I'd say which is very needed r ray going back to the liquid funds um when you invested in crypto manager like tar and Kyle you looked for very I would say you looked for very crypto native people I would assume uh and sacrificed on the operational side of things I I'm I'm making making an assumption about tar and Kyle here I think the Assumption can be made about a lot of the cryp the best crypto fund managers uh if you looked at their funds in 2018 I bet the back end in

operational stuff was a total nightmare and they ended up figuring that side of things out um but what they had was Alpha on the crypto side now does the same thing apply for liquid crypto are you looking for people who have like traded the the the crypto Market public crypto markets for a while or you saying look there's actually a different skill set you need I'm G to go find someone from uh two Sigma who's just coming in and saying this is a really inefficient Market let me build a fund around this okay so so I think those are two different questions but uh if if I refer to the operational side uh I would say that um the operations of an open-ended uh structure or hedge fund is way way more complex and more difficult to DD

than a venture one uh and yes you're absolutely right uh the uh operational status of most crypto native uh launches out there yeah are horrific and that makes sense right because you know that's not their skill set they didn't come from a a traditional hedge fund uh and you don't want them to uh but this is where uh we come in because you know we have that experience we've been allocating into hedge funds for a long time we went through the the 2008 crisis and we see what you know all the mistakes that traditional hedge funds have have have made it as well uh but this is also why it is really important for allocators and and us as well to invest during bare markets because

during bare markets you're you have the time to uh essentially restructure those the operational setup and it's a win-win because we're able to drisk our investment uh for our investors but at the same time we can prepare those funds to receive institutional investors later on and this is exactly what happened in 2018 2019 this exactly what happened in uh 20 uh 22 and after FTX we're very aggressive and mostly focusing on operations so operations is is really key and any tiny optimization on the operational side which has happened and there are real life examples from uh know managers that have an edge on the

investment side um have led to disastrous uh uh results so maybe take me into not the operational side but the skill set like what are you looking for in the skill set of a liquid person okay so um the skill set of a liquid person uh I think uh in 2018 back then you know your your trafi brain would automatically say hey it's liquid uh you need a Trader and you need to be active to um suppress that volatil U ility uh and initially that's how I started thinking about the space and it was a big mistake um because everyone tries to do that um all they want to do in crypto is how do we come up with products that actually suppress that volatility so one

way to do it is to launch a um uh a liquid Market neutral funder funds which is a big mistake and we never did that but within our portfolio initially we had a market neutral why is a market neutral crypto fund such a big mistake because uh one from a business perspective uh you know promising an investor a straight line uh in crypto for some reason has no a like investors don't have any appetite for that that's they're not interested right they're not interested in 15 or 20% you can do that in public markets are you you're you're investing in crypto to get outsid returns it's not to get absolutely absolutely and in addition to that if you look through I mean you're I mean there's no you know at the end of the

day what you're underwriting most of the time is counterparty and smart contract risk um and you know if you would have been heavy in Market neutral November 2022 would have been bad for you essentially that's why you're underwriting so there's that you know you're in crypto for the positive asymmetry you're not in crypto for a Capt for being short Val essentially in the form of counterparty risk so it's not really interesting and and those models didn't take off by the way so they didn't gather any they didn't gather much AUM and and and you know that's probably a good thing but the other uh the other approach that suppresses volatility is on the Venture side again either I do Equity or I do stuff that are private that way I don't show that volatility in the nav and

that's attractive for investors but I substitute that for liquidity so I give up the liquidity for Less volatility essentially that's the idea now when we when you look at crypto and I think we we uh we learned that lesson together uh tar and I I would say if if I'm allowed to say and tar correct me if I'm wrong but you know we learned that lesson March 2020 I still remember you know it was 3 3:00 am. um in Zurich I was chatting with Tushar and those are moments that are on the 12th of March if I'm not mistaken those are moments that I will never forget but essentially the lesson was that the best risk reward in crypto is because a third way to

suppress that volatility is to be a fundamental measure in crypto but more active in your trading so you take your net from zero to 100 and you try to suppress that volatility again March 2020 showed that those strategies don't work because human beings are unable to deal with the volatility uh of crypto and they burn out and they start doing stupid things right and you're incentivized to use leverage to catch up you end up blowing up so the lesson was the key in crypto is you expose yourself to fundamental measures you don't want a Trader you want to underwrite idiosyncratic risk and Market risk uh and once you accept that that the the

catch is to absorb the volatility to underwrite that volatility then you're able to you know invest on a horizon of 5 to 10 years and you'll do extremely well so we've learned that lesson we've moved away from the more active you are the more risk you incorporate in your portfolio in the form of you're on exchanges more often you're on you you're uh underwriting uh smart contract risk Etc you're underwriting the fact that you're going to be chopped up you can't you know uh pick bottoms or or tops it doesn't work that way it's impossible and so it's ironic but you drisk your strategy by having a more static portfolio that is longer term if that makes sense yeah I I want to chime in

here I agree with all of that I have a core investing belief that I think encapsulates a lot of this which is you should invest based on strength not lack of weakness and I think too many uh investors think about you know looking for an all-rounded manager uh that can do well at all of these different things yeah and I think that is exactly the wrong strategy I don't think you're looking for some you know a manager a firm that has the ability to pick fundamentals also trade beta also you know do Market neutral strategy like you're not going to see all of those things in a single manager that's not possible really like I haven't ever seen

it uh and so I think the key is invest based on strength not lack of weakness and then when you apply that philosophy to crypto markets specifically what you realize is uh a lot of the desire for managers to kind of suppress that volatility and try and trade beta uh right they're like oh the Market's up a lot maybe I should trim and take my net exposure down to 75 oh Market's down like I'll add right like a lot of that is them trying to focus on the lack of weakness yeah because they want to show their LPS that oh we don't get huge draw Downs right but what they miss is they miss the big upside and then what

happens is they get whipsawed and by whipsaw I mean they sell at you know price X because they think it's pretty high but then the market goes up to 3x or 4X and they're like well I missed out uh and my LPS are going to be upset with me and then they buy in with leverage at 34x and then the market sells off right like that is the max pain scenario for a manager who is actively trying to trade so that's why I think you know especially in a market like crypto the idea of trying to discretionarily or systematically control your exposure to Beta is not the right strategy for a liquid manager and I think the focus needs to be on your

strength which should be fundamental analysis and trying to predict the future of how these assets will evolve or how these markets will evolve not trying to play the game of Market psychology because that game is it is an inherently chaotic game that does not repeat uh there there are not really patterns you can't draw a bunch of lines and triangles on charts and outperform in crypto look at the Fibonacci numbers on uh on the token yeah um yeah humans are pattern-seeking machines right so they they love humans love to look for these types of P off the resistance why is it not uh yeah but like that's that's just not how these markets work they're

inherently chaotic it's it's almost like macro right like with macro it's so self-referential that it becomes impossible to predict right like because everyone in the world thinks that rates are going to go down you know six months from now well that changes the Behavior now such that that belief itself is stimulatory and then that reduces the probability that rates go down six months from now for example now I'm not a macro guy but just to draw that comparison like there are these Capital Market systems that are inherently chaotic and you can't go and bring a pattern matching approach to an inherently chaotic system so if you if you actually accept

that philosophy and and embrace it um the irony is that a result you know being exposed to a static manager fundamental that is liquid in 2022 while very painful uh you know A Min minus 85% for that measure is the risk that you underwrote so it's within the boundaries of that risk so you're in a position where you know that it could happen but you're in a much stronger position where you can add to that measure is if fundamentals around crypto have did not change materially does that make sense hey everyone Jason here just wanted to take a a quick break to talk about something exciting in the world of blockchain the Stellar development

foundation is hosting their sixth annual Meridian conference this October 15th through 17th in London it's a 3-day event where the brightest Minds in web 3 come together to discuss everything from tokenization to defi if you're a developer Builder policy maker or business leader looking to make an impact in transforming Global Systems through blockchain this is your chance to join the conversation you'll get to network with the forward thinkers who are defining the future of this space head over to meridian. stellar.org and use the code blockworks pod for early bird pricing now let's get back to today's episode hey everyone wanted to

take a second to talk about my prize the first multiplayer Casino where where you can watch chat and play together with your friends and favorite creators getting started is super easy use a credit card PayPal or even crypto to play over 500 games from classic slots to live table games join the my prize Community now and use referral code Empire to get $20 for free when you make your first deposit or purchase of $10 or more head on over to my prize.com invite Empire link will be in the description of today's episode this episode is brought to you by Avalanche Avalanche is a leading network of blockchains giving some of the world's largest financial institutions the

design space to explore new use cases and business models while leveraging completely customizable infrastructure everything that Avalanche has been building the last few years has culminated in this moment where today you have institutions and developers able to essentially have Limitless possibilities with the chain they've enabled developers to build cross-chain swaps or create gaming environments where one sub can unlock features in another or can use usdc as a native gas token Onyx for example by JP Morgan or city or dtcc digital assets or uh the Australian New Zealand banking group they are all building on Avalanche Evergreen subnets really cool stuff big thanks to Avalanche for sponsoring this episode of Empire go explore Avalanche subnet ecosystem at core. appd Discover

that's core C.A slcover thanks again avalanch hey everyone wanted to take a quick break to talk about your crypto security I am excited to tell you more about Harpy designed to keep your wallet safe 24/7 Harpy is the most advanced wallet security tool it monitors for risks blocks detected threats and recovers your stolen assets all in real time picture this you're browsing late at night and accidentally approve a shady transaction and it's too late to cancel it I know I've been there before well now Harpy's got your back it jumps in intercepts that transaction and takes your assets away to a vault that you control all completely free it works with all the major Wallets on ethereum base polygon and arbitrum head over to

Harpy iempire and set up your free protection today that's Harpy iempire I promise you that your future self will thank you now let's get back to today's episode in traditional Venture and liquid there's a line in the sand where Venture stops and liquid starts right and it's the it's usually the IPO window so you invest in Twitter early in a private company no matter how much you love that company you you you should and oftentimes do sell it when it goes public no matter if your best friends with the CEO and you love them whatever and you're still bullish oftentimes you sell it now there were some weird stuff in 2021 with Sequoia and the funds lasting forever as they said but seems

like that experiment didn't didn't really work out in in crypto there's a there's not the Line in the Sand um so I'm curious how you guys think about like where liquid starts and where Venture ends and may maybe I'll actually use one example to to think to think about this question so if you're liquid um you're a liquid fund manager you want to go long a token you could just buy it in the in the open markets that's maybe what a normal fund would do in capital markets is they would just buy the stock but in crypto you could actually buy that token uh from treasury for example and you could get it maybe maybe there's a six-month lockup you're like six months that's not really that long and I get a % discount on it so is that venture or is that liquid or in liquid you're like

uh I think that I'm going to make up a token here uh be chain I think that bar chain is going to launch their token in October and they're doing this like private round right now and it's July I'm making these things up I don't know anything about be chain um and I could get it at like what I think is going to be a big discount to it to the liquid Market is that VCH and and but I'm expecting it to go to be to be quote unquote public in three months is that Venture is that liquid so how do you guys think about that like that Line in the Sand I I can go first and hand it over to Ray I would say one thing is looking at discounts to market prices I think is a completely irrational way to be making

investing decisions you need to be underwriting from the bottom up of what do I think this thing is worth um it I actually think it's laughable we see all these deals come by they're like oh it's a you know four-year lockup linear lockup with a 40% discount or like you know a 2-year lockup with a 30% discount like this is a 100v asset right like how are how can you justify being locked up for two or four years on a 100v asset with that much of a discount right like that it just like mathematically does not make sense so I think you have to take that framework of oh the market price is X and I'm getting offered from

the treasury at 6X you need to throw it out the window that is an absolutely horrible framework to use and I think the right framework is how much is this worth in my mind what do I think this could be then figure out what is the best way for me to get exposure to it uh right and if the best way happens to be I should go and try and negotiate a deal with the treasury or the foundation in order to get that exposure then great or if the best way is I want to go buy it on liquid public markets because liquidity is there and actually you know I don't want to lock up because I think the market might come to price this asset appropriately before the lockup actually hits then go do that but I

think you know I think it's putting the cart before the horse when people say oh I'm looking at the discount and like this is what blew up 3ac really famously is that they were like oh we're doing this arm where we're buying you know at a 40% discount with a lockup uh and like that's an AR it's like no that's not an ARB like that's not what an ARB is um so yeah I I just fundamentally absolutely hate that framework yeah I agree with tar and that uh the liquid fund should set that valuation and that's based on the fact that investor in uh segmentation exists in all markets if you think about credit markets you've got investment grade high yield distressed and then you've got

your uh emergence from distress post reorg Equity you've got at least four to five type of investors that have underwrite different risks have different skill sets and you know when you know a bond goes from investment grade to high yield it's the high yield meure who's going to dictate what the spread is going to be on that Bond not the investment grade that gives a discount it doesn't work that way and uh you know I think one of the uh what we should see going forward is a much more powerful powerful liquid with crypto fund industry that essentially uh dictates the pricing of tokens at launch where you know today you know things are priced by maybe market makers and Founders they

should be priced by you know what is that liquid uh crypto manager uh at what price is he willing to hold that token for the next two to three years if that's their investment Horizon Ray Switching gears a little bit how important is it to get GP um can you explain like GP versus LP shares in a fund and and how important it is to to get GP shares if if I don't even know if the right word is shares or stake or um can you just explain that that Dynamic uh as a for an allocator like us yeah if you're an allocator and a and a new fund comes to Market oftentimes I think an allocator if they have enough

size will say hey I actually want a GP Stak not just a normal LP Stak can you explain that because I think that's something most folks who haven't been in the room don't don't actually understand yeah I mean you know if if you have a large allocator that comes in they're the biggest check and they've got enough power because the the manager is unable to raise enough money you know they'll negotiate a GP stake and uh you know we saw that happen um in 2023 and within on the VC side and you know I mean they're negotiating makes sense uh you know they're they're working for their investors but the the the problem is that you've got uh massive conflex conflicts that can take place in those situations if you're able to you need to place that LP stake and that GP stake

within the same structure for your investor or else you create massive conflicts of interest and that's not easy because the investment Horizon of of a GP stake versus an LP Stak especially if it's a liquid fund I me those are very different risks that you're underwriting so I know that a lot of people do that in crypto um we don't do that uh we might do it with one manager where we'll put them in the same vehicle and the reason why we haven't done it in the past is simply it creates a lot of conflicts uh and since we're serving Pension funds we don't even want to get close to uh those deals got it got it um to I want to change gears a little bit and it's a

related topic but I think it's I think it's relevant to this conversation maybe can you say some things about the the current token launch meta um it feels like the things are shifting in the in the narrative in the meta and the Zeitgeist on launching tokens and points and airdrops and all of that kind of stuff and specifically I'd love to hear your thoughts on on that but also it's the the effect that that will have on Venture and liquid investing yeah I I want to go back to uh what we were talking about before the GP question uh because I think it actually ties together really well let's look at how companies go public in traditional financial markets you have a underwriting process that happens you

have some shares that are being sold to institutional investors and you have a a banker go out and build a book and say this is where I think these shares should be priced now there's some error in that process and you know we can get into nuances of like why IPO pops are a good or bad thing and all this stuff but that I think is still a better process than we have in crypto today and I think the reason that we don't imitate a similar process is because of regulatory right icos actually led to Better Price Discovery in liquid crypto markets than the current token launch process does

because the current token launch process has this low float High FTV kind of um characteristic that I think is really problematic and there's not you're not allowed to go out and Market the token launch in the same way that an IPO is marketed right so you're not allowed to give the information needed for investors to be able to decide how much is this thing worth like what should I be willing to pay for this right and so a lot of investors are resorting to really amateur levels of analysis of oh let me just compare to the to a comparable project and let let's look at that or

let me look at the last Venture round and then value it based off that which by the way like never do that like that that's that's a truly horrible way to look at it that's like kind of pricing off a discount like the price that someone else paid for the thing should not change how much you think the thing is worth like that that's a really bad way to to look at the world um so I think what happens is that with public companies when they go IPO you see some price Discovery happen before any shares trade and that's what you used to see with icos in crypto as well but since icos have fallen out of favor now we

only see price Discovery after the token launches and that is a huge difference because uh sometimes you know people have this idea of I want to launch at a high value ation because it's going to give me some more ammunition to be able to use for recruiting for Partnerships it will give me some more legitimacy in the market it'll deliver you know all these intangible benefits but what happens is price Discovery is going to occur like that you know one thing I can guarantee you is that over the longer term like the markets do find price Discovery and they do Bend towards rationality like this is

the fundamental law of capitalism uh and what happens is if you launch at a really high price because you're looking for those intangible benefits then as price Discovery occurs and it turns out actually you know the valuation should be much lower well now everyone who believed in you in the public markets early on has lost money and now like you hurt the community you don't have you don't have the sense of positivity around your project people aren't as excited and I think that that creates a lot of longer term problems so to bring that rant back to your question of like what is the current token launch meta I think the meta for token launches is changing

right now the meta as it's been for the past six nine months or so has been you give users some points in exchange for doing some actions that you want in the protocol then you airdrop tokens to those people that have points using some alloc mechanism usually nonlinear so you're rewarding smaller accounts more than their Pro share and you're rewarding larger accounts less than their Pro share um and then you hope that those airdrop recipients help you achieve price Discovery faster than if you didn't do a large air drop right

like that that's that's kind of the current meta but like anything uh in crypto if if it works for a little while people figure out how to farm it or gain it and now we have you know just the airdrop Farmers that are going out there using everything uh and when they use these protocols they're farming the tokens in order to immediately sell regardless of the price at launch so they're not actually assisting in the price Discovery process they're just selling the tokens indiscriminately because they're just farming to do that and it's it's easy for a founder or a team to lie to themselves and say man my kpis are going up you know like look at how many

active addresses are interacting with my protocol look at how all this stuff is happening this is fantastic this is real growth and you know they'll lie to themselves and it's easiest to lie to yourself it's easier to lie to yourself than to anyone else right and and they'll say everything's going great but like those are just airdrop Farmers like that that should not count and then they're going to instad dump the token once it launches it doesn't help with price Discovery and the market is coming to that realization now right I think uh you know you saw like the really interesting anti-il air drop farming tactics at layer zero put in and I think that kind of was one of the sh shifting points on the meta uh because they realized the negative effects of airdrop

farming and they wanted to mitigate that and so I think that's changing how token launchers will happen moving forward maybe play it out a little more what what do you think the next like 6 to 12 months looks like for for when you when you say it'll change how token tokens are released and air drops moving forward what does that look like I don't think we're going to see as many Founders or teams able to basically do the same easily sibl farming um airdrop mechanisms I think the market is going to delegitimize that and say I know that that's not real and once once a market

knows that that's not real then you don't get credit for it anymore and that is going to change the mechanisms I think hopefully what we will see is some better mechanisms for Price Discovery before the token starts trading you know something that we've thought a lot about is you know things like using bonding curves to launch a token um or using all mechanisms in order to achieve price Discovery before the token is ever transferable and tradable uh and I hope to see more experimentation there I think that you know for now we're going to see a lot of that experimentation from offshore Founders but if we see a change in regulatory Administration then

I think we can see some more of that uh experimentation and innovation in the US and globally because I think that'll lead to more efficient Capital markets D you um there was a podcast that you did on Empire maybe like two years ago where you talked about uh Evolutions in every cycle is uh dominated by a new Evolution in fundraising I'm going to botch this a little bit I'm sure but icos and nfts these were just new evolutions of raising Capital would you say the New Evolution in this cycle is meme coins or we haven't seen it yet or how do how do you think about that I don't know if you think that thesis still holds true I I do still hold that thesis so to to

restate the thesis if you look back back at the history of crypto every bull market was sparked off by a new method of token distribution it because new methods of token distribution bring in new sets of users uh with new activities so you know if you look at the 2013 kind of bull market that was proof of workcoin forks because people were like oh this Bitcoin Thing Really Works that's when like Litecoin some this other stuff came into existence then you saw icos in 17 uh in 2019 you had a minle market from ieos which were icos but slightly different uh then you saw defi liquidity mining in 2020 2021 you saw nfts and yes I do think that Meme

coins are playing a big part in that role in this cycle uh and the reason for that is it's getting engagement with a new set of users who want to go do things on on chain right like that's that's the key unlock is getting distribution of tokens to a new set of users now is this going to be as powerful as defi liquidity mining or you know some of these other catalysts that's hard to say uh you know these meme coins are inherently memes uh right like there there's no cash flow or or anything to to go and point to like they they're they're fun um and I think retail investors really like mem coins

because there is no Alpha to be had so the sophisticated investors can't like make more money than you or take your money because it isn't about being smart or sophisticated like that that's not the game uh so I think that's interesting and different but I am looking forward to the new token distribution mechanism that delivers fundamental value which I continue to think for this cycle the next one is going to be deepin I think deepin is going to be one of the major token distribution mechanisms that incentivizes people to do actually useful work and then delivers a method of capital formation to deliver something that wasn't previously

possible I don't think that deepin has really broken into that mainstream crypto Market Consciousness just yet you see a lot of people talking about it but you see less participation in it than you do in you know even something like mem coins uh so that's what I'm looking forward to because at the end of the day like I'm here for fundamentals and I'm here for Building Technology that builds products that are useful and meme coins can be fun but they're not really useful and like that's what I'm more excited about Ray how do you think about maybe we can play off of deepin for a second it got me thinking about something else how do you think about ecos funds that are very focused around one sector um

and or like an ecosystem so like when I think deepin I think like um oh man what's the uh EV3 escape velocity guys like they um they're fund like very I I might botch this in uh to maybe you can correct me because I think you guys might be investors in them but like they are they dominate the deepend space like if there's a deepin deal they know about it they are they know every deepin founder um Ray from an allocation perspective like how do you think about investing in funds that have a very specific Focus like that um yeah I mean it can be really really interesting if the top down is really attractive um so so I wouldn't we wouldn't apply it as um as a given that

you know managers because the universe of crypto has expanded so much that we need to uh invest in specialized managers I don't think that makes sense um but if and and and you know we we looked at if through really really closely and and this is a great team and a very very good example I would say that they would be an exception um and so I would say out of maybe 30 fund Investments since our lifetime or 35 there might be one or two exceptions so it really depends on the top down of that specific sector uh you know how attractive it is from an asymmetry perspective from a the ability to actually generate alphone the liquid

side or uh the fact that it's really really non-consensus on the Venture side if I can Chim in on that uh I would say as a general principle whether it's liquid managers or venture or I think actually in any form of investing whatsoever in any Market whatsoever you never want to be a forced Trader you don't want to be forced to buy something and you don't want to be forced to sell something and when you specialize you could be forced uh to go and buy something because you are focused on this specific sector and you can't afford to miss a deal in that

sector and then that deal becomes a deal and then your LPS are you know just they're never going to want to talk to you again uh right so you are effectively forced to trade right you might do deals that you wouldn't otherwise do if you were not typ cast as you know this specific spefic sector uh so you know one thing that at least I think is very important is as a manager do not be pigeon hold into anything because when you are pigeon hold then you might be forced to trade right and Adventure that usually means being forced to buy something uh right that you may not otherwise want to buy

because of valuation or fundamentals or some other reason uh but you are forced to do it and fundamentally I think just like you never want to be forced to trade yeah it feels like the tricky thing comes when you're fundraising right because just talking to other fund managers who are raising if you go out to the market and you say I'm raising $400 million or 500 million for a crypto fund the LPS are going to say well what makes you different you say ah I am a gaming fund I am a I am a deepin fund right I am a i an I'm a consumer fund uh and they say oh that's great okay cool that makes a lot of sense we're going to invest in you now because you've like carved out this Niche for yourself but then I think yeah I I I think you're

spot on too Char like you Nar things change so quickly you become a forced buyer um there's like external pressure and internal pressure to do things that you if it was a fully free market you would not do so yeah if you're if you're a really good manager you should not be making decisions about what to do based on what LPS will give you money to do right right like that's that is not a good way to make decisions LPS are hiring you to make those decisions right so if you're Outsourcing that decision-making to the lp like I I think that's nonsensical Ray if you'd like to add anything no I just wanted to say that even outside of crypto I mean the biggest driver of performance is being

unconstrained right so even if you look at hedge funds out there uh if you the mo more most sustainable uh drivers of returns were typically the micr funds because they had the freedom to go where the premum is right and I I think that's it's the easiest way to perform sustainably over the long run so I sent this tweet and I want you guys to tear it tear it apart I said became a bit of a meme format uh I said someone will make a lot of money building a monad fund brand as a monad only fund raise 5 million put 100K into the top 50 monad deals as early as possible run back the frictionless capital Playbook but for monad instead

of salana you want to tear that apart to sh uh I feel like I might have already torn that apart with my last answer right like the problem is now you're a force buyer of every deal and you're gonna end up investing in a bunch of CopyCat projects just because you're like I need to do every deal I need to do them on deals yeah I need to do every deal and like you should just never feel like you need to do anything I think that leads to poor returns look maybe that strategy works and like one of those things ends up being a winner right like I can't say that it won't perform but I can say that you know without having the benefit of hindsight I just never want to be forced

to do a deal that I otherwise wouldn't want to do yeah um I just thinking about the liquid conversation from the beginning of this episode I have a few questions about it that have just come into my mind throughout this conversation um when you so tar you guys have a you guys have a venture fund and a liquid fund right correct okay okay so maybe I can pick on you for this question and Ray I'd love to get your thoughts too the biggest um like in the traditional Capital markets public markets the uh if you think that the market is good there's there's no like like crypto works on these fouryear cycles and it and it always has worked on these fouryear cycles and maybe that'll go away one day but for for right now I think the assumption is still like it it's working on these Cycles the biggest

um driver of returns has not been picking tokens actually it's just been actually timing Cycles I would call it I see Ray shaking my head so maybe Ray I'll pick on you first but um yeah I which I guess you're right like if you picked Zeke like uh the Privacy coins you were never making money um but if you pick some of the l1s in 2021 you were making all of the money so I think that's right but but also like if you could time you you you have two people who buy salana uh the person who like times the top buys the bottom I guess that's obvious is going to make more money but how do you think about um a liquid fund manager going to their like basically saying I'm out I'm like I'm selling I'm moving all to cash I'm not shorting because I'm not shorting in

crypto because that's a scary thing to do I'm moving to cash and the LPS are like but I'm paying you 2% and you're like 95% in cash H and you're G to get back into the market when oh you're getting back into the market in a year from now so I'm paying you 2% to get back into the to just sit on cash for a whole year there's like speaking of like like LP pressure there's this LP pressure to be in the market even when you maybe shouldn't be in the market so so winding question there bit long-winded but how do you how do you guys think about that Dynamic should I give it a shot first so uh so so just looking at history uh so since 2018 I think on the liquid side we invested in 25 funds um from you know across that time and there's only two

funds that outperformed everyone and the Divergence in performance is enormous I mean we're talking about funds being up on the liquid side 15x Plus versus you know multiples that are versus uh you know managers that lost everything and so the Divergence is enormous and the Divergence comes from idiosyncratic risk actual selection funnily enough those two funds are very static in their exposure they don't go to cash that's not their job their job is to stay exposed but they were able to outperform because they had the right projects during that period of time um and massive outperformance and the way just based on what we said before and the lessons that we've learned is that yes

an investor can an investor through an open-ended structure can go to cash themselves that's a beauty of liquidity so why should you as an investor give up your liquidity to a close-ended structure that by the way is doing a lot of liquids anyway you can take charge of that liquidity and decide when you reduce your position and I give you a a a real example about this so we have uh the first swis pension fund that came in uh put a first trunch in Q4 2019 a second trunch on the first April of 2020 and you know a Swiss pension fund puts uh their crypto exposure in the alternative bucket which is capped at 15% the alternative bucket you have PE VC that are a liquid on the trafi side

and they were lucky enough to put in liquid crypto with us in their alternative bucket now if you put 75 basis points in crypto and you're up 10x by the end of 2021 or a large multiple you're blowing up through that 15% cap where if you if if you reach that cap you need to talk to the regulator so liquidity is really important so those that pension fund was able to drisk at the end of 2021 and double down again in 2023 and that's the beauty of open-ended or being uh or or possessing the liquidity to act yourself so I would today I would rather have a that is fully allocated or at least those are

our core positions within our book by the way we have managers that are more active but are two largest positions are always fully allocated and uh you know gener generating Alpha through picking which has shown to be much more meaningful and I think will be more meaningful uh in the future and we can drisk if we want to and whenever we want to yeah look trading beta is just extraordinarily difficult I have not met a single person who can trade beta in crypto well because you know it's easy to say in hindsight oh crypto works on fouryear Cycles just buy the bottoms and sell the tops right like fantastic but if you let me trade in hindsight I'd be

the world's first trillionaire right like that that's just not yeah how it works uh and the difficulty is managing your own psychology in that process right to go off on you know a bit of a tent like I think there are four sources of edge that exist in investing the first is your uh information or access Edge right like do people pick up the phone when you call do people call you with deals that kind of thing the second is analytical Edge how smart are you are you able to understand what you're doing the third and this is the one that I think is relevant to this question is psychological or behavioral Edge how do you manage your emotions because when the market when you sell at you know uh in the middle of 21 let's say you know

July August period because you think uh this Market's pretty overheated like I I want out but then you see the market rip up through the rest of the year and everyone's saying like hey why are you missing out on all these returns how do you manage that fomo how do you manage that emotion and actually what happens with a lot of managers is they go buy in again at a higher price Stanley dren Miller Tech bubble 2000 like I mean best world greatest of all time absolutely legendary investor and even he is prone to this same category error so to anyone who thinks that like oh I'm gonna be able to trade beta it's like well even you know someone like Dr Who who is this

Legend like has had failures on this specific like scenario that I'm describing so that psychological Edge is so so hard to manage also when the market's at a bottom there's very few investors who are able to hold their nose and buy the bottom uh right like that's just that's an extraordinarily difficult thing to do because you think the world is ending right like oh my God everything's going to be over like or maybe I'll get to buy in cheaper right like so like eight bucks at the end of uh 2022 people are like I'll buy it when it's four right like that that's what people some people were thinking and it's like well you know like it's just you can't time this stuff and just for the sake of completeness I'll say the fourth Edge in

investing is structural uh right if you have the ability to do things that other people can't do in your mandate uh this kind of fits into the question earlier about being pigeonholed into a specific sector uh I think having flexibility is a big structural Edge in order to give you optionality to outperform um uh let's talk about consumer for a second so there's a one of the other so we talked about like token Zeitgeist ending and airdrops and things like that not ending but uh narrative shifting the other thing that feels like it's happening is uh infrastructure fatigue re excitement about apps um the problem with applications I would say has not

actually been around people don't want to use them it's that people don't want to fund them um there's been too much money to be made in in infrastructure uh in l1s and l2s there is zero incentive to invest in consumer uh one idea I have is if things start going public they start doing their tokens and it's actually priced below the valuation of the last private round that's the incentive that will maybe drive a new wave of consumer Investments I'd be curious how you too think about that I I can go first on this I do think that there is infrastructure fatigue I think that is specifically driven by just the incredible complexity of the

modular stack as opposed to to the simp icity and elegance of the integrated stack I think they both accomplish similar outcomes they want the same endgame it's just the modular stack has many more tokens involved and many more moving pieces involved in order to accomplish the same endgame uh and it's it's really hard if you're a you know retail investor to go and understand like what is an inter subjective work token like what do those string of words together even mean right like there's maybe 50 people on this planet who actually understand that right so I think what you're seeing is fatigue on that side you're seeing the emergence of

meme coins which kind of distracts attention away from a lot of these infrastructure tokens uh and at the end of the day like we live in an attention economy uh and everything is driven by attention uh so I think you're seeing less interest in infrastructure for sure but at the same time on the consumer side I don't think the lack of consumer products is due to a lack of investor interest I can tell you you know multicoin is absolutely interested in investing in consumer facing products or applications and we are not alone there are a number of other you know large sophisticated smart investors that we respect who are interested in funding

that stuff really what we need are more fundamental thesis on what consumer products make sense uh for this industry right like I think everyone already understands defi uh but in my opinion defi is a second Horizon thing you don't use defi like the or the ordinary person isn't going to just like start using defi out of nowhere they need to get a wallet with some funded assets first somehow and ideally it's through some consumer application that'll that gives them tokens that they do not have to buy uh and then they'll use defi as a second Horizon thing right I think payments is

very similar the thesis for payments is really clear like clearly to anyone who understands anything about how payments works like this is the future of payments blockchains are the future of payments if you fast forward 30 40 50 years to pick a long long long time frame like I I would bet you any amount of money that almost all payments are done over blockchains in that period uh but that doesn't I don't think that starts with payments I think you have to get something else first and so that's something that we're really focused on and I think it's likely going to be deepen that gives people tokens or it's going to be you know something similar

to that maybe it's gaming right like May it's something else where I as a consumer can interact with an application and get tokens without having to put in my credit card information and that now I'm in the onchain economy and I can go do a bunch of other stuff but right now like I only have two ideas for what that can be and that's you know gaming or deepin are like the only two things and so going back to my you know first sentence answering this question it's about a fundamental thesis that investors need in order to be able to justify investing in consumer yeah if you think about all the fundamentals that tar um elaborated on and you you

look at the intersection of what is really non-consensus I would say gaming is is is interesting today because obviously a lot of competition on the infra side gaming had a lot of attention a year and a half two years ago and today it's it's becoming um it is non-consensus it's interesting and so those are areas that overlap with some of uh tushar's thoughts that are known consensus and could be very attractive for um terms of building positions for a portfolio um all right I have three three buckets of three topics left I want to ask here one is um this dreaded question of where are we in the cycle um

but I would be curious how you almost just I I'm not asking like Hey we're seven we're 70% of the way done with the cycle um it's more around just having conversations with folks on the podcast it feels like there's a general consensus that hey we're kind of choppiness and too much Market uncertainty so we're going to chop and consolidate until maybe the fall and like probably October and then we've got like interest rate stuff happening in the elections so more certainty gets baked into the market as we know who gets elected in November and then Biden gets elected number goes down Trump gets elected number goes up uh let's say Trump gets elected number goes up we have a good bull market for a year and then cycle over that feels like what

85 5% of people say on this podcast um I'd be curious how you two think about uh both just how you think about thinking about the cycle and specifically if you think that if you would agree with that consensus bet maybe I start with big picture um so very quickly so you so you've mentioned many things many variables that are impossible to predict uh so I would say that you know we're the way we're thinking about it is um it's going to be very difficult to know where you're in the cycle uh all we know is today the liquid side is very attractive and still highly investable uh and so uh

we're you know frankly we're active on both both the liquid uh side with funds and the VC side on the direct side and with funds as well um I can tell you that during after FTX we we've deployed maybe 5x the amount 6X the amounts that we've deployed we've deployed in liquid funds versus Venture funds so that's a reflection of our view towards our bullishness on the liquid side and we believe that that structural imbalance that we described at the beginning which is going to take years to play out is the only is one of the things that you can has a high probability of taking place and that's how we're positioning

uh ourselves so I would say active management on the liquid side is very very interesting um and that's that's where it stops essentially yeah it's like I said it's basically impossible uh to go and trade beta uh right like the problem is it's self-referential but you all the things you said are true this is what the market believes but what that means is that's what is built into expectations and that's what's priced in today right like people are pricing in their expectations of what rate Cuts or what election results or any of this stuff looks like and that's all baked in right now people are thinking about oh there's

going to be an EF there will be inflows from that now there's talks about a salana ETF right and like we've seen some filings for that but like all of that stuff is in the expectations uh and I think that's what makes crypto such a brutally hard Market to try and time Cycles but is it but is it big enough for that stuff to be baked in it reminds me of the question of like is the havening baked in like and for years and for many H it it it actually wasn't necessarily baked in or like is the Bitcoin ETF baked in everyone said it's baked in it's baked in but it really wasn't baked in um uh so I don't know that that' be my only counter to that yeah I'm not saying that markets are perfectly efficient I do not

believe that that is the case uh however I do believe that markets are more efficient when it comes to Market Beta And I think they're less efficient when it comes to idiosyncratic picking one I think that there's more opportunity in the idiosyncratic picking than there is in timing beta also because the idiosyncratic picking I think fits those sources of edge that I was talking about much better like you you have the ability to be better than the market uh either on an access or informational Edge or on an analytical Edge or on a behavioral psychological Edge or a structural Edge on ID sycratic picking

and it's very hard to have an edge on beta right like you can think I'm really smart I can go look at the last three data points and last three Market cycles and like the past is going to look like the future right but like that rarely ever ever happens yeah and you know I think just as a manager you want to focus on an area where you can have Edge like I don't want to play the hardest game possible I want to actually play the easiest game possible I want to play the game where like I know I'm good and not the game where I'm like well yeah this is just really hard I mean the biggest driver of beta is Market liquidity it's I I would argue it's very difficult to predict on a month toon

basis where liquidity is going to be for the entire Market not only crypto but we're talking trfi Etc yeah um tar related to the election I saw that um uh Kyle announced he said today multicoin is proud to announce a special contribution to match all donations of soul to the Sentinel action fund uh Sentinel action fund is um a conservative superpack um so we'll match it up to 1 million for sole donations made over the next 10 days can you tell me your expectations for what happens to crypto uh yeah absolutely we've been spending more time being engaged on the politics side because as a old saying

goes you may not be interested in politics but politics is certainly interested in you uh and so I think you have to engage you can't just hope that good things happen uh and I think that the key thing to understand about political engagement is it's about showing the the political parties and the political class that you are an important constituency that can help swing key elections that's what they care about they speak the language of power they're not they don't speak the language of oh this is what's right or wrong right like I I don't think they think about it that way I think they speak the language of power and the way to demonstrate that is you want to

put money and votes to work and very critically you want the politicians to know that you did that you want them to know that you were as a community what helped swing a critical election right like I think worst case scenario for uh crypto politically right now in the United States is you know we see progressives the Elizabeth warwing of the democratic party really take a lot of power I think that's the worst case scenario because they've just shown that they're anti- crypto they they inherently don't believe in the property rights that crypto enables right they want the state to control more but you

know what what else would be not like a great scenario would actually be that Republicans but crypto is not given any credit for that win and in that case crypto is not going to be a priority there's a bunch of other stuff going on in the world like you know the world's a big chaotic crazy place and if crypto does not show up and say hey we are an important constituency we will not be a priority in a future Administration so the outcome that we think is the best outcome for crypto is we see the conservatives take power in the US this administration because theyve shown that they are more Pro crypto so far and very critically they understand that crypto

helped make that happen uh and now look multi coin looks for asymmetric oportunities right like we try to look for the non-consensus thing we do a lot of diligence to try and understand like where can we have the most impact and we brought that same rigor and process to uh our political activism and uh engagement and the focus that we have is on the Senate because the Senate confirms all regulatory appointees so you know that's absolutely critical for us we want we want to have Pro crypto senators in there when they're making those decisions and also we've seen the fit Act pass the house and now the Senate is rewriting their version of it

and then it's going to go to reconciliation so the Senate is critical for that component as well so we think the single highest leverage place to have crypto's voice show up is in the US Senate and we think the single highest leverage way to do that is by donating to these critical swing races in swing states where crypto as a community with our money and our votes and our voice can have a real impact and I think that's how you can chain together the string of events to get to the best possible regulatory outcome for crypto Ray when you are fundraising or when you're speaking with LP are allocators do they is it fair to say that they say

look I'm waiting for the election to invest and specifically maybe I'll invest if Trump is elected and maybe I won't invest if Biden's elected or the first is true but the the the the latter is not true um no I I would say that uh the US regulatory question is important uh even for Swiss and and just to be clear uh we mostly talk to Swiss institutions very important for Swiss institutions I mean the US is really important those decisions or that progress drives markets so that's why they care uh but it doesn't go down to Biden versus Trump uh that's too uh it's it's too short term they're thinking long term if there's

progress um you know they're they're willing to invest and by the way they they're paying a lot of attention just based on that product progress this year so it's very important despite the fact that you've had some CL clity or Clarity regulatory Clarity in Switzerland that's not enough you need the US side to clarify itself as well yeah um last question before we wrap here is um would love to you guys have just several years of fund management experience in crypto would love to just leave this with a a piece of advice for emerging fund managers could be Venture could be liquid um would love to yeah would love to leave with one piece of advice for these emerging fund managers as they uh start on their Journey

go for it sh sh okay so uh first um you know I would my advice is um I think the biggest business opportunity for an asset manager and that's if you're able you you've got Edge uh to to um to manage it that way is uh start launch a liquid fund um from a supply demand perspective uh I think it's a great business opport Unity um of course you need to find an edge and build the right team and maybe the last advice that I'll give is transparency is key with your investors um you know you'll be surprised but we've been through uh really really difficult situations uh

with many of our managers but the ones there's a very very high correlation and we're talking uh you know nearly a big chunk of our portfolio is in two manager managers that we've known for a long time and it's due to transparency uh so I think being transparent to your investors is is key okay I I agree with both of those I would add on a few things the the first I would say is if you are an emerging manager sit down and be really honest with yourself about your source of Edge and then only do things where you really believe that you have an edge uh markets are really good at taking away money

from people who go operate where they do not have an edge because someone else is going to be better than you at that thing and they're going to take your money so go sit down I think there like I said there are four sources of edge uh and just to repeat them you know you have analytical you have information access you have Behavioral or psychological and then you have structural and so go rate all of those and really think long and hard about where your Edge is and then importantly you have to stick to it don't let yourself get strategy drift don't let yourself think oh you know I said that I don't have Edge trading beta but like man the market really makes me want to trade beta and then you start doing it

and then you see the strategy drift and like that that is a way to failure so I think you know focus on your strength not your lack of weakness uh and focus on where you have Edge and then the second piece of advice I'd give is call Ray he's the best fun to funds investor out there in crypto I can say that from experience uh you know he's been with us through thick and thin he's the only investor who doubled down on us in the periods of like the worst periods that we had so you know if you can get Ray on in your corner I think you'll be way better off it's really all you can ask for kind words thank you guys for the time appreciate it thank you hey everyone big thanks for watching today's episode

wanted to just quickly remind you about the Stellar development foundations sixth annual Meridian conference this October 15th through 17th in London this is an incredible opportunity to network with the forward thinkers who are defining the future of this space head over to meridian. stellar.org and use the code blockworks pod for early bird pricing [Music]