Author: Chen Zhiyan, Undercurrent
When you believe that all opportunities are gone, leaving the table may not mean "being a deserter".
I met Huang Yu in mid-April, when he returned to Shanghai from the Hong Kong Web3 Conference. He described to us a long-lost, vibrant scene - a schedule that was fully scheduled from 9 am to 11 pm every day; he would occasionally run into acquaintances while walking, and sit down to chat for an hour; there was no need to worry about idle time, "the previous person would naturally arrange the next schedule for you."
“The scene was very lively,” Huang said, just like the golden age of Chinese VC, “or any booming industry would be like this.”
A year ago, Huang Yu was the head of China investment at Blue Pool Capital, a family office jointly established by Joseph Tsai, Jack Ma and others. Now, the 36-year-old has become the founding partner of an investment institution called NextGen Digital Venture (NDV), focusing on providing investors with a compliant way to invest in cryptocurrencies.
In April 2023, NDV's first fund was launched. The fund was established in cooperation with cryptocurrency wealth management company Metalpha Technology Holding Ltd (NASDAQ: MATH).
"Dark Waves" learned that, as of now, the fund has raised $100 million from global investors, including institutional investors and top family offices. Since its establishment more than a year ago, the fund's performance has reached +170%, cumulatively outperforming Bitcoin by more than 50% and Ethereum by 100%.
Huang Yu has some special settings for NDV due to his experience of standing at the investor's side: for example, in response to the concerns of wealthy people about Crypto compliance and security, NDV chose the "9th license" structure based on Hong Kong's "asset management" to keep assets under supervision. DBS is used as the custodian bank, and daily transaction records are sent to the Hong Kong Securities Regulatory Commission for filing. At the same time, professional third-party fund administration will give investors corresponding net value updates. These designs allow investors to obtain Crypto-related benefits without actually holding virtual currencies.
"This is the most investor-friendly structure on the market. Investors can obtain the returns of this industry in a compliant, complete and mature custody system," said Huang Yu.
Despite the impressive results in one year, Huang Yu believes that Crypto is far from a new world. He expects this new market to grow, but as an asset manager, he also expects more rational and long-term investors. "Crypto is an alternative asset with great potential and high risk. We operate in the most compliant way in the highest risk industry."
The following is the conversation:
Part 1: In the middle of Crypto
"Undercurrent": NDV's performance in its first year outperformed the surging Bitcoin. What does this mean to you?
Huang Yu: I majored in history at Peking University. In my opinion, the power of an individual is insignificant in the face of the general trend. All we have to do is to follow the trend of the times and make choices. Looking back at the reform and opening up, China has experienced many industry waves - from the global expansion of manufacturing, to the booming real estate industry in the process of urbanization, to the e-commerce boom brought about by the Internet revolution. Each wave is a major opportunity that lasts for more than ten years.
Today, in the context of so-called "anti-globalization", cryptocurrency represents a new way of asset allocation, and it is an indispensable one in the future mainstream allocation. It is not only a technological innovation, but also the optimal solution for global allocation in my opinion. Any staged success of NDV is not worth being complacent about. Because the real hero behind this is the change of the times, which provides unprecedented new opportunities.
"Undercurrent": Crypto has indeed just experienced a big surge, but is this sustainable?
Huang Yu: Crypto itself is a new opportunity for more than 10 years. I continue to communicate with the world's largest institutional investors (sovereign funds, pension funds, and endowment funds). The current consensus is that global geopolitics will continue to be unstable. As the owner of the right to issue reserve currencies, the United States' abuse of its power has led to excessive liquidity and rising inflation, which will further increase the uncertainty of the US dollar. The current high interest rate of the US dollar is difficult to sustain for a long time, so in order to maintain the dominant position of the US dollar, war will be a natural choice for the United States. All these factors have prompted investors to seek diversified asset allocation in regions and categories. This is a long-term positive for Crypto. In fact, the invention of Bitcoin is also a product of the excessive printing of money in the United States in 2008.
The only remaining question is: what proportion are you willing to spend to buy asset security.
"Undercurrent": If investing in what you call the "big era" is the right big decision, then what are the right small decisions that NDV made in making profits?
Huang Yu: We actually use a lot of quantitative indicators to make decisions. A lot of data in the Crypto world is open and transparent. For example, on June 15 last year, we monitored that the top 10 Bitcoin addresses in the world increased their holdings by 7,500 Bitcoins in a single day (today's market value is US$500 million). 13 days later, the world's largest asset management company BlackRock applied for a Bitcoin spot ETF. Although Crypto is anonymous, the movement of chips of large investors can be monitored. From the perspective of game theory, we are highly dependent on data. Although NDV is a fund that invests in cryptocurrency stocks, it uses blockchain tools and traditional financial market methods to make investments.
"Undercurrent": Compared to those who "don't believe" or "all in" on Crypto, you chose a middle ground.
Huang Yu: In the public's perception, Crypto is considered gambling. Objectively speaking, the unregulated part of this field will indeed breed a lot of problems and scams.
For digital currency natives, Crypto is the "gold rush" of the new era. In the early stage, when the market is hot, many Crypto practitioners will make a lot of money in this industry, but this does not mean that everyone can keep this part of the income.
Because of my previous work experience, I have a richer toolbox than others. Simply put, my family office experience has made me better understand the needs of LPs and the impact of macro trends on single asset classes, while my VC background makes it easier for me to use long-term thinking to understand the changes brought about by technology. Crypto has a good prospect, but because the leverage ratio is very high, there will be a round of correction of more than 70% every few years. Being able to make money periodically is not the most important thing. What is important is to exit safely.
"Undercurrent": Why did you choose to leave home and start a Crypto fund in 2023?
Huang Yu: From the outside, the change from family office to Crypto is huge, but for me, there is actually not much difference, because investment itself is pursuing major structural changes: after the epidemic, the instability of the global economic situation has increased, which has given Crypto assets an opportunity to innovate. In the long-term diversified asset allocation, for investors, compliance is more important than returns. After spending half a year investigating all types of Asian institutions including primary, secondary, quantitative, arbitrage, etc., I found that there is a lack of compliant channels on the market to allocate Crypto asset categories, so I decided to turn to the Crypto investment field.
There is also a more emotional reason. I have been an NBA fan for nearly 30 years. In 2022, I had a period of despair in Shanghai. At that time, my favorite NBA star Curry led his team to win the NBA championship alone. He was 34 years old like me. I witnessed him gradually change from a pure outside shooter to a player who could compete fiercely on the court. In the year when everyone was least optimistic, he led the team to win the championship. This gave me great courage to start a business. Even in the middle and late stages of his career, Curry never gave up on change. This made me realize that it is never too late to change.
"Undercurrent": Before establishing NDV, did you predict the big rise in Bitcoin in 2023?
Huang Yu: 2022 is the year when Bitcoin plummeted, and many people had already left Crypto at that time. The courage to do this at that time showed a clear understanding of the future direction of this particular asset.
In fact, Bitcoin shows obvious cyclicality, and most of the retracements occur 1-2 years after reaching a new all-time high. For example, from $1,163 in 2013 to $152 in 2015, to $19,666 in 2017, and then to $3,100 at the end of 2018, and then to $69,000 in 2021. After each high point, the price of Bitcoin will retrace 80%-85%. This volatility is mainly due to the issuance and mining mechanism of Bitcoin, the tide of the US dollar, and the high leverage effect caused by its lack of regulation.
Therefore, I started my business when Bitcoin reached the bottom of this cycle. If investors can also look at Bitcoin from a long-term perspective, understand and accept its cyclical nature, then its long-term returns are still quite attractive.
"Undercurrent": We can hardly find a new fund successfully raised in the primary market in 2023. From your experience, will Crypto be the only solution for new funds in the future?
Huang Yu: I don’t like to make any choices by elimination. The market is rich and dynamic, and there will definitely be a phased optimal solution at each stage.
At present, NDV's positioning is the most suitable for me. Due to my previous career experience, I can directly feel that Bitcoin has become an asset class overseas, which has a positive impact on the entire Crypto market. I think the market is currently in a stage where traditional finance is gradually accepting Crypto.
"Undercurrent": Indeed, this year the US SEC and Hong Kong have approved spot Bitcoin ETFs. What does this mean for the Crypto investment field?
Huang Yu: After the US Bitcoin ETF was approved at the beginning of the year, the price rose from 40,000 to 70,000, and the net inflow of US dollars through the ETF reached more than 15 billion. This means that these ten ETFs manage a total of 22 trillion US dollars, which means that their customers have allocated less than one thousandth of their funds to enter this market, which has almost doubled the price of Bitcoin. If the allocation ratio reaches 1% in the future - and this is not difficult - what does it mean for this asset class? In the future, it is difficult to estimate what order of magnitude Crypto will reach. But one thing is certain, it is far from the top now.
People who previously participated in Crypto investment are actually very similar to Chinese VC practitioners before 2006. They were the first batch of people, many of whom were cross-industry investors. They were sharp, but had little to do with professional finance. But in the future, as a large asset class, Crypto will definitely take on more funds and will also need corresponding and more professional people to manage it.
Part 2: More Conservative and More Adventurous
"Undercurrent": In the changing situation, investors tend to be more conservative and stable in their attitude toward assets, which seems to be contradictory to Crypto, which is known for its risks.
Huang Yu: I don’t understand it that way. We have always recommended that investors allocate 1%-5% of their assets in Bitcoin as a hedging strategy to deal with the uncertainty of the global situation. The high volatility of assets should be controlled by position control, rather than not participating at all.
Today, Bitcoin is a risky asset in the short term, but it is more of a safe-haven asset in the long term. As a new asset in the short term, it is normal for newcomers to have a sharp rise and fall because of insufficient knowledge. This is related to market value/stage. The same is true for early technology stocks. But in the long run, Bitcoin has long-term value as a tool to fight against the printing of US dollars.
In fact, colonialism has never disappeared in the world. The first generation of colonial empires was the British Empire, and their way of ruling the world was to open direct stores and send governors to collect taxes all over the world. The second generation of colonial empires was the United States, and their approach was more advanced, which was equivalent to the "POS machine + franchise store" model to collect seigniorage, and the specific approach was to print money.
As the United States continues to print money, more countries will begin to be unwilling to continue to be harvested and decouple from the US dollar, gradually forming a Bitcoin consensus network. Countries and regions such as El Salvador have already used Bitcoin as a reserve currency, which is a good start.
"Undercurrent": How do you view regulatory risks?
Huang Yu: In general, it is clear that the use of RMB to buy Cryptocurrency is prohibited in China, but there are also some cases that show that the court recognizes that Bitcoin is protected as an asset. From the perspective of NDV, we still focus on Hong Kong and serve the overseas asset allocation. At present, Hong Kong has legislated to confirm the legality of digital assets, so the specific operations are also placed in Hong Kong.
As for Crypto itself, the more important thing is the attitude of the United States. After the Bitcoin ETF was passed, the United States has already regarded it as a new asset. From a policy perspective, both Biden and Trump, the candidates of the two parties in the United States, support Crypto, so the regulatory structure of major countries has basically been determined. In the long run, both US listed companies and central banks of small countries will have incentives to buy Bitcoin, and the money flowing into this asset class in the future will not be less than one trillion US dollars.
"Undercurrent": Although NDV's performance seems good at present, how many times has it retreated in the past year?
Huang Yu: A 20% drawdown of Crypto is very normal. In the past 13 months, there have been two relatively large drawdowns, one of which was 8% and the other was 15%. But even taking these two drawdowns into account, the overall floating profit is around 170%, and the risk-return ratio is relatively appropriate.
From the perspective of overall risk control, the fund has set a lock-up period. The main reason is that this asset class is different from others, and its volatility and cyclicality are very obvious. The lock-up period is actually set in the hope that LP can maintain a relatively long-term attitude towards this asset. In the past 11 years, Bitcoin has continued to show the characteristics of long bulls and short bears, but even in a bull market, a monthly retracement of 10-20% is normal. However, any participant will panic when seeing a 20% drop in a new category. But from our point of view, if you are sure that a big trend is happening, you should not leave the market. We encourage LPs to make allocations and put 1-5% of their assets into Crypto-related products.
"Undercurrent": We have studied some family offices in the Chinese market. One of the common difficulties faced by practitioners is gaining trust. How does setting a lock-up period solve the trust problem?
Huang Yu: The core of all asset management industries is to make money from trends. However, under the trend, it is very important to use a reasonable incentive mechanism to align the interests of you and investors.
On the one hand, NDV's partners put $6 million into the fund on the first day, and their interests are very consistent with those of all investors. On the other hand, except for a subscription fee paid for daily expenses of the fund, NDV currently does not charge management fees. This means that as a manager, we will only receive profit sharing when we exit, because we don't want to give ourselves too much risk-free returns in the early stage.
"Undercurrent": What is the value of working in a top wealthy family office to you?
Huang Yu: In addition to having a larger financial toolbox than ordinary investors, I will look at the global capital flow and the flow of large capital. I like to look at things from the perspective of historical trends. Compared with the past, the main theme of the world today is more confrontational, so the flow of funds will be very unstable. In uncertain times, relatively neutral third-party unowned assets like Bitcoin are easily favored.
"Undercurrent": What kind of understanding do you want people to have about Crypto?
Huang Yu: It is also a new alternative asset. In the future global asset allocation, Crypto is a nationality-free asset in terms of country, and it is a category that can partially replace US dollar VC in terms of returns. Because a qualified asset portfolio always has a high-risk, high-return configuration.
"Undercurrent": Is Crypto the only option for high risk and high returns in the future?
Huang Yu: Of course AI is also. But there are still too few opportunities for AI assets to directly participate in the primary and secondary markets. In the long run, I believe that AI will be combined with Crypto at some point in the future. AI itself is an advanced productivity, but if any country or individual can control AI, it will be a very dangerous thing and will also damage the promotion of AI. Crypto is a production relationship that no one can control, and it can be organically combined with AI.
