Compiled and edited by TechFlow
Guests: Ray Hindi, L1 Digital CEO/CIO; Tushar Jain, Co-founder and Managing Partner of Multicoin Capital;
Moderator: Jason Yanowitz, Founder of Blockworks
Podcast source: Empire
原标题：Death of Crypto Venture? Rethinking Crypto Fund Strategies | Tushar Jain Ray Hindi
Air Date: July 23, 2024
Background Information
In this episode, Ray Hindi of L1D and Tushar Jain of MultiCoin Capital share their thoughts on the evolving landscape of crypto fund management.
They discussed the current state of the financing ecosystem and believed that investor interest was not as high as expected, causing many funds to face difficulties in raising funds. The shift from venture capital to liquidity investment, believing that future opportunities may appear more in the field of liquid assets.
The conversation also delved into the changing dynamics of token issuance, with the current process problematic and unable to allow for adequate marketing and price discovery like an IPO.
Although market cycles are difficult to predict, the right market timing can significantly impact investment returns, and macro funds often outperform because they have the freedom to select the best investment opportunities.
Political outcomes will also have potential impacts on the crypto industry, and the cryptocurrency community needs to actively participate in politics and demonstrate its influence through donations and voting.
Current financing ecosystem: Overall fundraising is difficult, and small funds face greater challenges
Yano pointed out that we are at a stage in the cycle where funds should start raising and announcing financing. However, despite the popularity of cryptocurrencies on social media, investor interest is not as high as expected in the actual allocation of funds. This has caused many funds to face difficulties in raising funds.
Ray Hindi's opinion
Ray said that although pension funds have shown an increased interest in cryptocurrencies in places such as Switzerland, this has not translated into actual capital inflows. Globally, venture capital funds are quietly raising funds, but they are struggling to reach their expected fundraising targets due to fierce market competition.
Ray believes that while large funds are still able to raise capital, smaller, emerging funds face greater challenges.
Tushar Jain's opinion
Tushar pointed out that changes in market conditions have made many fund managers reluctant to publicly announce smaller fund raises as this could be seen as a sign of weakness. In 2021, many funds seized the opportunity of the capital markets to raise large amounts of funds, but today's market environment is different.
Tushar stressed that the responsibility of managers is to match capital demand and supply, rather than simply pursuing growth in assets under management (AUM).
Capital supply and demand balance
In the field of venture capital, Tushar believes that there is currently a situation of excess capital and insufficient demand, which makes the venture capital market extremely competitive. In contrast, in public markets, the difference in returns between high- and low-quality assets has increased significantly, providing more opportunities for active management strategies.
The evolution of crypto funds
Ray reviewed the development of crypto funds, pointing out that before 2018, the market was mainly a few assets such as BTC, and investment options were limited. However, with the maturity of the market and the rise of decentralized finance (DeFi), investment options have greatly increased.
Ray believes that although venture capital funds have dominated in the past few years, future opportunities may appear more in the liquid asset sector.
The evolution of crypto venture capital, from BTC to liquidity funds
Early Stage: Bitcoin Fund
Yano mentioned that the initial stage of crypto venture capital was mainly concentrated in Bitcoin funds, such as Pantera’s Bitcoin Fund, which basically just invested in Bitcoin and charged a 2% management fee and a 20% performance fee.
Phase 2: Service Company
In the post-ICO era, investors are less interested in tokens and many companies are no longer considered credible investments. As a result, investment has begun to shift to companies that serve the cryptocurrency ecosystem, such as Anchorage, Bitgo, Circle, and Coinbase. These companies have attracted a lot of capital into the crypto venture capital field.
Phase 3: Agreement Investment
As the market matures, some smart crypto venture investors, like Multicoin, realize that the real returns will come from investing in protocols rather than service companies. They started putting capital into these protocols and saw significant gains.
Phase 4: Liquidity Fund
Currently, there is too much capital pouring into the crypto venture capital sector, resulting in fierce competition. Yano believes that the next stage of opportunity may lie in the liquidity token market, and more liquidity fund managers are expected to enter this field.
Ray Hindi's opinion
Ray agreed with Yano’s classification, adding that when a lot of capital pours into a particular strategy, performance tends to be mediocre, with only a few exceptions that outperform the market. He believes that once traditional investors realize that there is excess return (alpha) in the liquid crypto market, they will pay more attention to this area.
Tushar Jain's opinion
Tushar pointed out that the structure of allocators determines their investment preferences. Many large allocators' venture capital teams are interested in cryptocurrencies, but their public market teams are not. This has led to more capital flowing to closed-end venture capital funds rather than liquid funds. He believes that this market distortion has led to excess capital in the venture capital field, while liquid funds have more opportunities due to less competition.
The Importance of the IPO Window
Tushar stressed that crypto companies need the IPO window to open so that investors and company employees can get liquidity through the public market. Without IPOs, venture capital funds find it difficult to show actual returns to their limited partners (LPs), thus affecting subsequent fundraising capabilities.
Ray added that venture capital funds investing in decentralized networks have outperformed over the past few years, while funds investing in traditional crypto companies have faced challenges.
Liquidity Market Advantage
Skills required
Ray pointed out that in 2018, traditional finance (TradFi) investors generally believed that liquid markets required active traders to suppress volatility. However, this thinking is wrong, as many investors have tried to suppress volatility by launching market neutral funds, but these funds have not succeeded in attracting a large amount of asset management scale (AUM).
The Problem with Market Neutral Funds
Ray explained that a major problem with market neutral crypto funds is the lack of interest from investors who want to earn high returns in the crypto market rather than just suppress volatility. In addition, these funds are often exposed to counterparty and smart contract risks, especially during periods of high market volatility, such as November 2022.
Evolution of investment strategies
Ray mentioned that the initial investment strategy was to suppress volatility through active trading, but this strategy proved to be ineffective during the market turmoil in March 2020. Humans tend to make wrong decisions when faced with the high volatility of the crypto market, and using leverage to chase the market may eventually lead to a blow-up. Therefore, Ray and his team turned to a longer-term fundamental investment strategy, accepting market volatility and performing well over a 5 to 10 year investment horizon.
Advantages of fundamental investing
Tushar added that his investment philosophy is based on investing in strengths, rather than avoiding weaknesses. He believes that trying to find a manager who can excel in all aspects is the wrong strategy. Instead, investors should focus on the manager's strengths, such as fundamental analysis and predicting future market developments, rather than trying to control market volatility through trading.
The Challenge of Market Psychology
Tushar points out that trying to control market exposure through trading is a wrong strategy because markets are chaotic and unpredictable. Trying to predict market movements through technical analysis or market psychology often leads investors to sell at highs and then buy at higher points, ultimately suffering greater losses. Therefore, investors should focus on fundamental analysis rather than trying to find patterns in the market.
The Difference Between Liquidity and Venture Capital
The Boundary between Liquidity and Venture Capital
Yano mentioned that in traditional venture capital and liquidity markets, there is usually a clear boundary, which is usually the IPO window. Investors invest in a company during its private phase, and no matter how optimistic they are about the company, they usually sell their shares once the company goes public. However, in the crypto market, this boundary is not clear.
Example analysis: In the crypto market, investors can buy tokens directly from the open market or from the project's treasury at a discount, which may have a lock-up period of several months. In this case, it is difficult to distinguish whether this is a venture capital investment or a liquidity investment.
Different ways of thinking about venture capital and liquidity investment
Tushar pointed out that making investment decisions based on a discount to the market price is completely irrational. Investors should start from the bottom and evaluate the actual value of the token and then decide the best way to invest, rather than simply looking at the discount. Historically, companies like Three Arrows Capital (3AC) have failed because of this arbitrage strategy.
Ray added that liquidity funds should set the valuation of tokens, rather than market makers or founders setting the price. Different types of investors will have different risk tolerance and skills at different market stages, so liquidity funds should play a greater role in token issuance.
Differences between GPs and LPs
During the discussion, the distinction between GP (general partner) and LP (limited partner) shares was also mentioned. Large allocators may ask for GP shares, but this would bring huge conflicts of interest. Ray said they usually do not do this to avoid conflicts of interest, especially when serving pension funds.
Current Status of Token Issuance
Tushar pointed out that the current token issuance process is problematic, mainly due to regulatory reasons, and cannot be fully marketed and price discovered like an IPO. Current token issuances usually have low circulation and high fully diluted valuations (FDV), which is very unfavorable for market price discovery.
Impact of the Airdrop
The current token issuance model usually involves users earning points through certain protocol behaviors, and then airdropping tokens to these users. However, this model is easily exploited by airdrop farmers, who sell the tokens immediately after obtaining them, resulting in a damaged price discovery process. Tushar believes that the market has begun to realize this negative impact, and some projects such as Layer 0 have begun to take measures against airdrop farmers.
Token Launch: Meta Shift in Crypto Markets
Outlook for the next six to twelve months
Tushar predicts that in the next six to twelve months, the market will no longer accept simple, easily manipulated airdrop mechanisms. Once the market recognizes the fraudulent nature of these mechanisms, these methods will lose their effectiveness.
Improvements in price discovery
Tushar would like to see better price discovery mechanisms before tokens start trading. For example, using bonding curves or other methods to enable price discovery before tokens are transferable and tradable. He believes that this experimentation will mainly come from offshore founders, but if the regulatory environment changes, we may see more innovation in the U.S. and around the world.
The new capital raising evolution
Tushar mentioned that each bull cycle was triggered by new token distribution methods that attracted new users and activities. For example, in 2013 it was the Proof of Work hard fork, in 2017 it was ICOs, in 2020 it was DeFi liquidity mining, and in 2021 it was NFTs. He believes that the evolution of the current cycle may be meme coins because they attract new user groups.
The Impact of Meme Coin
Tushar believes that meme coins attract a new group of users who want to conduct activities on the chain. Although meme coins have no actual cash flow, their fun and lack of expertise attract ordinary investors. However, he also pointed out that meme coins, while interesting, lack practical use.
The next evolution to look forward to: DePIN
Tushar believes that the next important token distribution mechanism will be the Decentralized Internet of Things (DePIN). He believes that DePIN will incentivize people to do practical and useful work and provide a new method of capital formation to achieve things that were previously impossible. Although DePIN has not yet fully entered the mainstream crypto market's consciousness, he is full of expectations for its future development.
Fund specialization
Professionalization of Ecosystem Funds
Ray mentioned in the discussion that specialization of ecosystem funds could be very interesting, especially if a specific sector is very attractive. However, he stressed that one should not default to investing in specialized managers. While funds like E V3 Escape Velocity have performed well in the DePIN space, this is an exception. Their investment strategy is based on the attractiveness of specific sectors and the potential asymmetries.
The risks of specialization
Tushar added that investors should not be forced into trades, whether in liquidity management or venture capital, or indeed in any form of investing. Specialization can lead to pressure to buy certain assets because funds focus on specific areas and there is pressure to miss trades. This pressure can force fund managers to make decisions that do not meet their investment criteria.
Challenges in fundraising
During the fundraising process, fund managers often need to show LPs (limited partners) what makes them unique, which may lead them to focus on specific areas. However, the market changes rapidly, and focusing on a certain area may lead to being forced into suboptimal deals. Tushar believes that good fund managers should not make investment decisions based on LPs’ requirements, but should decide based on the market and investment opportunities.
Unrestricted investment strategies
Ray further pointed out that even outside of cryptocurrencies, the most sustainable investment returns often come from unconstrained investment strategies. Macro funds often outperform because they have the freedom to choose the best investment opportunities. This freedom is key to achieving long-term sustainable returns.
Focus on specific areas of risk
When discussing a fund focused on Monads, Tushar again highlighted the risk of forced trading. Focusing on a specific area can lead to having to participate in every trade, which can lead to investing in projects that are not high quality. This strategy may perform well due to the success of a particular project, but overall it is not an ideal investment strategy.
Liquidity investment opportunities
Investment timing and cycle
In the crypto market, investment timing is an important factor. Traditional capital markets do not have fixed cycles, while crypto markets are generally considered to follow a four-year cycle. This cyclicality may change in the future, but currently remains a distinctive feature of the market.
The relationship between cycles and returns
Tushar and Ray discussed how in the crypto markets, the biggest driver of returns is not picking specific coins, but rather timing market cycles correctly.
Ray points out that while you may not make money by choosing the wrong token (like privacy coins), you can reap huge rewards if you choose the right L1 token at the right time (like Solana in 2021). Correct market timing can significantly impact investment returns.
Challenges for fund managers
Fund managers may face pressure from LPs (limited partners) when facing market cycles. For example, when a fund manager decides to convert investments into cash, LPs may question why they pay a 2% management fee just to hold cash. Ray pointed out that this pressure may force fund managers to re-enter the market at an inappropriate time, thereby affecting the performance of the fund.
Historical Performance and Strategy
Ray mentioned that they have invested in 25 funds in terms of liquidity since 2018, and only two of them have performed well. The performance of these funds varies greatly, mainly due to the projects they choose and risk management strategies. Those funds that perform well usually do not turn to cash, but always keep investing and get high returns by choosing the right projects.
The importance of liquidity
Ray emphasized the importance of liquidity. He gave the example of an extended fund that made two investments in 2019 and 2020, respectively, and controlled risk at the end of 2021. This liquidity allows the fund to reduce risk at market highs and re-add positions at market lows. Therefore, funds with liquidity can respond to market changes more flexibly.
Psychological and behavioral advantages
Tushar points out that psychological and behavioral advantages in investing are very important. Market fluctuations can affect fund managers' emotions, causing them to make wrong decisions at the wrong time. For example, selling at a market high may miss the subsequent rise, while buying at a market low requires great psychological tolerance. Even legendary investors like Stanley Druckenmiller made similar mistakes during the tech bubble.
Structural advantages
Tushar also mentioned that structural advantages are an important factor in investing. Funds with flexibility can adjust at different stages of the market and thus obtain better returns. For example, funds that are not restricted to a specific sector can freely adjust their portfolios when the market changes, thus avoiding being forced into undesirable transactions.
The rise of apps
Infrastructure fatigue and the resurgence of applications
During the discussion, a new trend was mentioned, which is infrastructure fatigue and the resurgence of applications. Although infrastructure (such as L1 and L2) used to be a hot spot for investment, investors are now tired of its complexity. Compared with the simple elegance of the integrated stack, the complexity of the modular stack makes it difficult for investors to understand and follow.
Investor interest in apps
Tushar said Multicoin and some other large investors are very interested in investing in consumer-facing products or applications. The problem is not that investors are unwilling to invest, but that there is a lack of fundamental thesis on which consumer products have prospects in this industry.
DeFi and the future of payments
Tushar believes that DeFi is a "second phase" application, and ordinary people will not start using DeFi directly. They first need to obtain a wallet and assets through some means, ideally through a consumer application to obtain tokens that do not need to be purchased. Payments are similar. Although blockchain is obviously the future of payments, it will not be a direct start.
Ways to get tokens
Tushar believes that possible avenues include DePIN (decentralized Internet of Things) and games, which allow consumers to enter the on-chain economy by earning tokens without having to enter credit card information. This approach can make it easier for users to get in touch with blockchain applications and gradually use other functions.
The non-consensus nature of the game
Ray added that gaming is a non-consensus area currently, although it received a lot of attention a year or two ago. Due to the fierce competition in the infrastructure field, gaming, as a non-consensus area, may be very attractive when building a portfolio.
Where are we in this cycle?
The unpredictability of market cycles
When discussing market cycles, both Ray and Tushar stressed how unpredictable they are. Despite the many variables and market expectations, it is nearly impossible to accurately predict where the market is headed.
Current Market Status
Ray pointed out that the current market conditions are very attractive, especially in terms of liquidity. He mentioned that since the FTX incident, their investment in liquid funds has increased significantly, reflecting their optimism on the liquid market. They believe that there is a structural imbalance in the current market that may take years to resolve, so they actively manage liquidity.
Market expectations and pricing
Tushar mentioned that market expectations are already reflected in current prices. For example, market expectations of interest rate changes and election results are already factored into prices. Although these expectations may not be completely accurate, the market has already taken these factors into account to some extent. This makes predicting market cycles more complicated because the market's pricing already includes these expectations.
Market Efficiency and Investment Opportunities
Tushar further pointed out that although the market is not completely efficient, it is relatively efficient when it comes to market beta. However, the market is relatively inefficient when it comes to selecting specific projects. This means that when making specific project selections, investors have more opportunities to obtain excess returns through information advantages, analytical advantages, or behavioral advantages.
Ideal investment strategy
Tushar stressed that as an investor, one should focus on areas where one has an advantage, rather than trying to compete in the most difficult areas. He believes that it is very difficult to predict market beta, so one should focus more on the selection of specific projects, as this is more in line with the investor's advantage areas.
The importance of market liquidity
Ray added that market liquidity is the biggest driver of market beta. However, predicting changes in market liquidity in the short term is very difficult, not only in the crypto market, but also in traditional financial markets.
The impact of a Trump or Biden victory
The importance of political participation
Tushar mentioned that Multicoin recently announced a special donation campaign to support conservative Super PACs, which shows their emphasis on political participation. He quoted an old saying: "You may not be interested in politics, but politics is definitely interested in you." Therefore, he believes that it is necessary to actively participate in politics instead of hoping that good things will happen automatically.
Strategies for political participation
Tushar emphasized that the key to political participation is to show the political parties and the political class that the cryptocurrency community is an important voter group that can play a role in key elections. He believes that politicians care about power, not moral right and wrong. Therefore, the cryptocurrency community needs to demonstrate its influence through donations and votes, and let politicians know that this support comes from the cryptocurrency community.
Worst-case political scenario
Tushar believes that the worst political scenario for cryptocurrencies in the U.S. right now is that progressives, especially Elizabeth Warren’s faction within the Democratic Party, hold a lot of power. These progressives are opposed to cryptocurrencies, do not believe in the property rights that cryptocurrencies support, and prefer state control.
Best political scenario
On the contrary, Tushar believes that conservatives taking power in the United States is the most favorable scenario for cryptocurrencies because they are currently more supportive of cryptocurrencies. But the key is to let conservatives know that the crypto community played a major role in their victory, otherwise cryptocurrencies will not be a priority for future governments.
The Senate's key role
Tushar pointed out that the Senate plays a key role in confirming all regulatory appointments, so their political activities are mainly concentrated in the Senate. They believe that donating to Senate elections in key swing states is the most effective way for the cryptocurrency community to participate politically.
Investor's perspective
Ray mentioned that when he talks to limited partners (LPs) or allocators, the US regulatory issues are very important to them, even for Swiss institutional investors. These institutions pay attention to US decisions and progress because this drives the market. However, they will not change their investment decisions due to short-term election results, they are more concerned about long-term progress.
Advice to fund managers
Transparency and Investor Relations
Ray stressed the importance of transparency. He pointed out that managers who have been with them for a long time and have maintained a high level of transparency tend to perform better despite the many difficult situations they have experienced. Transparency not only helps to build investor trust but also maintains good relationships during difficult times. Therefore, he advised emerging fund managers to always be transparent with their investors.
Identify and stick to your strengths
Tushar suggests that emerging fund managers need to carefully evaluate their strengths and focus on them. He believes that the market is very good at taking money away from investors who do not have advantages. Therefore, fund managers need to identify their areas of strength and avoid operating in areas where they do not have advantages. He lists four sources of advantage:
Analytical advantage: Advantage gained through in-depth analysis and research.
Information/Access Advantage: Advantage gained through unique access to information or markets.
Behavioral or psychological advantage: An advantage gained by understanding the behavior and psychology of market participants.
Structural advantage: An advantage gained through unique arrangements in the market or investment structure.
Tushar stressed that fund managers need to evaluate these strengths and focus on areas where they truly have an advantage to avoid strategy drift.
Start a Liquidity Fund
Ray suggested that emerging fund managers could consider starting a liquidity fund if they have the capabilities and advantages. He believes that this is a good business opportunity from the perspective of supply and demand. Of course, this requires finding one's own advantages and building the right team.
