Host: QuanYu, Co-founder and CIO of RootData
Guest: Arthur Cheong, Founder and CEO of DeFiance Capital
Compiled by: Scof, ChainCatcher
Recently, Rootdata held a Space themed 'Cold Thoughts Behind the Bull Market Wave: Cyclical Features, New Narratives, and Investment Strategies,' inviting Arthur Cheong, the founder and CEO of DeFiance Capital, for this interview.
This conversation revolves around the current bull market wave, the cyclical characteristics of the crypto industry, new narratives, and investment strategies. ARTHUR shared his views on the sustainability of the bull market, pointing out that U.S. policy changes and macroeconomic factors will have a profound impact on the market. He believes that tracks like DeFi, stablecoins, and public chains hold the most long-term value while emphasizing the potential of decentralized science (DeSci). Regarding investment strategies, ARTHUR stressed the importance of continuous learning, cautious use of leverage, and deeply cultivating specific tracks. Additionally, he discussed practical methods for project evaluation and relative valuation using Aave and Hyperliquid as examples, particularly how to uncover potential through on-chain data and user experience when there is a lack of public information.
Here is the full conversation:
QUANYU: I am delighted to participate in this communication activity with Arthur today. Next, I will represent everyone to ask Arthur some questions. After we complete the Q&A session, if there are still questions of interest, we can continue to ask Arthur.
The first question is about the current market sentiment. We see that the current market sentiment is generally high, but it also comes with some concerns. Many people are worried about whether this bull market can be sustained and whether it can reach its peak. What is your view on the sustainability of this bull market? What key indicators and events do you think are worth paying attention to?
ARTHUR：
I am glad to participate in this Twitter Space event and discuss with everyone. There have indeed been many significant changes in the cryptocurrency industry.
From a structural perspective, the cryptocurrency market, especially in the U.S., has undergone profound changes in industry regulatory frameworks with the government transition and policy adjustments after the elections. As the world's leading GDP country, the structural changes driven by the U.S. have a far-reaching and lasting impact on the industry. These changes will not end in the short term but will instead bring long-term benefits to the industry.
Despite the recent strong market performance, particularly the significant increase over the past month and a half, the positive effects across many industries have not fully materialized. Such structural changes require time to brew before their true value can be gradually released into the market.
In the short term, due to the uncertainty surrounding whether Trump can win the election, the market may be somewhat affected by this. However, it can be seen that if the Republican Party successfully takes control of the presidency and the majority in both houses of Congress, it is expected to bring extremely positive effects to the industry. Additionally, the rise in Bitcoin prices is also closely related to companies like MicroStrategy increasing their Bitcoin assets. If the market expects Trump to win, the current price performance is actually predictable.
In summary, whether from a structural perspective or short-term market dynamics, the industry is currently at a very potential development stage, and the future is still worth looking forward to.
QUANYU: Besides geopolitical or political events, from an industry perspective, what key indicators do you think are worth paying attention to? What indicators might reflect the industry's development trends or potential risks? I hope to hear your insights.
ARTHUR：
In terms of indicators, we typically analyze a large amount of data, especially on-chain data. On-chain data can somewhat reflect industry growth, but further filtering and analysis are needed to derive valuable conclusions.
From a DeFi perspective, TVL (Total Value Locked) is a very key indicator. At the same time, we can also focus on the number of user addresses. Although there may be some false active addresses generated for profit-seeking, through in-depth analysis, we can usually distinguish between real growth and abnormal behavior. Additionally, the performance differences between different public chains and their Layer 2 solutions can also provide important market insights.
Another noteworthy aspect is the performance of stocks of publicly listed companies like Coinbase and their quarterly reports. These reports often reveal more details about industry growth. Additionally, the scale of funding, project market capitalization, etc., also reflect the market's confidence in the industry's prospects.
Of course, Bitcoin is still the leader in the industry. Bitcoin's market capitalization largely determines the upper limit of the entire industry. Taking this election's market performance as an example, Bitcoin's market capitalization rose by 40% to 50%, indicating a significant increase in the upper limit of the entire industry, and the market potential has been further released.
QUANYU: Over the past decade, the cyclical changes in the crypto market have been quite evident, typically cycling over four to five years. The peak price of Bitcoin is usually two to three times that of the previous cycle's peak. So, what new features do you think will emerge in the current bull market?
ARTHUR：
Firstly, I personally believe that Bitcoin's four-year cycle may no longer be as dominant as it was in the past. Of course, this view is not yet mainstream. The four-year cycle in the cryptocurrency industry has primarily been dominated by Bitcoin, a phenomenon formed because Bitcoin undergoes a halving of block rewards every four years, leading to a decrease in new Bitcoin supply, which affects market sentiment and price trends.
However, the situation now is different. The halving of Bitcoin's block output has significantly reduced its impact on overall market capitalization and liquidity. Bitcoin's current market capitalization has reached several hundred billion dollars, which is already a considerable asset even on a global scale. Therefore, I believe we may not have the traditional four-year cycle starting from the next halving.
Even if there still exists some form of cyclicality in the market, the driving factors are no longer Bitcoin's halving but rather broader macroeconomic factors. For example, the current scale and influence of Bitcoin mean it is increasingly affected by geopolitical and macroeconomic environments, such as whether the U.S. government will include Bitcoin in its national reserves. If this policy can be realized, it would be a huge benefit and could trigger other countries to follow suit. In this scenario, the traditional four-year cycle might be broken, and Bitcoin's market performance could resemble that of traditional assets like gold, moving in closer sync with global financial cycles.
In summary, I believe that Bitcoin's future cyclical performance will be more linked to macroeconomic and financial market cycles rather than relying solely on its internal halving mechanism.
QUANYU: You just mentioned that some central banks in certain countries might start purchasing Bitcoin in the future. Do you think the likelihood of this happening next year is high? If so, which countries do you think might take the lead in this initiative? What are the driving factors behind it?
ARTHUR：
Firstly, we already know that there are indeed national governments that own Bitcoin. This includes not only some countries that mine Bitcoin by utilizing their cheap electricity (like hydropower) but also some governments that have acquired Bitcoin through judicial actions. For example, one country, Bhutan, has accumulated about one billion dollars' worth of Bitcoin through mining due to its rich and almost free hydropower resources. Meanwhile, the U.S. government has accumulated about ten billion dollars' worth of Bitcoin over the past five to ten years by seizing bitcoins from criminal proceeds, although some have already been auctioned.
In addition, there are rumors that some sovereign wealth funds from various countries have privately purchased Bitcoin but have not publicly announced it due to the sensitivity of the related issues. If the U.S., as a global economic power, decides to include Bitcoin in its national strategic reserves and through related legislation, it could become a milestone event.
However, I believe this situation may not be possible until the second half of next year. Because the proposal for Bitcoin as a national strategic reserve needs to go through the legislative process, even if the Republican Party controls both houses of Congress, this process will still take time to advance. Therefore, while discussions on this topic may begin next year, actual implementation may require a longer period of policy preparation and legislative processes.
QUANYU: We just discussed the driving factors of external events. Now, from an industry perspective, the cryptocurrency market is often driven by trends or concepts, such as the past DeFi, NFT, etc. In the current cycle, we have also seen many emerging trends, such as last year's DePin, RWA, and the currently high-profile AI.
In your opinion, which concepts have real product value and long-term development potential? And which might just be short-term fads, similar to past NFTs that can only be fleeting?
ARTHUR：
This is a very good topic. My personal view is that the track I am currently most optimistic about is still DeFi. DeFi has always been one of the core application areas in the cryptocurrency industry and is an important narrative supporting on-chain economic development. As the regulatory environment in the U.S. gradually improves, I believe the development space for DeFi will be broader and more free. In fact, the market performance over the past month has already validated this, with many DeFi projects performing remarkably.
Stablecoins are also an important track highly related to DeFi. Stablecoins themselves are a very lucrative business, especially when interest rates decrease. Thanks to their network effects, stablecoins still have tremendous profit potential. Additionally, stablecoins have a positive impact on national currency sovereignty. For instance, the global digital currency market is almost entirely priced in dollar-pegged stablecoins, which somewhat reinforces the dollar's hegemonic position.
Market recognition is also improving. For example, a recent acquisition of a U.S. startup due to its stablecoin payment solution at a high price indicates the potential and value in this area. Therefore, I believe the stablecoin sector will continue to grow in the future. For instance, Ethena has successfully integrated DeFi, stablecoins, and the basic interest rates of Bitcoin, making it a popular project in the market.
In the public chain field, who will ultimately become the dominant player is still uncertain. Currently, Ethereum remains the largest smart contract public chain, but other public chains like Solana are already close to or even surpassing Ethereum in terms of on-chain user activity. The narrative around public chains has been developing since seven or eight years ago and is far from over. Many new projects, such as Sui, Hyperliquid, etc., are continually attempting to break through. The ceiling for this track is extremely high, as Ethereum's high valuation provides a reference point for this field and will continue to attract more innovators.
Additionally, Bitcoin, as an independent asset, has already become a trend in itself, which does not require much elaboration.
For other tracks, while DePin has been discussed for more than a year, its growth is relatively steady, and its flywheel effect is relatively weak, remaining in a steadily developing phase. Meanwhile, DeSci, though still very early, has a clear integration point with blockchain and digital currencies, and may become a field worth watching in the future.
Overall, the tracks I am most optimistic about include DeFi, stablecoins, public chains, and AI, while Bitcoin remains the core asset of the entire industry. The performance of other emerging trends will require more time to validate their long-term value.
QUANYU: The hottest tracks discussed recently are undoubtedly Meme and AI. For Meme-type projects, many believe they are more suitable for short-term operations, primarily relying on market sentiment and community consensus, lacking long-term value support. Meanwhile, the AI field, especially AI agents, has sparked widespread attention and controversy. Recently, many venture capital institutions have discussed this concept, but there are still differences regarding its long-term potential. How do you view these two concepts?
ARTHUR：
Earlier, we mentioned Meme and AI; let me start with Meme. Meme-type assets will definitely continue to exist, but I am personally not an expert in this field. You may have heard Murad's views on Meme Coins; he is very optimistic about this area and believes it is a track that cannot be ignored. I basically agree with his view, especially concerning top projects like Dogecoin, whose valuation has become a benchmark in this field. However, regarding those emerging Meme projects, whether they can gain widespread recognition and grow to the height of Dogecoin, I hold a reserved attitude.
Of course, emerging Meme projects still may present opportunities for rapid growth from hundreds of thousands or millions in market value to billions or tens of billions. This 'explosive story' will continue to exist. This makes the Meme track seem like the gambling industry in the crypto world, providing people with a dream of chasing extraordinary profits. However, for larger institutions, these projects pose high risks and uncertainties, making it difficult to invest heavily.
On to AI. I am generally optimistic about this sector, but currently, there are still few projects that can deeply integrate AI and blockchain. Many projects merely bundle AI and cryptocurrencies for the sake of fundraising. However, there are also some projects that perform exceptionally well in this area. For example, Virtuals and Grass are recent projects we consider well integrated, capable of leveraging the flywheel effect of cryptocurrencies to drive AI development.
QUANYU: We have just discussed relatively macro narratives; now let's return to specific projects. Everyone is curious about how you, as a seasoned investor, approach researching a project. What is your research methodology for a new project or new token?
ARTHUR：
When researching new projects or new tokens, we rely on multiple information channels and combine various methods for analysis.
First, we purchase professional investment research reports and data services, investing a considerable amount of resources in this area. These tools provide us with detailed on-chain data, such as trading volume, number of active users, and on-chain transaction counts. For example, in November last year, on-chain data for Solana, including DEX trading volume and daily active user counts, surpassed Ethereum in multiple indicators. By continuously tracking this data, we understand industry growth points and trends, adjusting our focus tracks and investment directions based on data.
Secondly, we value communication with industry insiders. By interacting with entrepreneurs, other venture capital institutions, and peers focused on secondary market investments, we can learn which tracks are widely favored and the underlying logic and reasons. This information sharing provides us with a more comprehensive perspective.
Finally, social media is also an important reference channel. For example, we closely monitor platforms like Twitter for the latest project updates and industry trends. Additionally, we use specialized data analysis platforms like RootData, which significantly improve our efficiency in analyzing data and tracking market changes.
Through these methods, we can more effectively evaluate the potential and risks of projects, providing solid support for investment decisions.
QUANYU: Thank you, ARTHUR, for your support! For our platform, we also hope to provide users with a more efficient information search channel by integrating the latest news, research, team dynamics, fundraising situations, and more. This content is also the core information needed by most investors in their project research process.
So, on a project level, could you share some successful investment cases this year, ARTHUR? How do you evaluate these projects and ultimately choose them?
ARTHUR：
Taking Aave as an example, many people ask us why we were so optimistic about it in August or September. At that time, the market was sluggish, especially between April and September when almost all cryptocurrencies performed poorly. However, we noticed that DeFi still showed stable growth in Q2 and Q3. Through on-chain data and fundamental analysis, we observed Aave's on-chain data continuously growing and that it was about to update its token economic model. Based on these factors, we believed it had enormous potential and released relevant investment research reports.
Another success story is Hyperliquid. This project lacks a VC background but has become a leader in the Perp track due to its excellent product and application performance. The community's strong belief in it, combined with users generally choosing to hold rather than sell after the airdrop, has been validated by on-chain data.
QUANYU: Alright, besides these relatively successful projects, what do you think were some good opportunities that you missed this year?
ARTHUR：
Regarding some opportunities missed this year, there are a few cases that left a deep impression.
First, there are projects within the Solana ecosystem. Solana itself has achieved significant growth in market performance, and its on-chain data is very active, but some projects within the ecosystem, such as Raydium, have performed mediocrely. This is a signal worth noting because if Solana's ecosystem continues to grow, then projects within that ecosystem should theoretically benefit as well; it is unlikely that only Solana rises while ecosystem projects completely do not. Although these projects have relatively low liquidity, given Solana's active data and good market performance, the general performance of ecosystem tokens has indeed presented investment opportunities over this period, unfortunately, we did not seize them better.
Another more apparent missed opportunity is Sui. In fact, Sui's on-chain data has consistently performed well, including user numbers, trading volumes, and DEX trading data, showing a growth trend from Q1 to Q3. However, at that time, Sui's price did not show a significant increase. Although we noticed its data performance, due to insufficient time and energy allocation, we did not delve deeply into its ecosystem and potential. Additionally, Sui experienced some issues on a Korean exchange, and we did not spend time understanding the specifics, which may have also affected our judgment on its investment opportunities.
Overall, Sui is one of the most obvious opportunities I missed this year. Its on-chain data has fully reflected the growth trend, but we did not convert its potential into investment decisions early enough.
QUANYU: Indeed, the tokens mentioned earlier basically belong to the secondary market. I remember that when you first entered the industry, you focused more on primary market investments, but now your focus seems to have completely shifted to the secondary market, is that right?
At the same time, there is also much discussion in the industry regarding VCs and the primary market. According to our RootData statistics, although the prices of mainstream coins represented by Bitcoin continue to rise, the activity in the primary market has remained low. The latest data shows that the activity in the primary market in November decreased by approximately 20% to 30% year-on-year.
So, what prompted you to shift your focus more towards the secondary market? Do you think this reflects a certain trend or change in the industry?
ARTHUR：
I have been thinking about this question for two years. As early as 2022, I noticed that the scale of VC funding far exceeded the unlock amount of new project tokens that the secondary market could accommodate, with a ratio of about 3 to 4 times. This imbalance makes it difficult for retail investors to absorb the selling pressure during a bear market, resulting in insufficient market demand.
This is also one of the reasons I gradually shifted to the secondary market. Although there are still opportunities in the primary market, such as Eigenlayer and Celestia, the overall investment difficulty has increased. The gap between founders from financing to execution, the speed at which industry tracks are validated and shifted, among other issues, increases the uncertainty of primary investment.
Taking the gaming sector and prediction markets as examples, the timing of the former's explosion is still hard to judge, while the latter only rose to prominence this year due to Polymarket and the U.S. elections. The core difficulty of primary investment lies in the inability to predict the timing of its rise, even if the track is eventually validated as having potential.
Overall, secondary market strategies are more favorable in the current environment and are more suitable for flexible adjustments in a rapidly changing industry.
QUANYU: Indeed, there are widespread concerns in the market about the selling pressure brought by VCs. So, do you think there will be more projects like Hyperliquid in the future that rise successfully by relying on community consensus and concepts rather than VC involvement?
ARTHUR：
I believe this phenomenon will definitely increase, but whether it can become mainstream is still hard to say. After all, doing projects usually requires financial support. For example, Hyperliquid's founder is said to be a very successful trader with considerable personal wealth, so he does not need to rely on VC funding. However, for most other projects, especially those that need to build ecosystems like public chains or Layer 2 projects, a large amount of financial support is still needed.
However, this trend of 'not integrating VC funding' is indeed gradually forming. I believe ICOs may return to the market, although not as crazily as in 2017 and 2018. However, with changes in the U.S. SEC regulatory environment, more projects may choose to raise funds through ICOs in the future.
QUANYU: The current industry discussion on how to further push Crypto mainstreaming has always been a hot topic. Many people are trying to attract more users through developing consumer applications or educational outreach. So, in your view, what are the key shortcomings that hinder the mainstreaming of the industry?
ARTHUR：
Regarding the mainstreaming of the industry, I believe this is closely related to specific tracks. Taking DeFi as an example, previous shortcomings mainly focused on security issues and user experience. The biggest risk in DeFi lies in the vulnerability of smart contracts to attacks and the potential loss of funds due to coding errors. However, in the past 3 to 6 months, we can clearly see that this issue is improving. Through years of experience accumulation, such as learning lessons from early projects like Aave and Uniswap, current protocols have significantly improved in terms of code security. Additionally, user experience in wallets has also seen significant optimization, which is gradually addressing the shortcomings in the DeFi space.
Another key shortcoming lies in the integration of blockchain technology with application scenarios. In the past, we tried to apply blockchain technology broadly across various industries, but in reality, not all fields are suitable for deep integration with blockchain. I believe blockchain is more suitable for certain specific areas, such as finance, payments, and scenarios that require decentralization and democratized financing. These fields naturally align better with blockchain technology, enabling it to better leverage its advantages.
After multiple attempts from 2017 to now, we have gained a clearer understanding of the applicable scenarios for blockchain technology. Future directions should focus on these high-fit areas rather than trying to forcibly apply blockchain technology across all industries.
QUANYU: Recently, have you discovered any innovative new products or projects? What aspects do they showcase that are particularly worth noting?
ARTHUR：
I believe DeSci is a very innovative field, and it is also one of the topics I have been personally interested in lately. The core significance of DeSci lies in allowing more people to participate in funding scientific research, providing support for some small niche scientific projects that may have been overlooked.
Traditionally, many niche scientific researches often fail to attract the attention and financial support of large institutions because they are difficult to commercialize or have small potential markets. For example, some studies may be challenging to translate directly into drugs or products, so large pharmaceutical companies usually do not invest resources. However, this does not mean these studies do not contribute to humanity or that they lack future potential. Even if the current market audience for these results seems limited, such as only 0.001% of people globally needing related drugs, from a societal perspective, these studies are still worth supporting.
The innovation of DeSci lies in its ability to use blockchain technology to allow smaller communities to provide funding for these researches. For instance, even if only 100,000 people might benefit from a research project, those people or concerned individuals can raise funds through the DeSci model to promote the progress of relevant scientific projects. This model not only has the potential to develop new solutions but can also help fill the gaps in traditional scientific funding systems.
Currently, we can see some projects, such as the DeSci concept mentioned by Vitalik and the interest from well-known figures and institutions like CZ, which is because this field can make scientific research more democratic and diverse. I think this is a very interesting and potentially innovative direction.
QUANYU: Returning to the secondary market, what investment experiences and strategies do you think can be shared with ordinary users and investors? Can these experiences help them better grasp market opportunities?
ARTHUR：
Regarding investment experiences and strategies in the secondary market, I have some insights to share. As someone who has been a full-time investor in this industry for seven years, I deeply realize that investing in cryptocurrencies requires constantly updating one's knowledge system and cognitive structure.
Continuous learning and cognitive updates.
The changes in this industry are too rapid; it requires not only financial knowledge but also a comprehensive understanding of technology, policy, and market trends. For example, the impact of this year's U.S. elections on the market has been significant, so we spent a lot of time studying Trump's winning odds and possible policy directions, to the extent that we have become 'experts' on the U.S. elections. Furthermore, with the continuous emergence of new tracks (such as DeSci and DePINi), we also continue to invest effort in learning and understanding these fields.
Cautious Use of Leverage
The risks of leverage need to be repeatedly emphasized in every market cycle. In the past week, we have seen non-mainstream coins experience a drawdown of 20%-30%, and positions with more than three times leverage may have been liquidated. Even in a bull market, excessive leverage can lead to significant losses. Therefore, I recommend that investors always manage their leverage ratios well, especially in situations where the market is highly volatile, maintaining good risk control awareness.
Deeply cultivating specific tracks or ecosystems
A significant investment 'Alpha' comes from in-depth research into a specific track or ecosystem. Choose a track that interests you, deeply understand its technology, community, and ecological development, and even get to know key individuals within it. For example, although we as a professional institution have more resources, in the case of Sui, our missed opportunity to invest was due to a lack of proper follow-up on its ecological development. Members of the Sui community who truly understood it might have already realized its undervaluation and quickly positioned themselves when the market took off.
Advantages of Retail Investors
Retail investors have the advantage of flexibility and quick decision-making. For example, Hyperliquid's token went live on Friday and tripled over the weekend. Institutional investors often cannot respond quickly due to longer decision-making processes, while retail investors can use their judgment and agility to seize such opportunities. This flexibility allows retail investors to sometimes outperform professional investment institutions.
In summary, successful investment strategies include continuous learning, cautious use of leverage, in-depth research of specific tracks, and utilizing the flexible advantages of retail investors to seize market opportunities.
QUANYU: For projects like Hyperliquid, in the early stages, there is indeed a lack of public team information and funding information. So how should we assess their potential and lay out positions in advance? What key signs or data can help investors unearth these opportunities?
ARTHUR：
Regarding the investment judgment of Hyperliquid, we can mainly look at several aspects. First, as a user, you will find that Hyperliquid's user experience is the best among similar projects. This excellent product design has laid a good foundation for the project and boosted users' confidence in its development. Additionally, based on on-chain data, even before the token launch, Hyperliquid's TVL (Total Value Locked) and trading volume were already leading in the Perp track, making it a leader in the field. These data performances significantly enhance the community's confidence in the project.
Although Hyperliquid's token price performance after its launch exceeded most people's expectations, for some users who held strong beliefs in the project, they had already recognized the project's potential and laid out their positions before the token was issued. This strong community support, combined with the project's excellent foundation, is a key reason for Hyperliquid's success.
QUANYU: But how do you value such projects?
ARTHUR：
I believe that there has always been a lack of a systematic approach to the valuation of blockchain projects. Currently, in most cases, valuation is still derived through comparisons. For instance, regarding Hyperliquid, people generally start from its market capitalization at launch and believe there is still room for growth. Since Hyperliquid positions itself as a public chain, many people compare it with other successful public chains to infer its valuation potential.
This valuation method is essentially a relative valuation. For example, the valuation of Solana has gradually formed through comparisons with Ethereum. This benchmark-based valuation approach is still the mainstream method in the blockchain industry.
