Original title: "VC vs Liquid Fund Inside FriendTechs Exit The Chopping Block" Guests: Haseeb, Tarun, Jason, Tom Original translation: zhouzhou, joyce, BlockBeats
Editor's note:This podcast explores the impact of the sharp drop in the price of Friend.Tech tokens on project planning and user retention. It also discusses the ethical issues of crypto project exits, especially project termination after token issuance, and the different roles of venture capital and liquidity funds in the crypto market. In addition, the program analyzes the negative effects of airdrop mining and the impact of hedge funds on market liquidity and efficiency. The podcast also mentions the conflict between market speculation and long-term value creation, as well as the room for improvement in market efficiency.
The following core issues are raised and discussed in this podcast:
Friend.Tech token plummeted.
Project Exit and Ethical Issues
Different roles of venture capital and liquidity funds.
Negative impact of airdrop mining.
Market strategy loss and arbitrage behavior.
TL;DR:
Friend.Tech token crash: Friend.Tech token price fell 96%, revealing the risks of issuing tokens in the absence of sustainable product planning and user retention strategies.
Project Exit and Ethical Issues: The issuance of tokens by early-stage projects has sparked a discussion about whether project teams should have ethical obligations when exiting, especially when the project is accused of "running away" after termination.
The role of venture capital in the crypto market: Low barriers to entry allow a large number of venture capital to enter the crypto market, pushing up project valuations, leading to over-promotion and under-delivery.
Challenges of early token issuance: Early token issuance often confuses market signals, harming the long-term potential and user retention of projects.
Venture capital vs. liquidity funds: Explore whether venture capital is extracting value from the crypto market, or whether liquidity funds can improve market efficiency.
Hedge Funds and Market Efficiency: Whether hedge funds can improve market efficiency by increasing market liquidity and price discovery remains a hot topic.
Airdrop Mining and Wash Trading: Airdrop mining affects project metrics by creating false user growth data, resulting in value extraction.
Haseeb: Our special guest today is Jason Choy, the startup tycoon of Tangent. Jason, you should live in Singapore, right? Is American politics a hot topic in the Singapore circle?
Jason: Everyone is paying attention to what's happening in the United States recently. I usually operate on American time. In the past few weeks, we have been watching the Fed's movements and political debates all day long. To be honest, this is my least favorite part of the crypto cycle.
Haseeb: Are you following World Liberty Financial and the Trump family's DeFi projects?
Jason Choy: I heard that this project is related to Aave, and it seems to coincide with the sharp rise in the price of Aave's token. But other than that, I haven't paid much attention to this project. Is there anything we should pay attention to?
Tarun: I think I said this project was like a "rug scam" or a "poor man's exit scam."
Friend.Tech Token Plummets
Haseeb: The story dominating the news this week is Friend.Tech, a SocialFi project that basically lets you bet on creators and buy their tokens to join the creators' chatrooms. It was very popular in the summer of 2023, but then it gradually cooled down. This year they launched their own token, but it has not performed well. The price of the token has almost fallen all the way and is now down 96% from its all-time high. The initial market cap was about $230 million, and it has now shrunk to about $10 million. Friend.Tech has been criticized in recent times.
About 4 days ago, the Friend.Tech project transferred control of the contract to an invalid address, basically burning their own admin key. As soon as this news came out, Friend The price of the token plummeted immediately, and many people claimed that Friend.Tech was "running away", which means that they issued the token and then left, abandoning the project. The project was just an empty shell because it could not function at all.
An interesting detail here is that Friend.Tech did not sell their tokens. From what we understand, the tokens were not sold to investors, and the team themselves did not even hold them. So this was a so-called "fair launch" of tokens, and the team also said that they had no plans to shut down or abandon the project, and the application was still running, but everyone seemed to interpret it as Friend.Tech running away.
This incident has triggered a broader discussion about what kind of responsibilities crypto project teams should bear after launching products and tokens. The reason why this story is a bit strange is that Friend.Tech did not sell tokens to retail investors, and the team themselves did not hold these tokens. So I want to hear everyone's views on the Friend.Tech incident, especially on the responsibilities that crypto entrepreneurs should bear when launching products?
Jason:I did buy those tokens and lost a lot of money on Friend.Tech. I have a lot of airdrops and keys, joined clubs, and am very active on the platform. I was probably one of the largest holders of tokens in the world at the time, at least in public wallets. So now my tokens are worth 96% less, but I still feel like he launched an app that we liked, and people did use it, at least for a while. He also launched the token fairly, without doing a big internal sale, and I think his real problem is user retention and the timing of the token launch.
An anonymous developer creates an app, and everyone starts talking about it, which is typical in crypto. We saw a lot of this in the last cycle of DeFi, but not so much in this cycle. A topic will catch everyone's attention and everyone will be talking about it for weeks, and this is the Friend.Tech moment. And there are a lot of clones from this project, such as Stars Arena on AVAX, and a bunch of other imitators. This reminds me of the last DeFi, so I'm excited and think that maybe we will see a new wave of social applications from here, but it hasn't happened yet.
Haseeb: Tom, what do you think of this situation?
Tom: I think that stuff involves accountability or what you might call ārunawayā behavior. The worst runaways are probably the worst ICOs that raised a ton of money and made a bunch of promises and visions, but then delivered nothing. I think those are the teams that are often accused of that wave of projects in 2017, and then you look at some of the tokens or NFT projects, like Stoner Cats, which maybe didnāt promise to develop a TV show, but if you were just selling a JPEG, that was fine. And then there are the meme coins, which donāt have any expectations or promises or any clear vision, theyāre just themselves.
The Friend.Tech team didnāt distribute tokens, they just built a product, but I feel like people seem to be more angry at Racer and the Friend.Tech team than at other teams. Itās a bit strange that Racer has received more pressure than the teams that didnāt do anything. Because the team didnāt keep the tokens, but made money from transaction fees - they made about $50 million from transaction fees on the platform. Usually these revenues go into the DAOās treasury, and the team may receive grants from them, but in the case of Friend.Tech, all the revenues are completely private, and the team directly profits from these transaction fees.
Isnāt this exactly what everyone wants? Everything is decentralized, there are no administrators, you operate it yourself, and no one can "run away" you. But maybe depending on the mood of the people or the development of public opinion, things become negative. I donāt know why the Friend.Tech team is being targeted so much this time, after all, there are worse examples in the crypto field.
Haseeb: Yes, people are angry because everyone knows that Friend.Tech, as a company, has made over $50 million in transaction fees in a year and a half, but none of that money has flowed into the Friend.Tech token. I saw Hasu provocatively raise this point that when a token is issued, people understand that it means that the token will accrue value in the ecosystem of the product, but this token is like joining a club or something, it is not the thing that accrues value from the business. The business accrued $52 million in value, that's it. So at least there is a logical complaint that they knew people had this expectation, but they chose to do it this way and violated expectations.
Tom: I think if it was a more traditional project, where the team allocated tokens, and then the team made money by selling tokens, and the funds flowed into multi-signature wallets, and then the team ran away, then people would have more reason to be unhappy. But in the case of Friend.Tech, everything has been very transparent from the beginning to now about where the transaction fees go, how payments are made, how the system works, and nothing has changed.
So, on a surface level I can understand why people have negative feelings, but on a deeper level I don't think it's that big of a problem. I think there's something unique about the Friend.Tech setup, it's essentially a meme token, and that was obvious from the beginning.
Jason:I think a lot of the problems could have been solved by launching the token later, before there was any value accumulation mechanism, and they hadn't found the product market fit cycle. I think the app had strong virality initially, but they didn't solve two big problems. The first problem is that the platform will naturally become quirky, such as the price of buying Key is built into the price curve. So the Friend.Tech group would quickly exclude a lot of people as the price went up to 5 ETH, and as a result it was hard for these groups to scale beyond 30 people, so they never solved the scaling problem.
The second problem is that the value creators get on the platform is a one-time thing. If you earn fees from people buying your keys, then once someone buys your keys, you have no incentive to continue to provide value because you don't make money from people participating in your group. You can say that if creators are not active, people can sell their keys. But in reality, creators don't have much incentive to stay active because creators themselves don't hold the keys in the first place, because creators have to buy their own keys.
If they had solved these problems before launching the token, maybe they could have kept some of the heat. If I remember correctly, they launched the token at the beginning of the user curve, almost like a desperate attempt to attract people back with the promise of an airdrop, so they rushed the token.
Haseeb:This did trigger a surge in users, and everyone came back to the platform and saw that there were new features, new club systems. But the features didn't work, and the experience was very bad. Rather, they wasted the platform opportunity to attract users back through airdrops, which is really hard to deal with as a startup. Friend.Tech finally debuted on the biggest stage in the crypto space, but it blew it, and it became very difficult to seize a similar opportunity again.
Tarun: I was active for a while, but then it became a matter of people buying my keys just to ask me questions. I was like, I donāt have time to be a Q&A bot all the time, doesnāt ChatGPT already exist? But I would say that Friend.Tech actually got this āhype + entertainmentā metaverse gameplay wrong. They were indeed the first to create this model. The idea of burning keys and charging fees is actually exactly the same as the gameplay of the entire meme coin - someone injects liquidity, they burn keys, and the fees are shared by creators and platforms. This is exactly what Friend.Tech did, but they may have done it too early. Because Friend.Techās gameplay suddenly became mainstream on the Solana chain, but Friend.Tech itself failed to seize this opportunity.
Haseeb: I think what Friend.Tech didnāt figure out, or what Pump.fun figured out, is that you can start with a bonding curve, but you canāt stay on it forever because it will eventually break down. You have to transition at some point, and not stay on it.
Tarun: I think part of the reason people are upset with Friend.Tech is that theyāre seeing some of the more successful mechanics now, and the early days of Friend.Tech donāt look that great by comparison, but I think theyāre on the right track. You could say that Friend.Tech figured out the memecoin thing before it became popular. But I kind of felt like the social part of it was very fake, and I remember at one point I came back to the platform and all my key holders were bots, and they were asking me the same question like 500 times.
Haseeb: Why are they asking these questions?
Tarun: I think they probably wanted to get a bigger airdrop reward by having a lot of interaction. Because everyone was trying to "get the airdrop" at that time, some places became very strange. I think in the beginning, these rooms were quite interesting and unique, but then they became sour. When I think Friend.Tech really entered the mainstream was when those OnlyFans creators started to join, that's when it stopped being a niche crypto project and became something that really attracted the masses.
Tom: That's right, OnlyFans ended up with $8 billion in revenue, and 80% of that revenue went to the creators, not the founders of the platform.
Jason: There are also some local celebrities on Friend.Tech who have made it big on the platform. These are some good signs of creator platforms that creators can use to build their own businesses.
Jason: Friend.Tech did have some early signs of success, but it felt like the team didn't iterate enough on the core product idea. They seemed to see people liking the platform and thought things would just work out, but their infrastructure was so poor.
Haseeb: They were so slow to add new features, and the chat experience wasn't improving. I feel like they got stuck in their own product trap, because once the product started to take off, they felt like they should stick to that original direction. Friend.Tech didn't really grow beyond the original framework, it was just an app where you chat with people who have your keys, and that's it. I don't think they were willing to try new things, and maybe they should have done something closer to the spirit of memecoin.
Tarun: Yeah, at a certain stage, you feel like joining someone's group chat isn't particularly appealing. At first the questions you get are pretty interesting, then it becomes which token do you think will go up? Or what project do you think is good? And I also found Racer's Twitter behavior during that time a bit offensive, which is one of the reasons why I stopped using Friend.Tech.
I used to like his research-based Twitter content, which was very profound and niche. But since he started Friend.Tech, his content has become less good. I feel that this product not only did not get me good content, but also reduced the quality of his own content as a creator. It is a lose-lose situation. Now if you want to get good content, you have to buy his key and enter the exclusive room of Racer, and the public good content will not be given to you.
Project Exit and Ethical Issues
Haseeb: I want to focus on the issue of how founders in the crypto space exit. In traditional startups, it is normal to close a startup. In the crypto space, closing a project is a bit strange. The main problem is that there is no standard, no ready-made exit process or guide. People donāt know how to end it, and what responsibilities the founders should bear. I am curious about what cases you have seen in this regard?
Jason: In the early stages of a project, the difference between success and failure is often very large. If I were to give some advice to founders on how to make the right decision when they realize that the project is not working, I think it is relatively simple to shut down the project in the very early stage, because that is suitable for the tokens that have not yet been issued, and your stakeholders may only be four or five people, such as angel investors and a leading venture capital. You just need to communicate with them, work with lawyers to handle the dissolution of the company, and return the investment in proportion, which is basically a very simple process. But once you issue tokens, you are no longer facing only a few investors, but may face thousands of token holders.
Haseeb:So do you think the solution to this problem is to control the timing of token issuance? You should not issue tokens before the project is ready, unless you are sure that you have found product-market fit and are ready to accelerate growth through token injection. Do you know of any successful token exits? For example, FTT, although its project has stopped working, the tokens are still traded. And Luna, although there is no substantial development anymore, the token still exists.
Tom: Yes, there is a version of Luna called Luna Classic, which we like to call the classic version in the crypto field. In fact, something similar happened just this week. Vega, a decentralized derivatives platform, they have their own chain, and they put forward a proposal, which is basically to gradually withdraw and shut down the chain. This kind of thing is quite simple. Although it is decided by a community vote, the team has essentially decided to withdraw and gradually leave.
This reminds me of the discussion about IoT smart home devices. When the companies that make these devices go out of business or want to stop service, people often complain, "Why did you destroy my device that I spent $1,000 on?" They want the company to open source the code so that users can run their own servers. If the company can do this, that's undoubtedly the best course of action. But there are costs and legal issues involved, and there are very few teams that actually open source the code.
Jason: Indeed, if you can do that, that's the best path. In the crypto space, for example, if you want the community to take over, then open source the front end and let the users run and govern themselves. If you unilaterally shut down the project, it will be more difficult. To do this requires complete decentralization, or at least close to complete decentralization. Projects like Friend.Tech have servers hosting chat messages and are responsible for many of the actual operations. Without these functions, Friend.Tech is almost nothing.
Tom: Yes, there are almost no projects that are completely decentralized and gradually shut down. Examples that come to mind are Fei and Rari Capital, but thatās really rare. Most of the time, as long as someone is willing to run the infrastructure, they will always exist and be traded forever, like Ethereum Classic (ETC). The criteria for whether a token is ādeadā is pretty unique in crypto. While these tokens are still on-chain and even have people providing liquidity on some exchanges, they are basically ādeadā by most standards.
Haseeb: Tangent Fund does both early-stage startup investments and liquidity market investments and token issuance, right?
Jason:Yes, thatās right.
VC vs. Liquidity Funds
Haseeb:Recently, a lot of people on Twitter have been discussing the dynamic relationship between VC funds and liquidity funds, and the view that VC funds are net extractive to the crypto industry, that is, they take more money out of the crypto ecosystem than they put in. VC funds invest in new projects, usually at low valuations, and when these projects mature and are listed on major exchanges, VC funds will sell their tokens, draining funds from the crypto ecosystem instead of injecting funds into it. So this argument holds that more VC funds are bad for the industry, and they should allocate capital to the liquid market and directly purchase already listed tokens on the market instead of continuing to invest in new projects.
There is a growing consensus that VC funds are āextractiveā or a net negative for the industry. Considering that you previously worked at Spartan, which does both liquid markets and venture capital, what do you think of this debate? And what is your position at Tangent?
Jason: Not all VCs are the same. I think the barrier to starting a crypto fund is relatively low compared to the Web2 space in 2020 because this is the first time many people are entering this space. As a result, there are a large number of funds in the market, and they have lower requirements for the quality of projects, resulting in many random projects being funded. After these projects went public, people blindly hyped them up, and ultimately many tokens went one way down. This gives people the impression that VCs are just buying low and then trying to sell at unreasonably high valuations when they are listed on exchanges.
We have indeed seen a lot of this, but I would not deny the entire crypto venture capital space because of this. What we do at Tangent is that we think that part of the space is over-allocated, with too much capital chasing too few quality projects. Just like the venture capital space in Web2, eventually the VCs who are good at picking good projects will dominate the market. So when we founded Tangent, our original intention was not to compete with these big funds, so we wanted to support these companies by writing smaller checks.
I think the current liquidity market lacks a mature price discovery mechanism. For the valuation of startups, it is usually multiple mature venture capital funds competing to find a reasonable price. In the public market, there seems to be not much consensus, and there is generally no strict standard for the valuation of tokens, so we need a more rigorous price discovery mechanism.
Tarun: One of the interesting things about the crypto space is that it almost always blurs the line between private and public investing. As you said, in the crypto space, everyone seems to be able to participate. This is in stark contrast to traditional markets, such as private equity investment. Traditionally, you might only have one liquidity opportunity when a company goes public, and there is no content about frequent buying and selling in the documents I read. In contrast, in the crypto market, investors not only participate in project launches, but also help find liquidity, connect market makers, and do a lot of related work themselves, which leads to differences in market structure, which is why the price discovery mechanism in the crypto market is relatively poor.
And I think that pricing in the private market is even more inefficient than pricing in the public market. Many times, the final price of a transaction is not what investors think is reasonable or willing to pay. Due to competitive pressure, investors may have to pay a higher price to win the transaction. This "auction" mechanism often leads to a lack of pricing efficiency.
Haseeb: Yes, there is a "winner's curse". The "winner's curse" refers to the fact that in competitive auctions, the winner often pays a price that exceeds the actual value of the subject matter. Investors in the crypto space seem to be more willing to take this risk. When the US government auctioned oil field blocks in Alaska, the government allowed oil companies to collect a sample from the land and then decide the bid amount. At that time, due diligence was just someone going to the land to sample and measure, and there might not be sonar technology like today. The problem is that such auctions often lead bidders to pay too high a price because they make overly optimistic assessments based on limited samples.
Tarun: That's right. If one bidder samples a piece of land with a lot of oil, they will think that the whole piece of land is an oil field, while the place where another person samples has no oil. In fact, the true value of the land should be the average of all bidders' information. But because this information is private and bidders do not share it with each other, the final winner is often the one who bids too high. They may have just sampled a lucky oil field and misjudged the overall value of the land. This is the so-called "winner's curse" - although you win the auction, you actually win an inflated resource, in this case, an asset you plan to resell in the future, but you find that you actually paid too much.
Haseeb: Do you think this "winner's curse" is unique to crypto venture capital or does it exist in all venture capital?
Tarun: I think all venture capital has this phenomenon, but it is more obvious in crypto venture capital. Because private investors in the crypto market are also investors in the public market. They will participate in the liquidity construction of token issuance, such as reaching an agreement with market makers to provide supply. In traditional public markets, these processes are usually completed by bank intermediaries. Banks are responsible for pricing and bookkeeping, but banks are not the owners of the assets, usually third parties.
In the crypto market, private equity funds are able to intervene more when assets are publicly traded. In the public markets, private equity has very limited ability to intervene. So in the crypto market, even though it looks like a "winner's curse" on the surface, it's actually different because private equity can influence liquidity events.
Don't you remember when every other week, the partners at Benchmark would complain about the banks' pricing? They complained about how the IPO price was wrong and they lost control of the price. This affected how they priced the Series C round, and it also affected how they priced the Series A round.
Strategy loss and arbitrage in the market
Tom: This may indeed bring some additional impact, but I don't think it is significant. As you said, at most it is an introduction to market makers, but it does not mean direct participation in pricing or negotiation. Sometimes you may lend assets to market makers, or do other operations. In traditional markets, these are usually done by third-party intermediaries, but in the crypto market, the role of intermediaries is not prominent.
Crypto investment is not a simple commodity auction. It is usually not the team with the highest bid that wins. In fact, the team with lower costs often gets cheaper capital. This is also the reason why "European family offices invest in Series A" is often mentioned, because there are indeed low-cost funding options there. The venture capital funds that everyone is familiar with are often not the investors with the highest bids, which also explains why they can achieve better returns.
Tarun:I think one of the main differences between crypto venture capital and technology venture capital is that technology venture capital pays more attention to brands because their liquidity cycle is longer. Therefore, startup teams are usually willing to accept larger discounts in exchange for high-profile brand support. In the crypto space, teams are much less tolerant of this, especially after 2019.
Haseeb: Many well-known brand funds will actually help you find customers, especially in the early stages.
Tarun:I agree that brand is very important in the early stages. But in the later stages, the market becomes more homogeneous and the brand influence is relatively small. The problem is that there is no traditional late stage in the crypto space. It is almost all early stage until the liquidity event occurs. Series B can be regarded as late stage in a sense. Traditional venture capital may have Series D or Series F, but the stage division in the crypto space is not clear.
Haseeb:The premium for brand in the crypto space is higher than that of traditional venture capital. Brand is particularly important in the seed round or pre-seed round because when there is no product, everyone relies on signal transmission. If one top fund participates and the other is a no-name fund, the transaction price difference between the two will be very large. Therefore, crypto investment is not only a bid for capital, but also a bid for prestige. And in the crypto field, the balance of capital and prestige is more prominent than traditional venture capital.
Tarun: I agree with your point about later stages, such as Series F, but in early-stage tech investment, especially AI investment, I do think the influence of brand is even.
Tom: In 2020 and 2021, many people believed that cross-border investment funds like Tiger Global dominated the market and drove up prices. However, in the end, this argument did not come true, and instead the phenomenon of "winner's curse" emerged. But this was not the norm in the venture capital market, and it is not the case in today's market. Therefore, it is difficult to predict the future based on data points from a few years ago.
Jason: I think the public market in the crypto field has given projects valuations far higher than their actual value, which has enabled VCs to make huge gains on paper. For example, we invested in a new Layer 1 project at a fully diluted valuation (FDV) of $30 million, and three months later, when the token went online, the market pushed its valuation to $1 billion. This almost forced the VC to sell the token when the token was unlocked, so the public market provided VCs with an opportunity to cash out.
Behind this phenomenon is the different liquidity window of the crypto market from the traditional market. Traditional venture capital projects usually take 7 to 11 years to achieve liquidity, while crypto projects may be able to issue tokens a few months after the company is established, and liquidity comes faster, which is indeed much shorter than traditional venture capital. In particular, meme tokens are launched almost every 15 minutes.
The existence of liquidity windows does exacerbate this phenomenon. Projects usually do not have enough time to fulfill their vision. This is not only because VCs promote project progress or tokens are issued too quickly, but also because the market has given a huge speculative premium to almost any potential crypto project, and this early overvaluation is difficult to sustain. So, I think this problem will eventually correct itself, and retail investors have realized that buying new project tokens at billions of dollars of FDV often results in losses. We analyzed the token issuance in the past six months, and the prices of almost all tokens have fallen except for meme coins.
Haseeb: The market has fallen so much in the past six months, with almost all assets down around 50%, which makes me take this view with a grain of salt. Ironically, we manage a liquidity fund ourselves and we prefer to hold for the long term. I disagree with his view that liquidity funds are good for the industry and VC funds are bad. His argument seems to assume that there is no real value in what we are building in the crypto space, as if we are just playing a shell game.
If you donāt think there is real value, why are you involved? The fact is that VC-backed projects - whether itās Polymarket, Solana, Avalanche, or Circle, Tether, Coinbase - have expanded the crypto industryās landscape and attracted more people to the market. Without these VC-funded projects, Bitcoin and Ethereum would probably be worth much less than they are now.
The view that there is nothing worth building anymore and new projects are worthless is too narrow-minded. Historically, this skepticism of new technologies is untenable. Even if most VC-funded projects eventually go to zero, this is common in venture capital across all industries. And buying liquidity tokens is still necessary.
Tarun: I think VC funds have also driven the development of the entire industry, and we do need more liquidity funds, but it is unreasonable to completely deny the contribution of VC funds. You mentioned that the entry of liquidity funds into the market will improve market efficiency and benefit the crypto industry. My rebuttal is that the operating model of liquidity funds is to buy early, sell at high points, and then look for the next opportunity. Their purpose is to arbitrage, not to inject funds for the long term. If operated properly, liquidity funds will eventually extract more funds, not inject more.
Tom: I have worked in both traditional finance and crypto private equity, and this debate also exists in traditional finance. Some people criticize venture capital for only inflating book value without creating real value, and believe that capital should be invested in liquid hedge funds. This is actually a classic contradiction in capitalism: the conflict between long-term but uncertain returns and the need to know all information now drives the existence of trading activities. I think the public market in the crypto field has performed poorly in raising funds for project teams. Unlike the traditional stock market, teams rarely sell tokens directly on the public market, and almost all of them are sold to venture capital.
Haseeb: In the stock market, if a company needs funds, it can raise them by issuing new shares or debt, and the market is generally optimistic. But in the crypto field, it is difficult for teams to obtain new funds through the public market. Token trading is more of a retail transaction, lacking an effective financing channel. Most people on Crypto Twitter seem to support hedge funds, which is the opposite of the attitude of the traditional market. Hedge funds usually trade with retail investors, but Crypto Twitter supports them.
Tarun: Didnāt you follow the GameStop incident? That's the opposite situation. In the GameStop incident, people hated hedge funds, but in the crypto field, everyone seems to prefer hedge funds. Haseeb mentioned that retail investors participate in the crypto market through liquid tokens rather than private transactions, so they are more likely to resonate with liquid funds.
Jason: Arthur mentioned that most VCs in the crypto field performed poorly because the barriers to entry into this field were low in 2019 and 2020, resulting in many low-quality projects being funded and entering the market at overvalued valuations. This caused VCs to cash out quickly, leading to a negative view of VCs. But we are very cautious in choosing partners, such as co-investing with Dragonfly, because we have similar standards and tend to fund projects with real potential.
Also, the idea that liquidity funds "extract value" is an oversimplification. There are many different strategies in liquidity funds, and even high-frequency trading funds can add deep liquidity to the market. And many crypto funds are similar to VC funds. They are usually theme-driven, publicly share investment logic, help the market become more efficient, and transfer capital from low-quality projects to high-quality projects.
Haseeb: You mentioned that some hedge funds have performed poorly, but there are also funds like Berkshire Hathaway that are helpful to the market and improve market efficiency. So, what types of hedge funds are bad for the industry? Because what you just said is a bit vague, do you mean arbitrage funds are bad, or long-short funds are bad? Which funds do not meet your standards?
Jason: It's hard to say specifically which type of funds are bad. For VCs, if VCs keep funding those runaway projects, it is obviously not good. But for liquid funds, it is an open market and anyone can participate. I don't think there are any legal fund strategies that specifically support scams.
I think there is a clear line between legal and "good and bad". As long as it is not illegal, I don't feel qualified to judge which type of funds are "bad" and which are "good". But I think the funds that are most valuable to the market are those theme-driven funds that share investment ideas publicly. If I had to choose, I would prefer these funds over high-frequency trading companies. Theme-driven funds help the market discover prices better and move retail capital from bad projects to good projects. Of course, the two functions are different, so it is difficult to say which strategy is a net negative for the industry.
Haseeb: Tarun, what do you think?
Tarun: You mentioned the word "illegal" which is a bit subtle. The crypto market is indeed vague in some definitions. Many things may involve violations if you dig deeper. For example, many companies engage in wash trading. I think the market should develop to a point where the cost of wash trading is high enough to discourage this behavior. The goal of the crypto market is to prevent wash trading, rather than relying on SEC investigations like traditional markets, which usually lag behind the events. If you look at the penalty cases, it is usually five years before there is a result. The crypto market has not yet fully reached this norm, and there are indeed many people who profit from this method, which does not contribute to price discovery.
Types of hedge funds and their impact on the market
Haseeb: Can you talk more about other hedge fund strategies?
Tarun: I think there are some strategies missing in crypto that are more significant than some of the bad ones that exist. For example, in traditional markets, you can find self-funding portfolios, where the expected growth of the assets covers the cost of funding, such as option premiums. But in crypto, 90% of derivatives exposure is mainly perpetual contracts (perps), which are not self-funding because you have to pay funding rates all the time. Although staking exists, there is also a maturity mismatch problem.
This is also why there are not many long-term traditional hedging funds in crypto, more short-term operations or long-term holding strategies, and there is almost no operation in the middle. If you plot the transaction frequency of these funds, traditional markets show a normal distribution, while crypto markets have a bimodal distribution. This distribution pattern may change every time a new DeFi mechanism or staking mechanism appears, but it has not yet fully converged. Therefore, the lack of medium-frequency operations is a clear deficiency.
Jason: If I had to point to one hedge fund strategy that is detrimental to the industry, I would say it is the systematic airdrop āfarmerā strategy. This type of operation gives project founders confusing metrics data, making it difficult to determine whether the product is truly in line with the market. And these airdrop āfarmersā only extract value from the project and do not stay to use the product. Many studies have shown that the user churn rate after the airdrop is as high as 80%, which is not good for founders or projects.
This strategy has limited scale effects and is usually operated by a small team of two or three people. Although there have been larger-scale airdrop mining, such as Pendleās TVL performed well at its peak, the scale of this operation has decreased today.
Tarun: I would like to see a more efficient, transparent, and mature market. Although progress may seem slow, this field is indeed maturing compared to 10 years ago.
Haseeb: Yes, after this discussion, I generally agree with Jason's point of view. Short-term hedge funds can improve liquidity, and long-term funds can make the market more efficient and reallocate capital to some extent. Although Tom mentioned that capital reallocation in the crypto market is not meaningful because it is difficult for project teams to raise funds through the public market, they can still obtain capital through other channels, such as DWS or venture capital funds, and their discounts will be reflected in the public market, and price signals will also be transmitted back from the public market. Therefore, these strategies are generally reasonable.
Tarun: Another problem is that some risk-free operations can make a profit, and these operations have no impact on the long-term liquidity or price of the asset. For example, wash trading is to obtain agricultural incentives, but this incentive does not make traders take risks, so it has no positive impact on the project. The market should let participants take certain risks so that they will promote the long-term development of the project. Although airdrop "farmers" now take some risks, this does not change their unproductive nature.
Haseeb: Yes, but taking risks can prevent such behavior from undermining project indicators. If I believe that the project will have positive results, the risk will motivate me to make positive contributions to the project. The operation of risk-free returns is just inflating the project's indicators without actual help.
ćOriginal linkć
