Editor | Wu Talks about Blockchain

This podcast is a discussion organized by Wormhole & Pyth during Hong Kong Week. The host is Colin Wu, Founder of Wu Blockchain. Guests include BMAN, Co-Founder of ABCDE; Michael, Investment Lead, Inception Capital; Mia, Head of Ecosystem and Post-Investment at Hashkey Capital; Julia, COO of Caladan. This episode mainly discusses some of the challenges currently faced by Chinese cryptocurrency VCs.

What track are you most concerned about at the moment? Why?

Michael：

Last year, I mainly invested in several AI projects, such as MyShell and Flock. Recently, I have turned my attention to the Bitcoin track, especially projects like Merlin and Unisat. Currently, I am particularly interested in the UTX Stack or RGB++ project, which I think brings some innovative technical solutions to the Bitcoin field.

BMAN:

Given our ten years of experience in this industry and our background in multiple cycles, Bitcoin is currently in a state of renaissance. Therefore, we will invest more than 30% of our funds in the Bitcoin ecosystem, including Babylon, Merlin, Bitlayer, Unisat, etc., about ten projects. In addition, about one-third of the funds will be invested in the next AI-related projects. We will also hold a large-scale Asian AI Hackathon next. The rest of the funds will be mainly invested in infrastructure fields, such as ZK, modularity, and Parelle EVM. Our entire ABCDE team has a technical background, so we will focus on the technical field.

My:

I am mainly concerned about the follow-up of our investments and the development of the ecosystem. Recently, we have been paying close attention to various compliance issues and related financial products, including infrastructure and enterprise services. In general, our investment strategy is to seek progress in stability. As mentioned earlier, in the AI ​​and Bitcoin ecosystems, we are also making relevant arrangements, including the Restaking field. In addition, we have several new investments to be announced soon.

Julia：

Since we are an exchange company, we usually focus on projects related to exchanges. Recently, we invested in a new exchange project called Backpack. As mentioned before, we are also interested in layer 1 and layer 2 solutions. There have been many new layer 1 and layer 2 technologies launched this year, and we have invested in several of them. Recently, we have shown a lot of interest in Monad, Berachain, and Bitcoin projects. Another area of ​​interest for us is stablecoins, and we have seen a lot of stablecoin projects recently.

Is a bull market not a good time to invest because the project valuation is too high? What is the difference between bull and bear VC investments?

Michael:

From the perspective of VC, we have a consensus among our peers that the window period of the primary market may only be two or three months. In the bull market, VCs will have a clear exit cycle and high requirements for their investment in projects. Looking back at the past portfolio, especially the relatively bearish period from March to June last year, there were some parallel opportunities for the projects that came out in Hong Kong. Now our investment expectations may not be so high in terms of return, but the requirements for exit are more stringent.

BMAN:

The overall valuation is much higher now than it was a year ago, sometimes even two or three times higher. Therefore, for many projects, we have two options internally: first, if the project can be successfully launched within a year, we think it is worth investing in; second, we are ready to cross the market and hold it for 4 to 5 years until the next cycle. Projects in the middle state are in an awkward position, so our advice to the portfolio is to either prepare for the long term or seize the opportunities in the current cycle.

My:

Even during the bear market like last year, we were very active and had already made arrangements to adapt to the cycle. As Mr. BMAN said, we are also considering the possible tracks for the next cycle in advance and making some long-term preparations. For our asset management, there will definitely be a part of the transfer from the primary market to other investment opportunities with more possibilities, which is also one of our current strategies.

Julia:

I agree with BMAN that one significant difference between a bull market and a bear market is valuation and of course velocity. In a bear market, deals progress more slowly, it may take weeks or even months for you to decide whether to invest, and project parties have more time to develop their products and bring them to market. And in a bull market, everything needs to happen very quickly and you may only have a few days or at most a week or two to make an investment decision. If projects want to go live during this market cycle, they have to do it very quickly.

Many VCs have shifted from the primary market to the secondary market. What is the core competitiveness of VCs in the primary market?

Michael:

At present, the shift from the primary market to the secondary market is mainly for liquidity. At this time last year, we saw some funds start to set up secondary funds. This was because there was a valuation inversion between the primary and secondary markets at that time, and some good secondary investment opportunities emerged. As a major investor in the primary market, although we are currently focusing on the primary market, we will empower the project party as much as possible, whether it is organizing the situation, connecting resources or providing marketing and technical support.

BMAN:

Indeed, we see that many funds that originally focused on the primary market are beginning to turn to the secondary market. But our ABCDE funds are still focused on the primary market because we believe that the primary and secondary markets are fundamentally different. The primary market is more about empowerment and value addition, while the secondary market is more of a zero-sum game. We like the primary market because it is more like a positive-sum game. Our strategy is to go deep into the developer community, build our own development team, write open source projects, and communicate with developers in the community. We usually establish connections when the project is not yet mature and help them develop from the beginning.

My:

In addition to investments in the primary market, we also have some funds invested in the 1.5 level and secondary markets. For us, it's just a matter of risk control and preference. Our support for projects and the resources we provide will not differ depending on the level of investment. Our ecosystem is relatively large, including HashKey Exchange, etc., and we have recently launched some major projects such as compliance funds. This is a comprehensive strategy for our portfolio and the support we provide for them.

Julia:

As a VC, your investors are also choosing you, not just you choosing your investors. The strongest founders always have many choices. If you want to be a VC in the primary market, the most fundamental thing is that you need to be able to help your founders. Each VC has its own unique way and characteristics to provide help. For example, from our perspective, we are an exchange and market maker, which is a point where we can clearly help our projects. Other VCs may have advantages in geographical location, help projects from one region to another, or have strong connections in a specific industry. But in any case, as a VC in the primary market, you must have a competitive advantage that can really help the project.

AI is a hot topic among VCs. Is it just a pseudo-proposition with no life?

Michael:

In the past year, we have invested in many AI projects. I think it is not wrong to pursue AI because it is indeed a huge narrative. We hope to break through the limitations of the open source model through the incentive mechanism of blockchain. I have seen some AI-related blockchain projects promote the development of this field through innovative solutions. In the entire AI field, the current solutions are still centralized, which brings greater efficiency. Cryptocurrency itself is an alternative plan (Plan B), so why can't AI have a Plan B?

BMAN:

We have noticed that many funds in the market that originally focused on the primary market have begun to turn to AI. One of our portfolio companies, 0xScope, is doing AI, and they found that the prices of crypto projects are mainly affected by narratives and market makers. In the long run, I am very optimistic about the combination of AI and blockchain. Blockchain does not just serve humans, it is more suitable for serving AI or machines. Blockchain provides four key attributes for AI: instant confirmation of ownership, governance capabilities, assetization and liquidity. These attributes are not available in current AI technology. After combining AI, we see a promising future. We will invest one-third of our capital in AI.

My:

AI is an area we are very interested in, but we are not the most professional team. We encourage existing portfolio companies to integrate AI elements, such as AI governance. We support this transformation and are on the sidelines for new AI investments, but are willing to make some small investments. We remain optimistic about the combination of AI and cryptocurrency, although this is still in the pending stage.

Julia:

While there is a lot of hype in the AI ​​field, there are also real use cases. At our company, engineering teams use AI tools to write code, which significantly increases their efficiency. Another example is one of our portfolio companies, Kaito, where they use AI and language learning models to understand text-based data and sentiment data. We also use these tools. So I think focusing on AI will lead to more opportunities for practical applications.

What do you think about the Bitcoin ecosystem? Regarding the controversy over L2, how to solve the issue of whether only Chinese people are playing with it at the moment?

Michael:

From what I know about the West, the Bitcoin Layer2 they are working on is also pursuing TVL. Basically, there is not much difference between the East and the West. I hope the market will pay less attention to TVL, because the current market is mainly concerned about which platform has the highest TVL, such as launching a launch pad or DEX on Merlin because it is easier to get market attention. I hope that in the next month or two, the market will shift its focus to technological breakthroughs in Bitcoin rather than just TVL.

BMAN:

The Bitcoin ecosystem started to rise last year, starting with Ordinals and BRC20, and it has only been a year. It started in Asia, but recently the West has also started to participate. I explain the importance of the Bitcoin ecosystem to European and American VCs every week, such as Merlin and Inscription, and there are indeed projects invested by European and American investors. Each halving of Bitcoin will reduce the reward for miners, which requires new "military expenses" or transaction fees to maintain network security. The Bitcoin ecosystem can increase transaction fees, thereby incentivizing miners to continue to maintain the network. In addition, many Bitcoins are dormant, and the development of the Bitcoin ecosystem can increase the liquidity of Bitcoin and drive the prosperity of the entire crypto ecosystem.

My:

For many cryptocurrency VCs, including us, more discussions are about how to build ecosystems and practical applications, and how to make them generate value. When we communicate with players in the traditional financial world, they have already allocated a certain proportion of BTC, and they are now concerned about how to make these BTC generate compound interest. We support cooperation with any interest-bearing assets and their related applications, and we also maintain an open attitude and believe that there will definitely be new things around Bitcoin.

Julia:

I strongly support the views of BMAN and Mia. When communicating with traditional investors, I found that their attitude towards Bitcoin is completely different from other cryptocurrencies, especially after the launch of Bitcoin ETF, they are more accepting of Bitcoin as an asset, but still skeptical of other cryptocurrencies. I think this provides a good opportunity for the development of Bitcoin.

How good is Binance in VC investment projects? Does whether a project can be listed on Binance determine whether it can succeed? Is it too important?

Michael:

At present, this is indeed a dilemma, that is, in the decentralized world, centralized exchanges such as Binance have a monopoly. I hope that Binance can become more transparent in some aspects, which is more beneficial to the entire ecosystem. At the project level, there is no need to rely too much on Binance's investment decisions; if your project is good, Binance and OKX will naturally invest. Relying too much on the strategies of exchanges, such as reserving a large proportion of tokens for Binance and OKX, is actually useless. We should return to the essence of the project and focus on the innovation and value of the project itself.

BMAN:

The crypto industry is all about liquidity. As the largest liquidity platform, Binance is naturally the first choice for projects to list their tokens. However, I have observed two trends: first, the listing process is gradually becoming standardized, and it is becoming more and more like the listing of traditional financial institutions such as Nasdaq; second, the liquidity of decentralized exchanges has increased significantly, and the wealth effect and price increase of many projects mainly come from DEX. In the future, more projects may choose to obtain liquidity on DEX rather than centralized exchanges. This is a positive industry development trend.

My:

From a VC perspective, we shouldn’t chase Binance too much or predict its moves. We are always open to our portfolio, and if we can’t meet the requirements for listing on Binance at the right time, we will look for other opportunities. Our goal is to support them in seizing market opportunities, not to push them to make inappropriate listing decisions.

Julia:

From the perspective of exchanges, Binance only launched 30 to 40 tokens last year, which obviously does not mean that only these tokens are successful in the market. On the one hand, the number of tokens listed on Binance is very low, and on the other hand, Binance's market share is also declining, from more than 50% in January last year to less than 30% in December. In the past year, we have seen the rise of many new exchanges and DEXs, such as EDX and Backpack. Therefore, Binance should not be the only platform that projects need to pay attention to.