Death of Crypto Venture? Rethinking Crypto Fund Strategies | Tushar Jain & Ray Hindi

It's almost like macro. It's so self-referential that it becomes impossible to predict, right? Like, because everyone in the world thinks that rates are going to go down, you know, 6 months from now, well, that changes the behavior now such that that belief itself is stimulatory, and then that reduces the probability that rates go down 6 months from now, for example. Now, I'm not a macro guy, but just to draw that comparison, like, there are these capital market systems that are inherently chaotic, and you can't go and bring a pattern matching approach to an inherently chaotic system.

Hey everyone, we all know blockchain is changing the world, but who's actually driving it? I'm excited to invite you to the 6th edition of Meridian, a Web3 conference hosted by the Stellar Development Foundation in London from October 15th through 17th. Get early bird tickets at meridian.stellar.org with code BLOCKWORKSPOD. Special thanks to Stellar for sponsoring us. Now let's get into today's episode. Hey everyone, Jason Yanowitz here. Have you ever wanted to play casino games with your friends right from your couch? I'm excited to tell you about MyPrize, the first multiplayer online casino where you can play, chat, and win together. When you make your first deposit of $10 or more, you'll get $20 for free. Head on over to myprize.com/invite/empire to get started. This episode is brought to you by Avalanche. Avalanche is a leading network of blockchains giving some of the world's largest financial institutions new use cases and business models while leveraging completely customizable infrastructure. Check them out. It's core.app/discover. You can explore Avalanche's subnet ecosystem at core.app/discover. I was playing around earlier today. Really cool. Hey everyone, Jason here. Before we dive into today's episode, I wanted to tell you about your wallet's new best friend, Harpy. Harpy guards guards your digital assets 24/7, blocking sketchy transactions before they even happen. But that's not the best part— it's totally free. Secure your wallet for free at harpy.io/empire. Link in the description. Now let's get into today's episode. Although our guest this week is a managing partner of a registered investment advisor, nothing in this podcast should be considered an offer of multi-coins investment advisory services, or should otherwise be confused for investment, tax, legal, or other financial advice. All right, everyone, welcome back to Empire. We are here with Tushar Jain, co-founder and managing partner of Multicoin. Tushar, I'm going to skip the intro for you because I think everybody knows you at this point. And also new guest on the show, Ray Hindi. Ray is the co-founder of L1 Digital, one of the biggest fund-to-funds in crypto, as well as they do a lot of actually I think in recent years, right, you can fill us in on this, starting to do more and more venture investments as well, direct venture investments. So, Ray, welcome to the show. Tushar, welcome back, my friend.

Thanks for having me. Great to be here.

Thank you. Very happy to be here.

Ray, I'd love to pick on you for this first. Actually, we'd love to hear both your guys' take on this. There's a topic that Santi and I have been discussing a little bit that we, we've kind of grazed over it, which is We're at the point in the cycle where funds should be raising. Funds are raising and funds should be announcing. If you look back at the last several years, just based on where we're at in the cycle, where funds are at in their lifecycle, you— we're kind of at the stage where this summer and into the fall you should be seeing funds announcing, we just raised $300 million, we just raised $500 million. It feels eerily quiet right now. And I think some of the chatter behind the scenes is look, I know everyone's excited about crypto on crypto Twitter, but behind the scenes, talking to the allocators, there's still not as much appetite. And so funds are, uh, still maybe struggling to raise as much as they, as they wanted to. Um, Ray, can you just give us a look inside what is happening in the fund manager raising ecosystem? And what's it like when, you know, what, what's happening inside the mind of an allocator here when they're talking to some of these funds like Multicoin or Polychain or Paradigm or folks like that?

Yeah, I'd say that generally, I would say that there's a lot of improvement in terms of interest by allocators. And when I say improvement, so in Switzerland, for example, we've never had more interest from pension funds as ever before. So even, you know, compared to 2021, so the quality of investor or investor interest has is much higher than in the past, but that doesn't translate into flows yet. So they're learning about the space, they're interested, you get invited to institutional, to present to institutions all the time, more than ever before. And I would say on a global basis, what we see in terms of, you know, funds, assets being raised by funds, I would say that VCs are quietly raising because they're unable to reach their targets and they're reducing them over time and they're taking longer to achieve their final closes because the interest is much lower than in the past. And in addition, there's a lot of competition on the VC side. So yes, we're focused on very large managers out there that will be able to raise anyway. They'll raise much less than in the past, in my opinion, unless the environment changes significantly. But also you've got a lot of emerging managers that are hitting the market at the same time, and the competition is, is really fierce within that stack.

Hmm, to share what's happening with the fund managers. So I think, so one maybe data point I'd call out is Paradigm raised an $850 million, I think it was Fund 3, they announced it a month or two ago. Seems like a big raise, but that's actually down from their— I think it was a $2.5 billion fund too, right? So they've went from a $2.5 billion fund too in 2021, down to $850 million. What's happening inside these fundraise conversations for the different funds?

Yeah, I can't comment specifically about Paradigm because I don't know the specific details there, but I can say more generally there's, there's a perception that if a manager goes and raises a much smaller fund for a subsequent fund, that that is a sign of weakness, that something went wrong. And so you don't see managers itching to announce a new smaller fund because the perception of that is not very positive. However, the market conditions have changed. A lot of managers took advantage of the capital markets opportunity in 2021 to raise really large funds. Also, the capital markets had enough deployment opportunity at the time. There was enough opportunity to deploy money into deals in '21 in order to justify raising those funds. Now, a lot of those deals aren't going to work out because the prices were too high. And we can discuss that separately. But a manager's job is to try and match the demand for capital with the supply of capital. And at 2021, activity levels were at all-time highs, never seen levels anything like that ever before. And now I think you see managers raising funds, but they don't want to go out there and say, well, I raised a fund that's half the size because it makes them, you know, maybe not look as strong as they want to look. Even if that is the rational thing to do, because that's how much capital you can responsibly deploy. And I think, you know, the best managers are aiming to deploy capital responsibly, not just get AUM as big as possible.

What do you think, like, talking about the supply and demand of capital, like, where are we in the supply and demand balance right now?

I think it's different for different markets. For venture, I think we have an oversupply of capital. And, and not enough demand for that capital. Uh, you can see this by just how competitive the venture landscape is that Ray was just mentioning. Uh, we are seeing new emerging managers usually starting out with smaller funds who are competing for seed deals. Uh, and then you're seeing the bigger managers being forced really to go and deploy into higher valuation, later stage deals. That they might not, you know, really love as much, but they have to do something, right? Um, and on the public market side, I think we have an undersupply of capital. For, you know, the 7 years that we've been running Multicoin, we are now seeing the greatest dispersion in returns on the public markets that we've ever seen. We are seeing that, you know, high-quality names are trading differently than low-quality names. Everything is not as correlated as it used to be, uh, and that to me tells me that there's more opportunity for active management strategies on the liquid side. But there are very few large liquid managers out there.

Greatest dispersion in crypto history, meaning historically it used to be BTC would move everything would move the same, right? And there was just higher beta on some of the long tail of assets. But now maybe one day BTC goes down, ETH is flat, and I don't know, pick your, pick your other coin goes up. Is that, is that what you're talking about with dispersion there?

Exactly. An example is, you know, the recent sell-off in BTC driven by the German government sales, where, you if that had happened a few years ago, I would have expected that all of the higher beta assets would be down dramatically more than BTC. However, if you look at what the price action actually was this time around, that was not the case. You didn't see, you know, SOL down 50% or something in reaction to BTC being down 15%. So I think what we're seeing is that dispersion that is leading to more of an opportunity for active managers who are picking names?

Maybe I can approach it in a different way. So when we started looking at the space in 2018, your typical— the liquid side wasn't very interesting because of what Tushar is mentioning, as in the universe of assets was more restricted. And typically, your typical hedge fund portfolio that you had to pay 2 and 20 for, look, as you know, you're long BTC, ETH, and privacy coins. That was at the time in 2018. It was very difficult to find a manager that would differentiate from that consensus portfolio. Since, you know, 2020, after DeFi, and after 6 years, the universe has expanded substantially. And so today on the liquid side, you can really, when you look through all those measures, you have many different risk premiums that you can get exposure to. And so the supply of tradable assets out there, the universe is way richer, more interesting, and enables you to build a portfolio across managers that, that is way more robust. So that supply of liquid assets is very interesting. It's, it's nearly the, the flip side of the VC supply demand. So it makes it really, really interesting.

Hmm. Right. Maybe we can actually just go down that rabbit hole for a sec. Tell me about the evolution of crypto. Can you just say more about the evolution of crypto funds? Because what it sounds like I'm hearing from you is, look, there's been venture— venture funds have dominated. And I saw a metric somewhere, I think it was on crypto Twitter, I'm sure, the other day where it's like 90— I'm going to make up this number a little bit— 97% of the capital deployed today in crypto is venture. 3% is liquid. In traditional capital markets, that number is flipped. It's all liquid and a small amount of venture. So the Andreessens and Union Square Ventures of the world, there's actually a very small amount of capital there. And the real capital is in the public markets. Tell me about the evolution of crypto funds and like what you think will happen with this, with the liquid funds coming to market.

Yeah, so I'll start and Tushar, correct me if I'm wrong on some of the items because Sure, has been in the market longer. But essentially, when we started, I remember well, and we started looking at the space in 2015, between 2015 and 2017, there wasn't much to do outside of BTC. So it wasn't interesting for us. But things became interesting at the beginning of 2018. And so we launched our first fund, which is the Liquid Fund of Funds, in November 2018. And those were the main vehicles that were available If you looked at the blue-chip managers within the space, they had open-ended structures. They did some venture investments that were structured through side pockets that made a lot of sense. You know, those would become liquid after a few years and re-entered into the liquid pocket of the fund. So it all made sense. And in fact, when we started looking at venture at the time and thinking, hey, should we start venturing into venture. The reason why we wanted to do that was because we serve institutional investors, and the first reaction of institutional investors at the time was, hey, we don't get crypto. We like the space, but we'd like to have exposure to companies that service the space. So service companies, and at the time, as you know, we needed to deal with security. We needed to build crypto capital markets through robust exchanges, market makers, etc. So you had, you needed to invest in service providers within the space. And I still remember that in around 2019, we were struggling to find high-quality venture funds out there. There weren't a lot of them. But then you had that wave of institutional investors that had a preference for equity service companies that, you know, companies that service the space because they understand the equity structure. Um, and so a lot of flows came into venture funds and obviously the, uh, a lot of managers started launching, uh, venture funds.

And just pause you here as like a snapshot into the market back in 2018, 2019, the hottest companies were not, uh, you know, Arbitrum and Solana and Celestia and these protocols. It was BitGo and Fireblocks and Coinbase and Copper, and it was traditional it was this nice middle ground between, hey, look, it's actually structured as a traditional company. You're getting the equity. There's no token. There's never going to be a token, but it's in crypto. And so—

Exactly. And it was easier to sell this to an institutional investor. But seriously, at the time, there weren't enough venture funds doing that. Like, you would struggle to build a portfolio. And so that supply-demand was, you know, was— there was an issue in that supply-demand, the demand for capital, no venture funds. And, you know, that recalibrated itself over the next few years. So 2020, 2021, and especially 2022 as well, where, you know, consultants started pushing for venture funds because the only way you can raise capital from institutional investors is supposedly some consultants out there say that you can protect investors by putting them into a venture fund. That way they don't have to sell at the bottom, which I believe it's, it is not is unfair, to be honest. And this is why you have massive flows of capital and a lot of funds launching as VC funds, because the capital was there to invest in them. Now, the opportunities in the, you know, I think we have a lot of companies that provide security to the space. We have a lot of mature exchanges out there. We have a lot of market makers. And there are exceptions where some managers launched their VC funds to fund decentralized networks. So never went down the equity route. Those exceptions are very scarce. And those were the most attractive ones, to be honest. But today, the opportunity to fund companies that provide specific services to the space is no longer as attractive as it used to be. And so I believe that this whole, uh, supply-demand dynamic will flip towards, uh, the liquid side.

So let me— can I try to categorize it? And then, Tushar, I want you to jump in. So it feels like, okay, early managers were just allocating to— like, there was the Pantera Bitcoin Fund, they're taking 2 and 20 on basically Bitcoin. So that's like first evolution of crypto venture. Next evolution is, uh, they say, okay, we want to go raise capital, there's no appetite to invest in any tokens. This is like post-ICO era. None of these companies seem like reputable. We can never get a pension to invest in them. So we're going to do this nice middle ground of like what I'd call CeFi, Anchorage and BitGo and Circle and Coinbase and folks like that. Okay, cool. That pulls capital into crypto venture. Then some of the smartest crypto venture folks— and I know you guys were, I think, an early investor in Tushar and Multicoin's Fund 1— like funds like Multicoin said, look, we've got the capital for venture, but really the returns are not going to come from these what I'd call CeFi companies. They're going to come from the protocols. So that's maybe stage 3, is these venture funds investing in the protocols. They make a lot of money. Obviously Multicoin's done very well. And maybe now we're starting to enter the, the fourth evolution, which is there's too much money in that crypto venture pocket now investing in protocols. Now maybe some of the alpha is in the public tokens. And so we're going to see— start to see an influx of liquid, liquid fund managers. Is that a fair categorization of like the 4 stages?

Absolutely. Yeah, absolutely. So the exceptions always outperform. So you mentioned the exceptions, the consent. So whenever you have a lot of capital moving into a specific strategy, performance is average. The exceptions always outperform. And, um, and you know, the, the expectation is this will happen as soon as, uh, the, the difference in performance becomes really apparent. And especially as soon as traditional investors realize in bulk that alpha actually exists in liquid crypto, which doesn't exist in liquid markets anymore. That's how they think. So a traditional investor, whenever he thinks, okay, active, passive management on the liquids, my liquid exposure is going to be passive exposure. And as soon as I'm going to think active, I'm thinking PE and VC. And that's why they thought about the same way for blockchain and crypto. In addition, you have less mark-to-market. You don't have to discuss with your IC all the time and exit positions. You go in and you don't come out. I mean, that's the feature. It's interesting for them. But as soon as they realize that alpha exists in liquid crypto and they need that liquidity, and I can describe how a Swiss pension fund thinks about that liquidity. It's going to become really attractive for them.

Hmm. Tushar, did you want to—

Yeah, I want to chime in here about this market evolution around crypto venture to liquid strategies. I think for a lot of allocators, you have to look at how the allocator is actually structured and they have a separate team for venture versus liquid. Uh, and the risk profiles of those teams are very different. And so what happens is it's the venture people at the big allocators who are interested in crypto, uh, and not necessarily the public markets teams at those big allocators. But those venture, uh, allocators at those institutions are looking for closed-end funds, and they want you as a manager to fit into the template of what they are authorized to go do, which is going to be a closed-end 10-year vehicle, minimal recycling, and some of those basic venture terms. But that then creates this distortion in the market. And, you know, Ray said something a moment ago that I want to harp on because I think it's really critical. When it comes to capital markets, it is not enough to be right. You need to be right about something everyone else is wrong about. When something is consensus, you are not going to outperform by following consensus. And so today, the consensus amongst the large allocators, due to these structural reasons that I just described, is putting capital into venture funds and not into liquid funds. And I think that has created the supply glut of capital on the venture side. Which is going to mean that the liquid side outperforms because it's non-consensus and there is more opportunity there. Uh, just you have less competition. Capital markets are all about competition. It's not, it's not just about, you know, how great your brand is or how smart you are. It's also really the primary determinant is how much competition do you have and then what is your entry price. And that is probably the most important factor for returns more than anything else. And so looking for the non-consensus piece, I think, is critical.

You guys think that there will ever be appetite for the— maybe a two-part question here. Will there be appetite for the CeFi companies again? And I think CeFi maybe of 2018 and 2019 was— it was all market structure companies, I would guess. I actually kind of hate this word of CeFi. It's just like investing in the equity of companies where there's no expectation of a token. 2018, 2019, that is the custodians and prime brokers and folks like that. Do you think that there'll ever be appetite for that? And will it end up being the maybe the consumer companies or what does that look like?

So I have some thoughts here. Two things that I want to say. The first thing is, I think we need to see the IPO window for crypto companies open up again. And, you know, hopefully that happens with, you know, a change in regulators and just making the environment a little bit friendlier for these crypto companies.

Because, you know, can you say why that's so important? Because I think that a lot of people don't understand that. And as someone operating, who's operated a company with no token for 7 years in crypto, like, it's, it's a point that Mike and I talk about a lot. Like, why is this IPO window opening up so, so, so important for for crypto and how does the IPO market kind of flow back to Series D and Series E, C and things like that? Maybe just expand on that.

Yeah, absolutely. When a company goes public, the investors and founders and employees are now able to access public market liquidity. When the company's private, you just own the shares. They're worth something on paper, but you can't really transact with them easily unless, you know, you're SpaceX or something. OpenAI, one of the really big giants that people do want to transact in. And so because it's illiquid, you can't show any returns to your investors. For a venture fund, you're not going to have any DPI because you can't distribute illiquid private shares. It doesn't work. And so if you can't show any DPI, it's going to be harder for you to raise subsequent funds and harder to raise more capital to then go deploy back into that strategy. So if you were a fund that invested in a lot of crypto equity, like companies building in crypto, and you haven't had any real liquidity events, well, it's hard to go back to your LPs and say, hey, like, this strategy is doing so well, please give me some more capital to keep on doing this. You need to give them proof that it's doing well. And the proof that LPs really care about is DPI. Like, that's that's the proof is in the pudding. Like, you know, there's no, there's no paper marks, right? Like sometimes people look at paper marks, but, uh, you know, you really have to look at DPI.

And just to say, by the way, the divergence between venture funds that did equity, let's say 2019 vintages, roughly 2018, 2019 venture funds that did equity, mostly equity, and venture funds that did mostly decentralized networks, I mean, the first one has no DPI, right? And this, the second one has, on average, we're talking about minimum 6x, uh, sorry, uh, 3.5 to 4x DPI. So, and the performance is diverse, divergence is massive. So for them to raise their next fund, it's really difficult to compete with some of those exceptions. Does that make sense?

100%. Yeah. I mean, if you think about some of the big companies, like you could have invested in Circle, Circle in their seed round, Kraken in their seed round, BitGo in their seed round. You would have zero returns. You would have zero return, zero returns. Now maybe you did some secondaries or whatever, but you know, the gargantuan returns that you should have have been locked up, right?

Yeah.

I mean, there were some that were able to do some secondaries, but those again are exceptions within that area.

Yeah.

Like, like, but it's very difficult. I think of a fund like Blockchain Capital, right? They're like the first fund in crypto. They've done a lot of amazing token deals, right? The Eigen of the world and stuff like that. But also, they— I think they were the seed investor in— I think they might have led the first ever round in Kraken. Like, Kraken should be— there are a couple companies that like will probably hit the IPO market if maybe we have a change in administration. There's like Kraken, Circle, some folks like that. Like, I imagine Blockchain Capital is sitting there waiting for Kraken to IPO. And like, that's a— that could be a bit— I don't know how much equity they have. Maybe that's a billion-dollar unlock for them, which then means they can return capital to their original LPs, which means they have more success raising again. It starts this flow of innovation, innovation capital, I'd say, which is very needed. Right. Going back to the liquid funds, when you invested in crypto managers like Tushar and Kyle, you looked for very— I would say you looked for very crypto-native people, I would assume, and sacrificed on the operational side of things. I'm making an assumption about Tushar and Kyle here. I think the assumption can be made about a lot of the best crypto fund managers. If you looked at their funds in 2018, I bet the backend and operational stuff was a total nightmare and they ended up figuring that side of things out. But what they had was alpha on the crypto side. Now, does the same thing apply for liquid crypto? Are you looking for people who have like traded the crypto market, public crypto markets for a while? Or are you saying, look, there's actually a different skill set you need? I'm going to go find someone from Two Sigma who's just coming in and saying, this is a really inefficient market. Let me build a fund around this.

Okay. So, so I think those are two different questions. But if I refer to the operational side, I would say that the operations of an open-ended structure or hedge fund is way, way more complex and more difficult to DD than a venture one. And yes, you're absolutely right. The operational status of most crypto-native launches out there, yeah, are horrific. And that makes sense, right? Because, you know, that's not their skill set. They didn't come from a traditional hedge fund and you don't want them to. But this is where we come in because, you know, we have that experience. We've been allocating into hedge funds for a long time. We went through the 2008 crisis, and we see what, you know, all the mistakes that traditional hedge funds have made as well. But this is also why it is really important for allocators and us as well to invest during bear markets, because during bear markets, you have the time to essentially restructure those, the operational setup. And it's a win-win because we're able to de-risk our investment for our investors. But at the same time, we can prepare those funds to receive institutional investors later on. And this is exactly what happened in 2018, 2019. This is exactly what happened in 2022. And after FTX, we were very aggressive. And mostly focusing on operations. So operations is really key. And any tiny optimization on the operational side, which has happened, and there are real-life examples from, you know, managers that have an edge on the investment side, have led to disastrous results.

So maybe take me into not the operational side, but the skill set. Like, what are you looking for in the skill set of a liquid person?

Okay, so the skill set of a liquid person, I think in 2018, back back then, you know, your, your trad-fi brain would automatically say, hey, it's liquid, uh, you need a trader and you need to be active to suppress that volatility. And initially, that's how I started thinking about the space, and it was a big mistake because everyone tries to do that. All they want to do in crypto is how do we come up with products that actually suppress that volatility. So one way to do it is to launch a a liquid market-neutral fund of funds, which is a big mistake. And we never did that. But within our portfolio initially, we had a market-neutral—

Why is a market-neutral crypto fund such a big mistake?

Because one, from a business perspective, you know, promising an investor a straight line in crypto for some reason has no appetite. Like, investors don't have any appetite for that. That's— they're not interested, right?

They're not interested in 15% or 20% You can do that in the public markets, or you're investing in crypto to get outsized returns. It's not to get—

Absolutely. Absolutely. And in addition to that, if you look through, I mean, you're— I mean, there's no, you know, at the end of the day, what you're underwriting most of the time is counterparty and smart contract risk. And, you know, if you would have been heavy in market neutral, November 2022 would have been bad for you, essentially. That's why you're underwriting. So there's that, you know, you're in crypto for the positive asymmetry, you're not in crypto for a cap return, for being short vol, essentially, in the form of counterparty risk. So it's not really interesting. And those models didn't take off, by the way. So they didn't gather any, they didn't gather much AUM. And, you know, that's probably a good thing. But the other, the other approach that suppresses volatility is on the venture side. Again, either I do equity, or I do stuff that are private, that way I don't show that volatility in the NAV, and that's attractive for investors. But I substitute that for liquidity. So I give up the liquidity for less volatility, essentially. That's the idea. Now, when you look at crypto, and I think we learned that lesson together, Tushar and I, I would say, if I'm allowed to say, and Tushar, correct me if I'm wrong. But, you know, we learned that lesson March 2020. I still remember you know, it was 3 AM in Zurich. I was chatting with Tushar, and those are moments that are on the 12th of March, if I'm not mistaken. Those are moments that I will never forget. But essentially, the lesson was that the best risk-reward in crypto is— because a third way to suppress that volatility is to be a fundamental manager in crypto but more active in your trading. So you take your net from 0 to 100, and you try to suppress that volatility again. March 2020 showed that those strategies don't work because human beings are unable to deal with the volatility of crypto and they burn out and they start doing stupid things, right? And you're incentivized to use leverage to catch up and you end up blowing up. So the lesson was the key in crypto is you expose yourself to fundamental measures. You don't want a trader. You want to underwrite idiosyncratic risk and market risk. And once you accept that, that the catch is to absorb the volatility, to underwrite that volatility, then you're able to, you know, invest on a horizon of 5 to 10 years and you do extremely well. So we've learned that lesson. We've moved away from— the more active you are, the more risk you incorporate in your portfolio in the form of you're on exchanges more often, you are on you're underwriting smart contract risk, etc. You're underwriting the fact that you're going to be chopped up. You can't, you know, pick bottoms or tops. It doesn't work that way. It's impossible. And so it's ironic, but you de-risk your strategy by having a more static portfolio that is longer term, if that makes sense.

Yeah, I want to chime in here. I agree with all of that. I have a core investing belief that I think encapsulates a lot of this, which is you should invest based on strength, not lack of weakness. And I think too many investors think about looking for an all-rounded manager that can do well at all of these different things. And I think that is exactly the wrong strategy. I don't think you're looking for some— a manager, a firm that has the ability to pick fundamentals, also trade beta, also, you know, do market-neutral strategy. Like, you're not going to see all of those things in a single manager. That's not possible, really. Like, I haven't ever seen it. Uh, and so I think the key is invest based on strength, not lack of weakness. And then when you apply that philosophy to crypto markets specifically, what you realize is a lot of the desire for managers to kind of suppress that volatility and try and trade beta, right? They're like, oh, the market's up a lot. Maybe I should trim and take my net exposure down to 75. Oh, market's down. Like, I'll add, right? Like, a lot of that is them trying to focus on the lack of weakness because they want to show their LPs that, oh, we don't get huge drawdowns, right? But what they miss is they miss the big upside. And then what happens is they get whipsawed. And by whipsawed, I mean, they sell at, you know, price X, because they think it's pretty high, but then the market goes up to 3x or 4x. And they're like, well, I missed out. And my LPs are going to be upset with me. And then they buy in with leverage at 3, 4x. And then the market sells off, right? Like, that is the max pain scenario for a manager who is actively trying to trade. So that's why I think, you know, especially in a market like crypto, the idea of trying to discretionarily or systematically control your exposure to beta is not the right strategy for a liquid manager. And I think the focus needs to be on your strength, which should be fundamental analysis and trying to predict the future of how these assets will evolve or how these markets will evolve. Not trying to play the game of market psychology, because that game is— it is an inherently chaotic game that does not repeat. There are not really patterns. You can't draw a bunch of lines and triangles on charts and outperform in crypto.

Look at the Fibonacci numbers on the token. Yeah.

Yeah. Humans are pattern-seeking machines, right? So they love— humans love to look for these types of patterns.

Bounce off the resistance. Why is it not—

Yeah, but like, that's That's just not how these markets work. They're inherently chaotic. It's, it's almost like macro, right? Like with macro, it's so self-referential that it becomes impossible to predict, right? Like, because everyone in the world thinks that rates are going to go down, you know, 6 months from now. Well, that changes the behavior now, such that that belief itself is stimulatory. And then that reduces the probability that rates go down 6 months from now, for example. Now, I'm not a macro guy, but just to draw that comparison, like, there are these capital market systems that are inherently chaotic, and you can't go and bring a pattern matching approach to an inherently chaotic system.

So if you actually accept that philosophy and embrace it, the irony is that a result, you know, being exposed to a static manager fundamental that is liquid in 2022, while very painful, uh, you know, a minus 85% for that measure is the risk that you underwrote. So it's within the boundaries of that risk. So you're in a position where you know that it could happen, but you're in a much stronger position where you can add to that measure is if fundamentals around crypto have— did not change materially. Does that make sense?

Hey everyone, Jason Yanowitz here. Just wanted to take a, a quick break to talk about something exciting in the world of blockchain. The Stellar Development Foundation is hosting their 6th annual Meridian Conference this October 15th through 17th in London. It's a 3-day event where the brightest minds in Web3 come together to discuss everything from tokenization to DeFi. If you're a developer builder, policymaker, or business leader looking to make an impact in transforming global systems through blockchain, this is your chance to join the conversation. You'll get to network with the forward thinkers who are defining the future of this space. Head over to meridian.stellar.org and use the code BLOCKWORKSPOD for early bird pricing. Now let's get back to today's episode. Hey everyone, wanted to take a second to talk about MyPrize, the first multiplayer casino where you can watch, chat, and play together with your friends and favorite creators. Getting started is super easy. Use a credit card, PayPal, or even crypto to play over 500 games, from classic slots to live table games. Join the MyPrize community now and use referral code EMPIRE to get $20 for free when you make your first deposit or purchase of $10 or more. Head on over to MyPrize bit.ly/invite/empire. Link will be in the description of today's episode. This episode is brought to you by Avalanche. Avalanche is a leading network of blockchains, giving some of the world's largest financial institutions the design space to explore new use cases and business models while leveraging completely customizable infrastructure. Everything that Avalanche has been building the last few years has culminated in this moment where today you have institutions and developers able to essentially have limitless possibilities with the chain. They've enabled developers to build cross-chain swaps or create gaming environments where one subnet can unlock features in another or can use USDC as a native gas token. Onyx, for example, by JP Morgan or Citi or DTCC's digital assets or the Australian New Zealand Banking Group, they're all building on Avalanche evergreen subnets. Really cool stuff. Big thanks to Avalanche for sponsoring this episode of Empire. Go explore Avalanche subnet ecosystem at core.app/discover. That's core.app/discover. Thanks again, Avalanche. Hey everyone, wanted to take a quick break to talk about your crypto security. I am excited to tell you more about Harpy, designed to keep your wallet safe 24/7. Harpy is the most advanced wallet security tool. It monitors for risks, blocks detected threats, and recovers your stolen assets, all in real time. Picture this: You're browsing late at night and accidentally approve a shady transaction and it's too late to cancel it. I know I've been there before. Well, now Harpy's got your back. It jumps in, intercepts that transaction and takes your assets away to a vault that you control all completely free. It works with all the major wallets on Ethereum, Base, Polygon, and Arbitrum. Head over to harpy.io/empire and set up your free protection today. That's harpy.io/empire. Empire. I promise you that your future self will thank you. Now let's get back to today's episode. In traditional venture and liquid, there's a line in the sand where venture stops and liquid starts, right? And it's the— it's usually the IPO window. So you invest in Twitter early in a private company, no matter how much you love that company, you, you, you should and oftentimes do sell it when it goes public. No matter if you're best friends with the CEO and you love them, whatever, and you're still bullish, oftentimes you sell it. Now, there's some weird stuff in 2021 with Sequoia and the funds lasting forever, as they said, but seems like that experiment didn't really work out. And in crypto, there's a— there's not the line in the sand. So I'm curious how you guys think about like where liquid starts and where venture ends. And maybe I'll actually use one example to think, to think about this question. So if you're liquid, you're a liquid fund manager, you want to go long a token, you could just buy it in the, in the open markets. That's maybe what a normal fund would do in capital markets is they would just buy the stock. But in crypto, you could actually buy that token from Treasury, for example, and you could get it, maybe, maybe there's a 6-month lockup, you're like, 6 months, that's not really that long. And I get a 50% discount on it. So is that venture? Is that liquid? Or in liquid, you're like, I think that I'm going to make up a token here. BearChain. I think that BearChain is going to launch their token in October and they're doing this like private round right now and it's July. I'm making these things up. I don't know anything about BearChain and I could get it at like what I think is going to be a big discount to it to the liquid market. Is that venture? And but I'm expecting it to go to be, to be quote unquote public in 3 months. Is that venture, is that liquid? So how do you guys think about that, like that line in the sand?

I, I can go first and hand it over to Ray. I would say one thing is looking at discounts to market prices, I think, is a completely irrational way to be making investing decisions. You need to be underwriting from the bottom up of what do I think this thing is worth. Um, I actually think it's laughable. We see all these deals come by. They're like, oh, it's a, you know, 4-year lockup, linear lockup with a 40% discount, or like, you know, a 2-year lockup with a 30% discount. Like, this is a 100-vol asset, right? Like, how are— how can you justify being locked up for 2 or 4 years on a 100-vol asset with that much of a discount, right? Like, that— it just like mathematically does not makes sense. So I think you have to take that framework of, oh, the market price is X and I'm getting offered from the Treasury at 0.6X, you need to throw it out the window. That is an absolutely horrible framework to use. And I think the right framework is, how much is this worth in my mind? What do I think this could be? Then figure out what is the best way for me to get exposure to it, right? And if the best way happens to be I should go and try and negotiate a deal with the treasury or the foundation in order to get that exposure, then great. Or if the best way is I want to go buy it on liquid public markets because liquidity is there and actually, you know, I don't want to lock up, uh, because I think the market might come to price this asset appropriately before the lockup actually hits, then go do that. But I think, you know, I think it's putting the cart before the horse when people say, oh, I'm looking at the discount. And this is what blew up 3AC really famously is that they were like, oh, we're doing this arb where we're buying at a 40% discount with a lockup. And that's an arb. It's like, no, that's not an arb. That's not what an arb is. So yeah, I just fundamentally absolutely hate that framework.

Yeah, I agree with Tushar in that the liquid fund should set that valuation. And that's based on the fact that investor segmentation exists in all markets. If you think about credit markets, you've got investment grade, high yield, distressed, and then you've got your emergence from distress post-reorg equity. You've got at least 4 to 5 types of investors that have underwrite different risks, have different skill sets, And, you know, when, you know, a bond goes from investment grade to high yield, it's the high yield measure who's going to dictate what the spread is going to be on that bond, not the investment grade that gives a discount. It doesn't work that way. And, you know, I think one of the— what we should see going forward is a much more powerful, powerful liquid crypto fund industry that essentially dictates the pricing of tokens at launch, where you know, today, you know, things are priced by maybe market makers and founders. They should be priced by, you know, what is that liquid crypto manager, at what price is he willing to hold that token for the next 2 to 3 years if that's their investment horizon.

Hmm. Ray, switching gears a little bit, how important is it to get GP? Can you explain like GP versus LP shares in a fund and how important it is to get GP shares? I don't even know if the right word is shares or stake, or can you just explain that dynamic?

As for an allocator like us?

Yeah, if you're an allocator and a new fund comes to market, oftentimes I think an allocator, if they have enough size, will say, hey, I actually want a GP stake, not just a normal LP stake. Can you explain that? Because I think that's something most folks who haven't been in the room don't actually understand.

Yeah, I mean, you know, if you have a large allocator that comes in, they're the biggest check and they've got enough power because the manager is unable to raise enough money, you know, they'll negotiate a GP stake. And, you know, we saw that happen in 2023 and within on the VC side. And, you know, I mean, they're negotiating, makes sense. You know, they're working for their investors. But the problem is that you've got massive conflicts that can take place in those situations. If you're able to, you need to place that LP stake and that GP stake within the same structure for your investor, or else you create massive conflicts of interest. And that's not easy because the investment horizon of a GP stake versus an LP stake, especially if it's a liquid fund, I mean, those are very different risks that you're underwriting. I know that a lot of people do that in crypto. We don't do that. We might do it with one manager where we'll put them in the same vehicle. And the reason why we haven't done it in the past is simply it creates a lot of conflicts. And since we're serving pension funds, we don't even want to get close to those deals.

Got it. Got it. Tushar, wanna? Change gears a little bit. And it's a related topic. But I think it's, I think it's relevant to this conversation. Maybe can you say some things about the current token launch meta? It feels like the things are shifting in the, in the narrative and the meta and the zeitgeist around launching tokens and points and airdrops and all of that kind of stuff. And specifically, I'd love to hear your thoughts on that. But also, it's the effect that that will have on venture and liquid investing.

Yeah, I, I want to go back to, uh, what we were talking about before the GP question, uh, because I think it actually ties together really well. Yeah, let's look at how companies go public in traditional financial markets. You have an underwriting process that happens, you have some shares that are being sold to institutional investors, and you have a banker go out and build a book and say, this is where I think these shares should be priced. Now, there's some error in that process. And, you know, we can get into nuances of like why IPO pops are a good or bad thing and all this stuff. But that, I think, is still a better process than we have in crypto today. And I think the reason that we don't imitate a similar process is because of regulatory. ICOs actually led to better price discovery in liquid crypto markets than the current token launch process does, because the current token launch process has this low float, high FDV kind of characteristic that I think is really problematic. And there's not— you're not allowed to go out and market the token launch in the same way that an IPO is marketed, right? So you're not allowed to give the information needed for investors to be able to decide how much is this thing worth, like, what should I be willing to pay for this, right? And so a lot of investors are resorting to really amateur levels of analysis of, oh, let me just compare to the— to a comparable project and let's look at that. Or let me look at the last venture round and then value it based off that, which by the way, like, never do that. Like, that's a truly horrible way to look at it. That's like kind of pricing off a discount. Like, the price that someone else paid for the thing should not change how much you think the thing is worth. Like, that's a really bad way to look at the world. So I think what happens is that with public companies, when they go IPO, you see some price discovery happen before any shares trade. And that's what you used to see with ICOs in crypto as well. But since ICOs have fallen out of favor, now we only see price discovery after the token launches. And that is a huge difference because Sometimes, you know, people have this idea of, I want to launch at a high valuation, because it's going to give me some more ammunition to be able to use for recruiting, for partnerships, it'll give me some more legitimacy in the market, it'll deliver, you know, all these intangible benefits. But what happens is price discovery is going to occur. Like that, you know, one thing I can guarantee you is that over the longer term, like the markets do find price discovery and they do bend towards rationality. Like this is the fundamental law of capitalism. Uh, and what happens is if you launch at a really high price because you're looking for those intangible benefits, then as price discovery occurs and it turns out actually, you know, the valuation should be much lower. Well, now everyone who believed in you in the public markets early on has lost money. And now, like, you've hurt the community. You don't have, you don't have the sense of positivity around your project. People aren't as excited. And I think that that creates a lot of longer-term problems. So to bring that rant back to your question of like, what is the current token launch meta? I think the meta for token launches is changing right now. The meta as it's been for the past 6, 9 months or so has been you give users some points in exchange for doing some actions that you want in the protocol. Then you airdrop tokens to those people that have points using some allocation mechanism, usually nonlinear. So you're rewarding smaller accounts more than their pro rata share and you're rewarding larger accounts less than their pro rata share. And then you hope that those airdrop recipients help you achieve price discovery faster than if you didn't do a large airdrop. Right? Like that's kind of the current meta. But like anything in crypto, if it works for a little while, people figure out how to farm it or game it. And now we have, you know, just airdrop farmers, that are going out there using everything. And when they use these protocols, they're farming the tokens in order to immediately sell regardless of the price at launch. So they're not actually assisting in the price discovery process. They're just selling the tokens indiscriminately because they're just farming to do that. And it's, it's easy for a founder or a team to lie to themselves and say, man, my KPIs are going up, you know, like, look how many active addresses are interacting with my protocol. Look at how all this stuff is happening. This is fantastic. This is real growth. And, you know, they'll lie to themselves. And it's easiest to lie to yourself. It's easier to lie to yourself than to anyone else. Right. And they'll say everything's going great, but like, those are just airdrop farmers. Like, that should not count. And then they're going to insta-dump the token once it launches. It doesn't help with price discovery. And the market is coming to that realization now. Right. I think, you know, you saw like the really interesting anti-Civil airdrop farming tactics that LayerZero put in. And I think that kind of was one of the shifting points on the meta because they realized the negative effects of airdrop farming and they wanted to mitigate that. And so I think that's changing how token launches will happen moving forward.

Hmm. Maybe play it out a little more. What do you think the next like 6 to 12 months looks like for, for When you say it'll change how tokens are released and airdrops moving forward, what does that look like?

I don't think we're going to see as many founders or teams able to basically do the same easily Sybbled farming airdrop mechanisms. I think the market is going to delegitimize that and say, I know that that's not real. And once, once the market knows that that's not real, then you don't get credit for it anymore. And that is going to change the mechanisms. I think hopefully what we will see is some better mechanisms for price discovery before the token starts trading. You know, something that we've thought a lot about is, you know, things like using bonding curves to launch a token. or using other mechanisms in order to achieve price discovery before the token is ever transferable and tradable. Uh, and I hope to see more experimentation there. I think that, you know, for now we're going to see a lot of that experimentation from offshore founders, but if we see a change in regulatory administration, then I think we can see some more of that, uh, experimentation and innovation in the US and globally, because I think that'll lead to more efficient capital markets.

Hmm.

Tushar, you— there's a podcast that you did on Empire maybe like 2 years ago, where you talked about evolutions in every cycle is dominated by a new evolution in fundraising. I'm going to botch this a little bit, I'm sure, but ICOs and NFTs, these were just new evolutions of raising capital. Would you say the new evolution in this cycle is meme coins, or we haven't seen it yet? Or how do you think about that? I don't know if you think that thesis still holds true.

I do still hold that thesis. So to restate the thesis, if you look back at the history of crypto, every bull market was sparked off by a new method of token distribution because new methods of token distribution bring in new sets of users with new activities. So, you know, if you look at the 2013 kind of bull market, that was proof-of-work coin forks, because people were like, oh, this Bitcoin thing really works. That's when like Litecoin and some other stuff came into existence. Then you saw ICOs in '17. In 2019, you had a mini bull market from IEOs, which were ICOs, but slightly different. Then you saw DeFi liquidity mining in 2020. 2021, you saw NFTs. And yes, I do think that meme coins are playing a big part in that role in this cycle. And the reason for that is, it's getting engagement with a new set of users who want to go do things on-chain. Right? Like, that's, that's the key unlock is getting distribution of tokens to a new set of users. Now, is this going to be as powerful as DeFi liquidity mining or, you know, some of these other catalysts? That's hard to say, you know, these meme coins are inherently memes, right? Like, there's no cash flow or anything to go and point to. Like, they're fun. And I think retail investors really like meme coins because there is no alpha to be had. So the sophisticated investors can't, like, make more money than you or take your money because it isn't about being smarter, sophisticated. Like that, that's not the game. So I think that's interesting and different, but I am looking forward to the new token distribution mechanism that delivers fundamental value, which I continue to think for this cycle, the next one is going to be DePIN. I think DePIN is going to be one of the major token distribution mechanisms that incentivizes people to do actually useful work and then delivers a method of capital formation to deliver something that wasn't previously possible. I don't think that DePIN has really broken into that mainstream crypto market consciousness just yet. You see a lot of people talking about it, but you see less participation in it than you do in, you know, even something like meme coins. So that's what I'm looking forward to, because at the end of the day, like, I'm here for fundamentals. And I'm here for building technology that builds products that are useful. And meme coins can be fun, but they're not really useful. And like, that's what I'm more excited about.

Ray, how do you think about— maybe we can play off of Deepin for a second. It got me thinking about something else. How do you think about ecosystem funds that are very focused around one sector and/or like an ecosystem? So like when I think Deepin, I think like Oh man, what's the, uh, EV3 Escape Velocity guys? Like, they, um, their fund, like, very— I might botch this, and, uh, Tushar, maybe you can correct me because I think you guys might be investors in them, but like, they are— they dominate the deep end space. Like, if there's a deep end deal, they know about it. They are— they know every deep end founder. Um, Ray, from an allocation perspective, like, how do you think about investing in funds that have a very specific focus like that?

Um, yeah, I mean, it can be really, really interesting if the top-down is really attractive. Um, so, so I wouldn't— we wouldn't apply it as, um, as a given that, you know, managers— because the universe of crypto has expanded so much that we need to, uh, invest in specialized managers. I don't think that makes sense. Um, but if And, you know, we looked at EV3 really, really closely, and this is a great team and a very, very good example. I would say that they would be an exception. And so I would say out of maybe 30 fund investments since our lifetime, or 35, there might be 1 or 2 exceptions. So it really depends on the top-down of that specific sector, you know, how attractive it is from an asymmetry perspective, from the ability to actually generate alpha on the liquid side or the fact that it's really, really non-consensus on the venture side.

If I can chime in on that, I would say as a general principle, whether it's liquid managers or venture or I think actually in any form of investing whatsoever, in any market whatsoever, you never want to be a forced trader. You don't want to be forced to buy something, and you don't want to be forced to sell something. And when you specialize, you could be forced to go and buy something because you are focused on this specific sector, and you can't afford to miss a deal in that sector. And then that deal becomes a deal, and then your LPs are, you know, just they're never gonna want to talk to you again. Right? So you are effectively forced to trade, right? You might do deals that you wouldn't otherwise do if you were not typecast as, you know, this specific sector. So, you know, one thing that at least I think is very important is as a manager, do not be pigeonholed into anything. Because when you are pigeonholed, then you might be forced to trade, right? And in venture, that usually means being forced to buy something, uh, right, that you may not otherwise want to buy because of valuation or fundamentals or some other reason, uh, but you are forced to do it. And fundamentally, I think just like you never want to be forced to trade.

Yeah, it feels like the tricky thing comes when you're fundraising, right? Because just talking to other fund managers who are raising if you go out to the market, you say, I'm raising $400 million or $500 million for a crypto fund, the LPs are going to say, well, what makes you different? You say, ah, I am a gaming fund. I am a, I am a DePIN fund, right? I am a, I'm a consumer fund. And they say, oh, that's great. Okay, cool. That makes a lot of sense. We're going to invest in you now because you've like carved out this niche for yourself. But then I think, yeah, I think you're spot on too, Shar. Like, you know, things change so quickly, you become a forced buyer. There's like external pressure and internal pressure to do things that you, if it was a fully free market, you would not do.

So yeah, I mean, if you're a really good manager, you should not be making decisions about what to do based on what LPs will give you money to do.

Right? Right.

Like, that's— that is not a good way to make decisions. LPs are hiring you to make those decisions. right? So if you're outsourcing that decision-making to the LP, like, I think that's nonsensical. Ray, if you'd like to add anything.

No, I just wanted to say that even outside of crypto, I mean, the biggest driver of performance is being unconstrained, right? So even if you look at hedge funds out there, if you— the most sustainable drivers of returns were typically the macro funds because they had the freedom to go where the premium is, right? And I think that's— it's the easiest way to perform sustainably over the long run.

So I sent this tweet and I want you guys to tear it apart. I said, became a bit of a meme format. I said someone will make a lot of money building a Monad fund. Brand is a Monad-only fund, raise $5 million, put $100K into the top 50 Monad deals as early as possible, run back the Frictionless Capital playbook, but for Monad instead of Solana. You want to tear that apart too, Shar?

I feel like I might have already torn that apart with my last answer. The problem is now you're a forced buyer of every deal and you're going to end up investing in a bunch of copycat projects just because you're like, I need to do every deal.

You need to do the monad deals.

Yeah, I need to do every deal. And like, you should just never feel like you need to do anything. I think that leads to poor returns. Look, maybe that strategy works. And like, one of those things ends up being a big winner, right? Like, I can't say that it won't perform. But I can say that, you know, without having the benefit of hindsight, I just never want to be forced to do a deal that I otherwise wouldn't want to do. Yeah.

Just thinking about the liquid conversation from the beginning of this episode, I have a few questions about it that that have just come into my mind throughout this conversation.

When you—

so, Tushar, you guys have a— you guys have a venture fund and a liquid fund, right?

Correct.

Okay, so maybe I can pick on you for this question. And Ray, I'd love to get your thoughts too. The biggest— like in the traditional capital markets, public markets, the— if you think that the market is good, there's no like— like crypto works on these 4-year cycles and it always has worked on these 4-year cycles. And maybe that'll go away one day. But for right now, I think the assumption is still like it's working on these cycles. The biggest driver of returns has not been picking tokens, actually. It's just been actually timing cycles, I would call it. I see Ray shaking my head. So maybe I'll pick on you first. But yeah, which I guess you're right. Like, if you picked ZK, like the privacy coins, you were never making money. But if you pick some of the L1s in 2021, you were making all of the money. So I think that's right. But, but also, like, if you could time— you have two people who buy Solana. The person who like times the top, buys the bottom, I guess that's obvious, is going to make more money. But how do you think about a liquid fund manager going to their— like basically saying, I'm out, I'm like, I'm selling, I'm moving all to cash. I'm not shorting because I'm not shorting in crypto because that's a scary thing to do. I'm moving to cash and the LPs are like, but I'm paying you 2% and you're like 95% in cash. And you're going to get back into the market when— oh, you're getting back into the market in a year from now. So I'm paying you 2% to get back into them to just sit on cash for a whole year. There's like— speaking of like LP pressure, there's this LP pressure to be in the market even when you maybe shouldn't be in the market. So winding question there, a bit long-winded, but how do you— how do you guys think about that dynamic?

Should I give it a shot first? So, so, so just looking at history, so since 2018, I think on the liquid side, we invest invested in 25 funds from, you know, across that time, and there's only 2 funds that outperformed everyone. And the divergence in performance is enormous. I mean, we're talking about funds being up on the liquid side 15x plus versus, you know, multiples that are versus, you know, managers that lost everything. And so the divergence is enormous. And that divergence comes from idiosyncratic static risk, actual selection. Funnily enough, those two funds are very static in their exposure. They don't go to cash. That's not their job. Their job is to stay exposed, but they were able to outperform because they had the right projects during that period of time, um, and massive outperformance. And the way, just based on what we said before and the lessons that we've learned, is that yes, an investor can— an investor through an open-ended structure can go to cash themselves. That's the beauty of liquidity. So So why should you as an investor give up your liquidity to a closed-ended structure that, by the way, is doing a lot of liquids anyway? You can take charge of that liquidity and decide when you reduce your position. And I give you a real example about this. So we have the first Swiss pension fund that came in, put a first tranche in Q4 2019, a second tranche on the 1st April of 2020. And you know, a Swiss pension fund puts their crypto exposure in the alternative bucket, which is capped at 15%. The alternative bucket, you have PE, VC that are illiquid on the tradfi side, and they were lucky enough to put in liquid crypto with us in their alternative bucket. Now, if you put 75 basis points in crypto and you're up 10x by the end of 2021 or a large multiple, you're blowing up through that 15% cap cap where if you, if you reach that cap, you need to talk to the regulator. So liquidity is really important. So those— that pension fund was able to de-risk at the end of 2021 and double down again in 2023. And that's the beauty of open-ended or being, uh, or possessing the liquidity to act yourself. So I would— today I would rather have a fund that is fully allocated, or at least those are our core positions within our book, by the way. We have managers that are more active, but our two largest positions are always fully allocated and, uh, you know, generally generating alpha through picking, which has shown to be much more meaningful, and I think will be more meaningful in the future. And we can de-risk if we want to and whenever we want to.

Yeah, look, Trading beta is just extraordinarily difficult. I have not met a single person who can trade beta in crypto well, because, you know, it's easy to say in hindsight, oh, crypto works on 4-year cycles, just buy the bottoms and sell the tops, right? Like, fantastic. But if you let me trade in hindsight, I'd be the world's first trillionaire, right? Like, that, that's just not how it works. Uh, and the difficulty is managing your own psychology in that process, right? To go off on, you know, a bit of a tangent, like, I think there are 4 sources of edge that exist in investing. The first is your, uh, information or access edge, right? Like, do people pick up the phone when you call? Do people call you with deals? That kind of thing. The second is analytical edge. How smart are you? Are you able to understand what you're doing? The third, and this is the one that I think is relevant to this question, is psychological or behavioral edge. How do you manage your emotions? Because when the market— when you sell at, you know, in the middle of 2021, let's say, you know, July-August period, because you think, oh, this market's pretty overheated, like, I want out, but then you see the market rip up through the rest of the year and everyone's saying like, hey, why are you missing out on all these returns? How do you manage that FOMO? How do you manage that emotion? And actually what happens with a lot of managers is they go buy in again at a higher price.

Stanley Druckenmiller, tech bubble 2000, like—

I mean, he's one of the greatest of all time, absolutely legendary investor, and even he is prone to this same category error. So to anyone who thinks that like, oh, I'm going to be able to trade beta, it's like, well, even, you know, someone like Druck, who is this legend, like has had failures on this specific scenario that I'm describing. So that psychological edge is so, so hard to manage. Also, when the market's at a bottom, there's very few investors who are able to hold their nose and buy the bottom. Right? Like, that's just, that's an extraordinarily difficult thing to do, because you think the world is ending. Right? Like, oh my God, everything's gonna be over, like, or maybe I'll get to buy in cheaper, right? Like, so like $8 at the end of 2022, people were like, I'll buy it when it's $4. All right, like that, that's what people— some people were thinking. And it's like, well, you know, like, it's just, you can't time this stuff. Um, and just for the sake of completeness, I'll say the fourth edge in investing is structural. Uh, right, if you have the ability to do things that other people can't do in your mandate, uh, this kind of fits into the question earlier about being pigeonholed into a specific sector. Uh, I think having flexibility is a big structural edge. In order to give you optionality to outperform.

Let's talk about consumer for a second. So there's one of the other— so we talked about like token zeitgeist ending and airdrops and things like that, not ending, but narrative shifting. The other thing that feels like it's happening is infrastructure fatigue, re-excitement about apps. The problem with applications, I would say, has not actually been around people don't want to use them, it's that people don't want to fund them. There's been too much money to be made in infrastructure, in L1s and L2s, there is zero incentive to invest in consumer. One idea I have is if things start going public, they start doing their tokens, and it's actually priced below the valuation of the last private round. That's the incentive that will maybe drive a new wave of consumer investments. I'd be curious how you two think about that.

I can go first on this. I do think that there is infrastructure fatigue. I think that is specifically driven by just the incredible complexity of the modular stack, as opposed to the simplicity and elegance of the integrated stack. I think they both accomplish similar outcomes. They want the same endgame. It's just the modular stack has many more tokens involved and many more moving pieces involved in order to accomplish the same endgame. And it's really hard if you're a retail investor to go and understand, what is an intersubjective work token? What do those string of words together even mean? There's maybe 50 people on this planet who actually understand that. All right. So I think what you're seeing is fatigue on that side. You're seeing the emergence of meme coins, which kind of distracts attention away from a lot of these infrastructure tokens. And at the end of the day, like, we live in an attention economy and everything is driven by attention. So I think you're seeing less interest in infrastructure for sure. But at the same time, on the consumer side, I don't think the lack of consumer products is due to a lack of investor interest. I can tell you, you know, Multicoin is absolutely interested in investing in consumer-facing products or applications, and we are not alone. There are a number of other, you know, large, sophisticated, smart investors that we respect who are interested in funding that stuff. Really, what we need are more fundamental theses on what consumer products make sense for this industry, right? Like, I think everyone already understands DeFi. But in my opinion, DeFi is a second horizon thing. You don't use DeFi— like, the ordinary person isn't going to just like start using DeFi out of nowhere. They need to get a wallet with some funded assets first, somehow. And Ideally, it's through some consumer application that gives them tokens that they do not have to buy. And then they'll use DeFi as a second horizon thing. Right. I think payments is very similar. The thesis for payments is really clear. Like, clearly, to anyone who understands anything about how payments works, like, this is the future of payments. Blockchains are the future of payments. If you fast forward 30, 40, 50 years to pick a long, long, long timeframe, I would bet you any amount of money that almost all payments are done over blockchains in that period. But that doesn't— I don't think that starts with payments. I think you have to get something else first. And so that's something that we're really focused on. And I think it's likely going to be Deepin that gives people tokens, or it's going to be, you know, something similar to that. Maybe it's gaming, right? Like, it's something else where I as a consumer can interact with an application and get tokens without having to put in my credit card information. And that now I'm in the on-chain economy and I can go do a bunch of other stuff. But right now, like, I only have two ideas for what that can be, and that's, you know, gaming or DePIN are like the only two things. And so going back to my first sentence answering this question, it's about a fundamental thesis that investors need in order to be able to justify investing in consumer.

Yeah.

If you think about all the fundamentals that Tushar elaborated on and you look at the intersection of what is really non-consensus, I would say gaming is interesting today because obviously a lot of competition on the infra side. Gaming had a lot of attention a year and a half, two years ago. And today it's becoming, it is non-consensus, it's interesting. And so those are areas that overlap with some of Tushar's thoughts that are non-consensus and could be very attractive for, in terms of building positions for a portfolio.

Alright, I have 3 buckets of 3 topics left I want to ask here. One is this dreaded question of where are we in the cycle? But I would be curious how you almost just— I'm not asking like, hey, we're 70% of the way done with the cycle. It's more around just having conversations with folks on the podcast. It feels like there's a general consensus that, hey, we're kind of choppiness and too much market uncertainty. So we're going to chop and consolidate until maybe the fall and like probably October. And then we've got like interest rate stuff happening and the election. So more certainty gets baked into the market as we know who gets elected in November. And then Biden gets elected, number goes down. Trump gets elected, number goes up. Uh, let's say Trump gets elected, number goes up. We have a good bull market for a year and then cycle over. That feels like what 85% of people say on this podcast. Um, I'd be curious how you two think about both just how you think about thinking about the cycle and specifically if you think that, if you would agree with that consensus bet.

Maybe I start with big picture. So very quickly. So you've mentioned many things, many variables that are impossible to predict. So I would say that, you know, we're the way we're thinking about it is it's going to be very difficult to know where you're in the cycle. All we know is today the liquid side is very attractive and still highly investible. And so we're, you know, frankly, we're active on both, both the liquid side with funds and the VC side on the direct side and with funds as well. I can tell you that during, after FTX, we've deployed maybe 5x the amount, 6x the amounts that we've deployed deployed in liquid funds versus venture funds. So that's a reflection of our view towards our bullishness on the liquid side. And we believe that that structural imbalance that we described at the beginning, which is going to take years to play out, is the only— is one of the things that you can— has a high probability of taking place. And that's how we're positioning ourselves. So I would say active management on the liquid side is very, very interesting. And that's where it stops, essentially.

Yeah, it's like I said, it's basically impossible to go and trade beta, right? Like, the problem is it's self-referential. All the things you said are true. This is what the market believes. But what that means is that's what is built into expectations. And that's what's priced in today. All right. Like, people are pricing in their expectations of what rate cuts or what election results or any of this stuff looks like. And that's all baked in right now. People are thinking about, oh, there's going to be an ETH ETF, there will be inflows from that. Now there's talks about a Solana ETF, right? And like, we've seen some filings for that. But like, all of that stuff is in the expectations. And I think that's what makes crypto such a brutally hard market to try and time cycles. But is it—

but is it big enough for that stuff to be baked in? It reminds me of the question of like, is the halving baked in? Like, and for years and for many, it actually wasn't necessarily baked in. Or like, is the Bitcoin ETF baked in? Everyone said it's baked in, it's baked in, but it really wasn't baked in. Uh, so I'm— I don't know, that would be my only counter to that.

Yeah, I'm not saying that markets are perfectly efficient. I do not believe that that is the case. Uh, however, I do believe that markets are more efficient when it comes to market beta, and I think they're less efficient when it comes to idiosyncratic picking. I think that there's more opportunity in the idiosyncratic picking than there is in timing beta. Also, because the idiosyncratic picking, I think, fits those sources of edge that I was talking about much better. You have the ability to be better than the market, either on an access or informational edge, or on an analytical edge, or on a behavioral psychological edge, or a structural edge on idiosyncratic picking. And it's very hard to have an edge on beta, right? Like, you can think, I'm really smart, I can go look at the last 3 data points and last 3 market cycles, and like, the past is going to look like the future, right? But like, that rarely ever, ever happens. And, you know, I think just as a manager, you want to focus on an area where you can have edge. Like, I don't want to play the hardest game possible. I want to actually play the easiest game possible. I want to play the game where like, I know I'm good, and not the game where I'm like, Well, yeah, this is just really hard.

I mean, the biggest driver of beta is market liquidity. It's— I would argue it's very difficult to predict on a month-to-month basis where liquidity is going to be for the entire market, not only crypto, but we're talking tradfi, etc.

Yeah. Tushar, related to the election, I saw that Kyle announced— he said today Multicoin is proud to announce a special contribution to match all donations of SOL to the Sentinel Action Fund. Sentinel Action Fund is a conservative super PAC, said we'll match it up to $1 million for sold donations made over the next 10 days. Can you tell me your expectations for what happens to crypto?

Yeah, absolutely. We've been spending more time being engaged on the politics side because as the old saying goes, you may not be interested in politics, but politics is certainly interested in you. And so I think you have to engage. You can't just hope that good things happen. And I think that the key thing to understand about political engagement is it's about showing the political parties and the political class that you are an important constituency that can help swing key elections. That's what they care about. They speak the language of power. They don't speak the language of, oh, this is what's right or wrong, right? Like, I don't think they think about it that way. I think they speak the language of power. And the way to demonstrate that is you want to put money and votes to work. And very critically, you want the politicians to know that you did that. You want them to know that you were, as a community, what helped swing a critical election, right? Like, I think worst-case scenario for crypto politically right now in the United States is, you know, we see progressives, the Elizabeth Warren wing of the Democratic Party, really take a lot of power. I think that's the worst-case scenario because they've just shown that they're anti-crypto. They inherently don't believe in the property rights that crypto enables, right? They want the state to control more. But you know what, what else would be not like a great scenario would actually be that Republicans win, but crypto is not given any credit for that win. And in that case, crypto is not going to be a priority. There's a bunch of other stuff going on in the world. Like, you know, the world's a big, chaotic, crazy place. And if crypto does not show up and say, hey, we are an important constituency, we will not be a priority in a future administration. So the outcome that we think is the best outcome for crypto is we see the conservatives take power in the US, this administration, because they've shown that they are more pro-crypto so far. And very critically, they understand that crypto helped make that happen. And now Look, Multicoin looks for asymmetric opportunities, right? Like, we try to look for the non-consensus thing. We do a lot of diligence to try and understand, like, where can we have the most impact? And we brought that same rigor and process to our political activism and engagement. And the focus that we have is on the Senate, because the Senate confirms all regulatory appointees. So, you know, that's absolutely critical for us. We want to, we want to have pro-crypto senators in there when they're making those decisions. And also, we've seen the FIT Act pass the House, and now the Senate is rewriting their version of it, and then it's going to go to reconciliation. So the Senate is critical for that component as well. So we think the single highest leverage place to have crypto's voice show up is in the US Senate. And we think the single highest leverage way And the way to do that is by donating to these critical swing races in swing states, where crypto as a community with our money and our votes and our voice can have a real impact. And I think that's how you can chain together the string of events to get to the best possible regulatory outcome for crypto.

Hmm. Ray, when you are fundraising or when you're speaking with LPs or allocators, do they Is it fair to say that they say, look, I'm waiting for the election to invest, and specifically, maybe I'll invest if Trump is elected and maybe I won't invest if Biden's elected, or the first is true, but the, the, the latter is not true?

Um, no, I, I would say that, uh, the U.S. regulatory question is important, uh, even for Swiss. And, and just to be clear, uh, we mostly talk to Swiss institutions. Very important for Swiss institutions. I mean, the US is really important. Those decisions or that progress drives markets. So that's why they care. But it doesn't go down to Biden versus Trump. That's too— it's too short term. They're thinking long term. If there's progress, you know, they're willing to invest. And by the way, they're paying a lot of attention just based on that product progress this year. So it's very important, despite the fact that you've had some clarity or clarity, regulatory clarity in Switzerland, that's not enough. You need the US side to clarify itself as well.

Yeah. Last question before we wrap here is, would love to— you guys have just several years of fund management experience in crypto. Would love to just leave this with a piece of advice for emerging fund managers. Could be venture, could be liquid. Um, would love to— yeah, would love to leave with one piece of advice for these emerging fund managers as they, uh, start on their journey.

Okay, so, uh, first, um, you know, I would— my advice is, um, I think the biggest business opportunity for an asset manager, and that's if you're able, you, you've got edge to, to, to manage it that way is start, launch a liquid fund. From a supply-demand perspective, I think it's a great business opportunity. Of course, you need to find an edge and build the right team. And maybe the last advice that I'll give is transparency is key with your investors. You know, you'll be surprised, but we've been through really, really difficult situations with many of our managers, but the ones— there's a very, very high correlation. And we're talking, uh, you know, nearly a big chunk of our portfolio is in two managers that we've known for a long time, and it's due to transparency. So I think being transparent to your investors is, is key.

Yeah, I agree with both of those. I would add on a few things. The first I would say is if you are an emerging manager sit down and be really honest with yourself about your source of edge, and then only do things where you really believe that you have an edge. Uh, markets are really good at taking away money from people who go operate where they do not have an edge, because someone else is going to be better than you at that thing, and they're going to take your money. So go sit down. I think that, like I said, there are 4 sources of edge. And just to repeat them, you have analytical, you have information/access, you have behavioral or psychological, and then you have structural. And so go rate all of those and really think long and hard about where your edge is. And then importantly, you have to stick to it. Don't let yourself get strategy drift. Don't let yourself think, oh, you know, I said that I don't have edge trading beta, but like, man, the market really makes me want to trade beta. And then you start doing it and then you see the strategy drift and like that that is a way to failure. So I think, you know, focus on your strength, not your lack of weakness, uh, and focus on where you have edge. And then the second piece of advice I'd give is call Ray. He's the best, uh, fund-to-funds investor out there in crypto. I can say that from experience. Uh, you know, he's been with us through thick and thin. He was the only investor who doubled down on us in the periods of, like, the worst periods that we had. So, you know, if you can get Ray in your corner, I think you'll be way better off.

It's really all you can ask for. Kind words, Ray. Thank you, Jason.

Too kind.

Thank you guys for the time. Appreciate it.

Thank you.

Hey everyone, big thanks for watching today's episode. Wanted to just quickly remind you about the Stellar Development Foundation's 6th Annual Meridian Conference this October 15th through 17th in London. This is an incredible opportunity to network with the forward thinkers who are defining the future of this space. Head over to meridian.stellar.org and use the code BLOCKWORKSPOD for early bird pricing.