Why You Need To Think Like A VC

 

Grayscale Investments, a digital currency fund company that caters to institutional investors, just put out their Digital Asset Investment Report for Q2 2019.

You can check it out here: Grayscale-Digital-Asset-Investment-Report-Q2-2019-July-19

These are some of their takeaways:

Recent rally in digital asset prices is supported by fresh investment:Strongest quarterly inflows since Q2 2018, with inflows into Grayscale Products nearly doubling quarter-over-quarter. Total Investment into Grayscale Products in Q2 2019 was $84.8 million, bringing total investment into Grayscale Products for the first half of the year to $127.4 million.

With a digital asset market resurgence, Grayscale assets under management (AUM) nearly tripled: Grayscale AUM grew from $926 million at the end of Q1 2019 million to $2.7 billion at the end of Q2, and all ten investment vehicles included in the Grayscale family of products generated positive performance, net of fees for the first time.

“Alt” investment cycle resumes: Led by Grayscale Ethereum Trust and Grayscale Ethereum Classic Trust Grayscale products — products excluding Grayscale Bitcoin Trust accounted for 24% of inflows this quarter, versus 1% in Q1 2019.

So, what can we takeaway from this?

Essentially, there’s been a resurgence from institutional investors as crypto has become a hot investment again. 

Of course, you probably implicitly knew that, but it’s nice to see the data to back that up.

If you’re a data oriented person like me, you can go deep into this spreadsheet which lists what nearly 800 crypto-centric investment funds and hedge firms are putting in their portfolio. 

Crypto_Fund_List

For those not wanting to undergo death by speadsheet, here’s a quick CTRL-F analysis:

BTC: Held by 231/772 funds

ETH: Held by 135 funds

XRP: Held by 79 funds

LTC: Held by 59 funds

BCH: Held by 41 funds

EOS: Held by 39 funds

BNB: Held by 37 funds

Perlin: Held by 36 funds

Zilliqa: Held by 34 funds

Dash: Held by 32 funds

Fantom: Held by 31 funds

0x: Held by 31 funds

Stellar: Held by 29 funds

Mainframe: Held by 28 funds

Coinbase: Held by 27 funds

Origin Protocol: Held by 26 funds

XMR: Held by 25 funds

Zcash: Held by 24 funds

Basis: Held by 23 funds

NuCypher: Held by 21 funds

Celer Network: Held by 20 funds

Hedera Hashgraph: Held by 20 funds

Bluzelle: Held by 19 funds

Wax: Held by 17 funds

Blockstack: Held by 15 funds

Polkadot: Held by 14 funds

Filecoin: Held by 14 funds

 

That’s just barely scratching the surface.

So what’s the takeaway here?

Couple things:

1. Institutional players love Bitcoin 
2. Funds like any degree of stability or at least something to justify these high risk assets
3. They love infrastructure plays (sell pick axes). 
4. They love hedging for and against blockchain with alternative consensus models and alternative DLT solutions
5. This goes for why so many Bitcoin forks are here: they hedge Bitcoin and have a tolerable loss threshold even in tough markets
6. They build portfolios around the top 10, and hardly go outside that except for very specific plays
7. There is no consistent portfolio allocation except for a preference towards large caps
8. Funds like investing in other funds
9. Funds like investing in fiat on-ramps
10. Funds like investing in trading infrastructure.

 

There’s certainly more we can glean from so much data, but hopefully you can begin to see how funds operate in this space, hedge risk, and look for key opportunities. 

Many funds focus on being venture capital rather than hedge firms, but those of the latter tend to focus on quantitative strategies. 

To round this out, I think it’s prudent to employ an evaluation model that a VC would use in evaluating any of these projects for potential investment. Intentional investment, while somewhat intimidating or pedantic, will help you better separate logic from reason.

Opportunities exist in this space, even as Bitcoin controls 2/3’s of the market. Go find it. 

— THREE KEY ELEMENTS

1) Smart Founders

2) The Idea

3) The Execution 

ABOUT THE PROJECT

Which key problem does the project solve?

What valuable aspect of human nature is the protocol serving?

What is the Massively Transformative Purpose (MTP) of the protocol?

What are some key applications of the protocol? 

ADOPTION

Why would the protocol reach super dominance?

Who is the starting market?

How is the project leveraging network effects / Metcalfe’s Law? 

(Developer Ecosystem / Marketplace & User / Investor, Speculation & Hype)

How does the protocol tackle the blockchain trilemma? 

(Decentralization / Security / Scalability)

In what programming languages can developers build on top of the protocol?

Is the protocol interoperable with other blockchains? 

COMPETITION

Does the protocol have centralized and/or distributed competition?

Why does the protocol have a good chance at beating those competitors? 

TOKEN ECONOMICS

If this protocol has its own token, why does it need it?

How does this protocol generate and capture value? 

TEAM & COMMUNITY

Why is the team credible?

How is the community engagement? 

FUNDING & GOVERNANCE MODEL

How and when was the protocol funded?

Are the technology and governance model both decentralized? 

STATUS & CRITIQUES

What is the current status of the protocol? 

Is the blockchain actually used with transactions (check blockchain explorer) 

Is there an innovation gap?

Critiques / Flaws / Disadvantages?