The Breakdown - What Billions in Crypto Fund Raises Tells Us About the State of Markets

Starting point is 00:00:00 The simple fact is that based on all this capital, there are going to be great big war chests for whatever comes next. Whatever combination of development, user acquisition, or importantly, regulatory battles may be on the horizon. I think it's safe to say that what venture funding into crypto is showing is that there is a lot, a lot of capital on the sidelines and trying to get in. And that's going to shape the months and years to come. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys?

Starting point is 00:00:45 It is Tuesday, September 14th, and today we are talking about what billions in crypto fundraises tell us about the state of markets. Before we do that, however, I just want to do a single point. on the brief, which is about inflation. It was inflation day, and year over year, we're still at 5.3%. That's down 5.4% in June and July, however. So in terms of rate of change, the one-month increase in June was 0.9% and the one-month increase in July was 0.5%. The one-month increase last month in August was 0.3%. So there seems to be some slowing. Now, there are a couple ways to look at this. The first is that CPI is a bad, incomplete measure of inflation, and we should ignore it.

Starting point is 00:01:34 This is, like I said, the brief, so I'll leave that take to the side for now. The second is that CPI is slowing down and that the Fed has been right that this is all transitory inflation. It almost certainly seems to me like how many pundits will take it. But a third interpretation, which is one I've seen in a few outlets, is that this is something of a head fake. Here's what a commentator in the Wall Street Journal said. The August CPI report might be a little bit of a head fake, honestly, because, quote, other factors might be moving under the surface. There was a growing risk that higher inflation exacerbated by ongoing supply chain

Starting point is 00:02:09 frictions could put a dent in demand next year. Anyway, this is deserving of more than a brief, but I wanted to at least give you that update on the day that these inflation numbers came out. But with that, let's shift to our main topic for the day. There has been a lot of capital focused on crypto announced lately. Before we get into the specifics, I want to talk broadly about how to interpret capital coming into the space. First, obviously, it can tell us about the state of investor interest in the category as a

Starting point is 00:02:40 whole. If more capital is being invested now than was a year ago, especially if significantly more, there is clearly a sentiment shift. That said, I think what's more interesting is who is coming in and through what vehicles. Are there different types of actors who are investing who have a invested before? Are they investing personally or through their traditional vehicles? Are more institutional investors showing up in the ranks of limited partners of funds? One thing I will caveat is that investment into funds can be a lagging rather than a leading indicator. The reason for this is that in general,

Starting point is 00:03:11 it takes some number of months for fund investments to close. Given how fast crypto markets can shift, a deal could have come together while markets were hot but then be announced months later even after things had turned. What's more, certain types of fund investments can be Exhibit A in a larger froth. A great example of both of these was in 2017 during the ICO boom. Something like between 400 and 500 new crypto hedge funds were formed and funded. This was often basically someone who had gotten rich on early bets or on Bitcoin or Ethereum, having a bunch of other well-to-do people around them asked them if they could help them invest. The number of those 2017 vintage funds, many of which, by the way, closed in early 2018 months after the peak that survived,

Starting point is 00:03:52 is in the, I don't know, low dozens at most? In other words, we're probably talking about a 90% fail rate. The point of all of this is just to make the case that more funds flowing into a space are not a priori a bull signal, even if they represent market bullishness. With that caveat out of the way, let's look at some of the recent announcements. And first, let's follow up on our friend Dan Tapiero, who I had on the show last week. For those who didn't listen or who just missed some of the details, Dan Tapiero is a macro investor who has been in the game for 25 plus years. He's worked for Tiger Management, Duquesne, which is

Starting point is 00:04:26 Dan Druckenmiller's fund, and more. He's also launched investment firms focused on gold, real estate, and many other categories. A couple of years ago, however, he really started going down the crypto rabbit hole. There was a 2019 interview of him with Raoul Paul from Real Vision, and you can see him in the midst of light bulbs going off. 10T is Dan's big play into the space. In 2019, 2020, he founded the firm, and his focus was on equity and revenue-generating businesses in the crypto arena. Instead of token holdings, he's looking at the equity in companies like exchanges or infrastructure companies. To get a sense of his profile, the firm has invested in companies like Crackin, Deribut, Bitfury, E. Toro, Ledger, and more. What's interesting to me about

Starting point is 00:05:07 Dan's fund is that it's focused on a category that hasn't had as much interest from crypto investors as others. In some ways, it feels to me like the risk spectrum for crypto investors is, totally bifurcated in barbell. On the one end is all the way in. Get me in early to DeFi, get me in on the next Solana, give me tokens, let's go. On the other end is just passive exposure to Bitcoin, or maybe a basket of quote-unquote blue chips, although those products seem to be massively less popular than the simple Bitcoin funds, but either way, Dan is carving out space in the middle, space for a picks and shovels bet. Picks and shovels, by the way, refers to the idea that during the gold rush, the actual gold rush, in the mid-19th century in America,

Starting point is 00:05:48 one of the best ways to make money wasn't to be out prospecting or funding prospectors. It was to build the infrastructure of the things that all those people in that new industry needed around them. Any of you heard of Levi-Gene's? Guess where that started? Anyway, by focusing on this type of equity business, where investors can actually see and track the multiples to revenue of the valuations of these companies, he's opening up crypto exposure to a new category of investor who perhaps can't wrap. their head around token valuations and tokenomics, even if they understand that what matters

Starting point is 00:06:17 is that a whole industry is growing up around them. The specifics of what Dan announced last week is that the 10-T family of funds had raised about $750 million, $3 quarters of a billion, and had allocated a huge chunk of it already between $650 million and $700 million over the last few months. And to the point that I was just making about opening up investments to new categories of investors, the funds limited partners include public pension plans, endowments, foundations, family offices, and high net worth individuals. That list, by the way, is almost perfectly in rank order of conservatism, with public pensions being the most conservative. One of the pensions involved in 10T is the municipal employee's retirement system of Michigan. So what does it mean that

Starting point is 00:07:00 a pension is investing in a crypto fund? Well, I think it's reflective of two things. The first is a growing comfort with the crypto asset space as something that is going to be here for a while to come. And certainly within that, an increase in the types of tangible business operations. opportunities with these adjacent unicorn businesses. But it also demonstrates the fact that zero-bound and negative real interest rates are forcing even these arch-conservative funds to look farther out on the risk spectrum for return, for yield. They simply can't meet their obligations with Uber-safe assets. The last thing I'll note on Dan, which was a pretty remarkable stat from his interview, is that when he was raising the fund in 2020, they did some research and found around 20 crypto

Starting point is 00:07:38 infrastructure, service exchange, mining, et cetera, unicorns. This year, this year, that's that number has 3.5xed to over 70. NIDIG sponsors this podcast, and they also put out a really good newsletter, focused purely on Bitcoin. If you want insights into what's driving market moves, regulatory changes, and the metrics that deserve your attention, sign up at NIDIG.com slash NLW. That's NYDIG-FORDS. Next, let's talk Bain Capital Ventures. A few months ago, Bain Capital Ventures, which is the venture arm of the private equity firm of the same name that has more than $120 billion in assets under management, announced a new $1.3 billion fund to invest in startups. And for the first time, Bain Capital Ventures

Starting point is 00:08:32 has a dedicated crypto fund. This is according to public filings. It's classified as a pooled investment vehicle and so far hasn't made any sales. Now, Bain has in the past invested in crypto companies, including CoinDesk Parent Digital Currency Group, Compound & Lolly, and it also led BlockFi's $350 million around earlier this year. But this represents something different and deeper in the crypto space. James Lavish on Twitter added these details and said it's for qualified purchasers, individuals and families with $5 plus million of investments and limited to $499 investors here. He also wrote Keys here, classified and signaled as a venture fund,

Starting point is 00:09:09 which could relate to the crypto asset class itself or the stage of companies they plan to invest in, and still only for ultra-wealthy qualified purchaser-level investors. Speaking of getting deeper into the crypto space, Met's owner and 0.72 founder Steve Cohen continues on down his crypto rabbit hole. He's investing in an individual capacity in a firm called Radical, although it's spelled RADKL. It's a quant trading fund focused on digital assets. The fund said that Cohen won't be involved day to day, but he's involved enough that he gave a quote in the launch press release. Quote, while the cryptocurrency market is now a $2 trillion asset class, we are still in the early stages of institutional adoption. As more

Starting point is 00:09:46 professional investors enter this space, there's a need for institutional acumen and a firm like radical. Now, speaking of that transition, there is also one announcement that represents a fund that is both traditional, but has been quietly making big moves in crypto for some time, and now they're revealing more of their strategy. That's Jump. The headline news is that Jump Capital, based in Chicago, closed its seventh venture fund, a $350 million fund. That's about 75% bigger than its sixth fund of $200 million from October 2019. Jump Capital has previously invested in crypto, including joining a $62 million round in the Mexican Exchange Bitso in 2019. Bitso was recently in the news for working with the El Salvador government to build the Chivo wallet.

Starting point is 00:10:29 Jump said that in addition to their historic fintech mandate that this fund will also have, quote, an increased concentration on the evolving crypto ecosystem. That means potentially the infrastructure layer, defy, gaming, Web 3. But still, the unveiling of a deeper involvement in crypto isn't just on the, the venture side. Jump trading is the firm that Jump Capital came out of. It's been around since 1999 with effectively no public brand and has previously been called, quote, one of Wall Street's most secretive high-speed trading firms. Over the last six years, the company has quietly put billions with a B to work in crypto. They provide liquidity for Robin Hood Crypto. They've also

Starting point is 00:11:06 provided liquidity for the serum decentralized exchange. As I mentioned, the company's Wall Street roots have always been super on the DL, but now they're launching Jump Crypto. a new, more public division that will be staffed with 80 people. The new president is Canne of Korea who said jump capital is a recognition basically of the fact that in a community-driven space, we need to have a voice and be more reachable and share what we are doing more broadly. It's a commitment to the way we intend to operate to position our firm itself as a meaningful contributor participant.

Starting point is 00:11:36 Then on top of all this, there are the existing crypto funds. Pantera, which is a stalwart in the space, is raising a new $600 million fund, of which 375 million closed in June. The fund has three categories. Venture equity, similar to what Dan Tapiero is doing, although potentially earlier stage, early stage tokens, and then traded liquidity tokens, which is Bitcoin, basically. The largest allocation in this fund is venture equity. And so in some ways this sounds similar to 10T, although still farther out on the risk curve. Dan Moorhead, Pantera's CEO, wrote, the new fund is able to capture the often large swings in value between equity and tokens. Tokens reset quickly.

Starting point is 00:12:14 In May, tokens dropped 55% in the span of a few weeks. On the other end of the spectrum, venture equity is very slow moving. Pantera manages $5 billion in total and started investing all the way back in 2013. To get a sense of how much things have changed, listen to this quote from Paul Verada Tackett, a partner at Pantera. Our first institutional or outside LP venture fund was in 2014, and it was a slog. It was so tough to fundraise. we raised about $25 million for that one, mostly from high net worth individuals and family offices,

Starting point is 00:12:47 and it was just venture. End quote. According to Pantera, DeFi has been driving increased interest. Quote, because of what was happening last year with DeFi, investors really opened up to the possibilities of getting exposure to tokens. A lot of investors think it makes sense to have exposure to everything, and they want to defer to a fund manager versus trying to decide which strategy to deploy and when.

Starting point is 00:13:08 The only other one I'll mention from the traditional crypto world, or I guess they're kind of a traditional Silicon Valley world gone crypto is A16Z and recent Horowitz. In June, they announced their mega $2.2.2 billion second crypto fund, and the biggest thing we've seen from them is just an absolute string of hires. They are scooping up talent from other crypto firms and from traditional finance. In fact, it's almost becoming a meme on Twitter with people announcing that they are not announcing that they are joining A16Z. Says to me that they're positioning strongly for a competitive role in basically every round in the future that's going to involve venture capital. So let's close this out by summarizing what all these

Starting point is 00:13:46 raises tell us. First, on the face of it, funds are continuing to raise. That is your first important piece of information. And I don't believe in this case that this is a lagging indicator, given that things are as bullish right now, or at least they have been over the last few weeks, as they were earlier this spring, and certainly are way more bullish than they were over the summer. Second, traditional funds investors continue to come into the space. Pension funds joining Dan's 10T, Bain getting in deeper, Steve Cohen investing in more exotic instruments. These things show that while we're not getting a breaking news story about institutions coming to crypto every few days like we were in January and February, that secular shift into the

Starting point is 00:14:25 crypto space is very much alive. Three, it's showing that the deeper funds get into the space, the more they have to play by crypto's rules rather than venture capital's rules. See, for example, Jump, basically announcing that they have to play an active public role in communities and governance. And four and finally, the simple fact is that based on all this capital, there are going to be great big war chests for whatever comes next. Whatever combination of development, user acquisition, or importantly, regulatory battles may be on the horizon. I think it's safe to say that what venture funding into crypto is showing is that there is a lot,

Starting point is 00:15:02 a lot of capital on the sidelines and trying to get in. And that's going to shape the months and years to come. For now, guys, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - What Billions in Crypto Fund Raises Tells Us About the State of Markets

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