Tim’s Tech Tidbits #1

Starting the new year right!

Hi all,

I’ve been toying around with the idea of a (semi) regular email update to share my musings on the latest happenings, news and interesting developments in the tech space. After months of putting off this personal project, may I present the first ever “Tim’s Tech Tidbits” letter! The name is obviously work-in-progress, but did not want to use it as an excuse to put this off.

The goal of this newsletter is to help distill important and complicated technology trends into short and simple terms which can be understood by everyone. At the risk of being absolutely shameless, I am sharing this with a small group and invite you to follow me on my journey to make sense of the fast changing digital world we live in.

Today’s topics

1. Ushering in the era of higher interest rates: how high will it go, exactly?
2. The neck-to-neck race between Metaverse 2.0 and 3.0
3. A generation-defining opportunity of a lifetime: riding the crypto wave as bankers

Ushering in the era of higher interest rates: how high will it go, exactly?

• All eyes are on the upcoming FOMC meeting which is expected to take place early this week (Jan 25–26) as investors look to get more clarity from the Fed on the number and magnitude of interest rate hikes in 2022. Inflation appears to be more persistent than initially thought, and with no clear end in sight for supply chain disruptions, investors have started to de-risk their portfolios and adopt a “wait and see” approach while businesses have been more cautious in their outlook.
• The impact has reverberated across all markets — the bond market is in disarray; the stock market, particularly technology companies, is off to the worst start in years; on the other end of the spectrum, the crypto market has been a bloodbath with 40–50% corrections. With inflations climbing to 40-year highs, the Fed is likely to raise interest rates and take the foot off the pedal on quantitative easing policies, which will likely cause further market volatility in the short term. However, there are a few reasons to be cautiously optimistic:
• (1): It would be challenging for the Fed to increase rates higher than 3–5% without placing too much burden on servicing interest payments. In the 1970s-80s, Paul Volcker, then chairman of the Fed, had raised interest rates to >20% to combat excess inflation. US national debt was ~US$1 trillion at that time. Currently, US has ~US$30 trillion worth of debt, so even an incremental increase in rates can lead to obscene levels of interest payments.
• (2): It is important not to ignore the politics behind the decision to raise rates. High inflation has impacted lower-income families the most, which represents ~40% of the US population. This group is increasingly unhappy, with polls dropping precipitously across the board, citing inflation as the #1 cause for discontent. On the other hand, the fate of many retirements depend on the performance of the stock market, which the Fed would need to balance. The last thing the Fed would want is to cause stock markets to crash, which would antagonize those whose futures rely on it.

The neck-to neck race between Metaverse 2.0 and 3.0

• The concept of a metaverse is quickly gaining traction in the crypto industry as well as in big tech. For better or for worse, it is evident that the metaverse will become an integral part in shaping our future. The question is: what would this future look like?
• In 4Q last year, Mark Zuckerberg announced that Facebook would be rebranded to Meta, signaling to the market their conviction that the future of the company is in the metaverse and will succeed the mobile internet. Meta also announced that they have spent at least $10 billion on the technology last year and expect to increase their investments over the next several years.
• Meta isn’t the only big tech company investing heavily in the space. Roblox, an online gaming firm, has already launched its own kind of metaverse that allows gamers to create and host their own game worlds. Just last week, Microsoft also announced the acquisition of Activision Blizzard for ~$70 billion in cash, marking the largest deal in gaming industry history and represents the company’s bet on the metaverse.
• These big tech companies believe that the metaverse has potential to fundamentally change how people interact with one another. With the proliferation of web 3.0, big tech companies are looking to develop their own version of a centralized metaverse — let’s call this the metaverse 2.0 — in their bid to remain relevant.
• Open or decentralized metaverses, commonly known as metaverse 3.0, have garnered an incredible amount of interest from users and capital from investors. Examples of metaverse 3.0 include The Sandbox, Decentraland and Axie Infinity. Last week, we also saw Animoca brands, a blockchain gaming company and developer of The Sandbox, complete a $360 million fundraise at a $5 billion valuation.
• In contrast to the tightly regulated and closely guarded ecosystems of big tech companies, metaverse 3.0 are aligned with the concept of “ownership economy” — a phrase used to describe the new paradigm of user-owned everything. While centralization makes sense in certain cases where quick decision making is called for, the downside risks can be huge. Centralization means an entity can (1) freeze your account, (2) kick you off or (3) prevent you from joining in the first place. Centralized entities tend to be rent-seeking in nature given their ability to structure the overall environment to their benefit and confer vast powers to the monopolizers. This type of unfettered discretion is prone to abuse, including the appropriation of IP from users. In the context of metaverses where there is more at stake than just your ability to shop online or post a tweet, and the use case is much more pervasive, a centralized metaverse bears much more risk in creating a significant, negative impact on a user’s life.

A generation-defining opportunity of a lifetime: riding the crypto wave as bankers

• In 2021, Bitcoin had gone up by 100% vs. S&P (26%), NASDAQ (31%) and Gold (-2.5%). Crypto as an asset class continues to generate superior returns compared to other asset classes such as stocks and bonds, and have seen new and increased interest by traditional institutional investors. Unlike previous years, the crypto sector is more prepared with the right infrastructure in place to take advantage of and foster additional demand.
• Last year saw historic levels of venture funding, with over $25 billion being allocated to crypto companies — more capital than the previous six years combined. There was also a higher frequency of mid to later-stage deals (Series C to E) which is a leading indicator of a maturing sector. Most of the funding were poured into the trading / brokerage vertical, which has demonstrated one of the most lucrative and proven business models, and NFT / gaming companies, which are increasing in popularity day by day. This has led to an explosion of crypto unicorns with over 65 companies valued at more than $1 billion by the end of 2021.
• M&A funding were at record highs as well. Crypto M&A volumes surpassed $6 billion this year, which represents a 700% increase year on year and roughly double the amount than the industry’s previous eight years combined. Notable deals include Galaxy Digital’s acquisition of BitGo, a crypto custodian for $1.2 billion and Riot Blockchain’s purchase of Whinstone, a bitcoin miner for $650 million.
• Amidst the flurry of activity, investment banks can also play a vital role. In order for crypto adoption to become mainstream, the role of centralized platforms adjacent to crypto (e.g. Binance, Coinbase, BlockFi, Celsius, Grayscale crypto trusts, etc.) cannot be ignored, as initial users will rely on these platforms as a more convenient way to access crypto markets. As these centralized companies grow with the sector, we have seen a number of these list in the market, most recently with the IPO of Coinbase. USDC stablecoin backer Circle is also rumored to be contemplating a listing via SPAC. Investment banks can help bridge the gap between traditional institutional investors, regulators and the budding sector as larger players continue to grow and garner demand from the public.

If you like to discuss any of the themes, trends or topics further, please feel free to reach out. I would also love to get any thoughts and suggestions on the above.