Inside the room at Multicoin Capital’s Investor Summit; a snapshot of the current blockchain market from one of the leading crypto hedge funds

Last Wednesday, I spent the day at the annual meeting for Multicoin Capital. Multicoin Capital is one of the more active and visible “crypto hedge funds,” whose hallmark is openly sharing their perspectives on the crypto / blockchain industry, evolution of blockchain technology underpinnings, and analyses on specific crypto assets (like EOS, IOTA, XRP, REP). In a market that is commonly described as frothy and overhyped, Multicoin Founders Kyle Samani and Tushar Jain offer an open, rational and objective approach to their analyses and investments, which they share on their very active blog. Shasta Ventures is not an investor in Multicoin Capital, but the team is nice enough to have invited me among a small number of outside engaged people in the space.

Jacob Mullins of Shasta Ventures and Kyle Samani of Multicoin Capital

It was an incredible event, the speakers and attendees were leading entrepreneurs, builders and investors in blockchain today, including Vinny Lingham of Civic, David Sacks of Craft Ventures and Harbor, Ryan Selkis of Messari, Arianna Simpson of Autonomous Partners and Amitt Mahadjan of RareBits, among many others.

Notably, and as a broad comment on the evolution of the overall crypto investing industry even over the past six months, there has been a real maturing in how crypto asset investors are approaching the market. Six months ago, I attended the Consensus:Invest event in New York in Dec 2017; notably at this time both BTC and ETH were at all time highs, BTC auspiciously crossed USD$10,000 the day of the conference, and it seemed you just couldn’t lose in Altcoins. There there was clear exuberance, cash was pouring in from everyone and their brother, and CNBC was running instructional segments on buying BTC across national television.

Since then, what has happened…

  • The entire market cap of all crypto assets has lost 40% to 60% of its value
  • The leaders, BTC and ETH, saw lows of nearly 30% to 40% of it’s highs
  • XRP is at less than 1/3 of it’s all time high, drawing crypto-mainstream conversation around the importance of true tokenomics and de/centralization of private blockchains
  • Altcoins as a segment have deflated with capital going back to BTC and ETH as stores of value

I view this retrenchment as a good sign, a very strong indicator of a robust market in the making. Why is this good?

  • This retrenchment is threshing out the wheat from the chaff, leaving more long term crypto investors, and less speculative retail investors
  • Longer hold investors increase stability of prices
  • Investors are gaining a real understanding of the tops, and bottoms, and are more sober about expectations and opportunities, and the reality of dramatic loss of value
  • Investors are more actively considering the fundamentals of blockchain businesses, such as team, technology, opportunity, as a method of valuation, as opposed to just historical growth (e.g. “mooning”)
  • Crypto fund managers are learning and employing risk mitigation tactics to curb losses, (An interesting note here, as opposed to traditional hedge funds, many of the short and derivatives instruments that enable traditional public market “hedging” simply do not exist in crypto today.)
  • As opposed to the developer community being the primary purchasers of crypto assets, institutional investors, family offices and traditional financial investors are becoming increasingly familiar in how (and why) to invest in the market as an asset class.

Now, back to the insights from the Multicoin Capital Summit.

State of Blockchain in May 2018
Presented by Kyle Samani and Tushar Jain of Multicoin Capital

  • Today, we are still largely in the infrastructure building phase (picks and shovels) to enable the promise of a broad decentralized “internet” and dapps.
  • Big believers in the native token as the core of a smart contract platform — Dapp infrastructure is the key for any Dapps to be successful. Bullish to invest across many smart contract platforms because it’s still early, there is no winner/s yet.
  • While Ethereum is the earlier leader with a very robust developer community, because of scaling concerns, lots of competitors are building to solve this problem. And this is one of the more interesting parts of the market, including projects like Tezos, Dffinity, Solana and EOS. Excited to invest across all projects and watch as developer mindshare grows around them.
  • While crypto asset market caps are down, what hasn’t changed is developer interest, still seeing the smartest technologists in the industry moving into blockchain and building blockchain products.
  • In 2018, appears the crypto entrepreneurs raising are “more experienced” with deeper thoughts about product and economics of the token product, as compared to 2017 where entrepreneurs were a little “less experienced” and more opportunistic to “grab cash.”

State of Dapp Development
Panelists: Vinny Lingham, Civic; Matt Luongo, Keep; Yaniv Tal, The Graph; Nadav Hollander, Dharma

  • Dapps take a very long time to build today, because of lack of tooling and greater platform services that just don’t exist yet
  • Major need for Dapp to support cross-chain flexibility; when BTC hit its peak in late 2017, simple transactions became incredibly expensive ($50 per validation), desperate need to leverage other chains that are more efficient, can’t be so dependent on one.
  • Dapp developers should choose the base blockchain based on their application use case and their concerns such as, need for true decentralization, processing speed, anonymity, country dependence, etc.
  • Not many Dapps have shipped, yet, the next 6 months we will see many go live, which should (hopefully) decrease the wild speculation in the cryptocurrency markets for those tokens
  • The panelists most exciting areas of Dapps right now: a) chain computation, b) cross chain interoperability, c) plasma chains, d) distributed file storage

I asked the panel, in such a frothy market, how do you focus on attracting the right types of long term users / holders of your token, versus the speculative investor looking to flip for a quick buck? They replied…

  • The spirit of the token airdrop is right, but the execution breeds speculation
  • Do not do token pre-sales
  • It starts with company and team culture, if the team ever mentions “HODL” “MOON” or “LAMBO,” they are disciplined
  • The team does not hype price expectation in their comms channels / Telegram room
  • Seed tokens with developers, not end users

Investment Opportunities in Dapps
Panelists: Arianna Simpson, Autonomous Partners and Josh Nussbaum, Compound VC

  • Most investment focus today is focused on Dapp infrastructure platforms to enable Dapps
  • Strong belief that Non-Fungible Tokens, platforms like Cryptokitties, will be the first Dapps to acquire large mainstream user bases. An anecdotal example, 25% of Cryptokitties users have not previously held cryptocurrency.
  • Long term questions about crypto-native monetization models for Dapps that align incentive with users and validators that also create stability

I asked a question about the panelists long term view of the value of owning equity — which is comparatively illiquid — in a crypto-native company that has a robust liquid token economy, and the belief was:

  • Structure equity purchase agreements to be flexible and aligned with the team, so as the business / token model shifts, the investors can take part in the new economics as well
  • Equity would act as base ownership value in perpetuity (for this entity) enabling an investor to take part in any economics the company produces, offers, issues, etc.
  • Starting to see some standardized legal terms around this, but still very early
  • Beyond the economics that the equity will produce to investors, the equity itself may be rendered illiquid and unsaleable if a traditional “exit” never comes; make sure to plan for realizing returns along the way through token value or other means, not expecting M&A or IPO.

Opportunities in Non-Fungible Tokens (NFTs)
Panelists: Tony Sheng, Decentraland and Amitt Mahadjan, RareBits

  • Believe NFTs will be one of the first blockchain applications that stretch to mainstream user bases
  • Many many types of NFTs: collectibles, experiences, fractional ownership of physical goods, unique digital assets in AR/VR, rare digital art, enable “reselling” of digital goods like music / video licenses and more
  • Brand matters! Most blockchains (and thus Dapplications / NFTs) are forkable, so to retain value in your unique digital marketplace, product or asset you must build a strong brand that resonates with end users
Tushar Jain of Multicoin Capital, David Sacks of Craft Ventures & Harbor, Ryan Selkis of Messari, Kathryn Haun of Coinbase Board of Directors (left to right)

Opportunities in Tokenization of Securities
Panelists: David Sacks of Craft Ventures and Founding Chairman of Harbor, Kathryn Haun (Coinbase Board Member, and former US Prosecutor assigned to “shut down” Bitcoin), Ryan Selkis of Messari

  • It’s clear that most all “utility” tokens that ICO’d in 2017 are all securities; this should seriously halt the ICO market until SEC enquiries and enforcement actions come down. Tread very carefully if you are planning an ICO.
  • Next area of complexity that US regulators will come down on: regulation on compliance of utility token exchanges, as actual securities exchanges
  • Harbor is laser focused on ensuring that security tokens are compliant with federal securities laws; doing so through frameworks and code embeds into the blockchain to identify accredited investors, specific time lock ups, etc.
  • Harbor proposing a PICO (Private Placement ICO) to ensure compliance with securities laws and US regulatory moves
  • David Sacks believes that securitizing real estate investments will be the biggest opportunity for security tokens, potentially even the biggest opportunity for the entire blockchain, bringing liquidity to a previously $1.3 Trillion in illiquid assets
  • Summer 2018 will be the summer of security tokens

In summary, it was an incredible day. The wealth of knowledge and collective experience in the room was very impressive, and illustrative of the bright future ahead for builders of and investors in blockchain and cryptoassets. Thanks to Multicoin Capital.

— I invest in Emerging Platforms at Shasta Ventures, specifically technologies bridging the digital and physical worlds including AR/VR, computer vision, robotics and blockchain. If you’re working on something interesting in these spaces I’d love to chat with you. Find me on twitter @jacob.

Partner at Shasta Ventures investing in Smart Software: Applied AI, Computer Vision, Blockchain, and Financial Services.