Web3 for TradBiz — Web3 implications and opportunities (12 of 14)
Emerging Web3 investment opportunities
Investment models, opportunities, and vehicles to participate in Web3 ecosystems and related companies
Let’s now discuss some of investment opportunities arising during the transition from today’s dominant Web2 environment to the Web3 future. This includes identifying the different types of crypto and Web3-aligned businesses that exist along with providing an overview of the various custodied and non-custodial investment vehicles you can use to make investments. We also provide a framework for evaluating Web3 investment opportunities.
While this chapter focuses on investment opportunities, it is not meant to be investment advice. Investing in crypto and other Web3 assets has both risks and rewards, like any other risk assets. We encourage potential investors to do their own research, solicit professional investment advice, and never invest more than they can afford to lose.
Multiple opportunities exist for investors to participate in Web3 evolution. We’ve identified multiple categories for investors to explore both crypto and non-crypto Web3 investment opportunities, including established Web3 ecosystems, DeFi yield farming, liquid venture, crypto derivatives, Web3 solutions providers, and Web3-aligned TradBiz companies.
Many investors get started in Web3 by acquiring the cryptoassets of established Web3 ecosystems. These include investing in the tokens of the most promising, large capitalization networks, including layer one protocols like Bitcoin and Ethereum, layer two enablers and scaling solutions, distributed applications (dApps) such as Uniswap, NFT collections like CryptoPunks and Bored Ape Yacht Club, and more. Cryptoassets in this category are somewhat analogous to S&P 500 companies, in that they have an established track record, demonstrated use case product-market fit, and active stakeholder communities.
Decentralized finance provides a range of different investment choices. DeFi yield farming includes lending, staking, and participating in liquidity pools, thereby earning yields on cryptoassets invested, as well as the ability to earn additional rewards provided by protocols for providing liquidity and being involved in governance activities. Examples include lending platforms Aave and Compound, stablecoin provider Maker, exchanges Uniswap and Curve, and aggregator Yearn.
There are plentiful opportunities available to invest in the cryptoassets of early stage Web3 projects as well. We refer to this as liquid venture since the risk-return profile is similar to venture capital with companies. The big difference between the two, however, is that cryptoassets are typically tradable on exchanges, whereas traditional venture capital is not. When investing in an early-stage growth company, investors usually are making five-to-ten-year commitments of capital before they have the possibility of an exit via acquisition or initial public offering. With liquid venture, investors can monitor the progress of their investments continuously, with the opportunity to increase allocations in those that are making good progress, take money off the table by reducing allocations, or simply exit projects that have become less promising or no longer match their investment objectives.
Crypto derivatives provide yet another opportunity for investing in Web3. These are alternative products that provide indirect access to cryptoassets, such as via future contracts or options. Crypto derivatives are available through traditional financial institutions, like the CMG Group, which offers futures and options for both Bitcoin and Ether. Derivatives are also increasingly traded on crypto exchanges like Binance, OKX or Deribit. Coinbase launched its first derivative product, Nano Bitcoin Futures, in June 2022, which will initially be available through select retail brokers while the company secures its own futures commission merchant (FCM) license to cater directly to consumers.¹ Other derivative products being offered by top exchanges include perpetual contracts, swaps and leveraged tokens.
Web3 solution providers offer non-crypto opportunities to invest in Web3. These include investing in publicly traded or private companies that are enabling Web3 ecosystems, such as centralized exchanges, crypto banks, blockchain mining, software developers, wallet providers, and analytics firms. Coinbase Global, for example, a U.S.-based crypto exchange delivering a broad range of services to individuals and businesses, is traded publicly on NASDAQ, providing investors a way to get exposure to Web3 within their existing securities accounts. IBM, on the other hand, has been developing solutions, based on the open-source Hyperledger Fabric, enabling enterprises to implement a diverse range of blockchain applications across industries. Samsung, one of the world’s leading electronics device manufacturers, has been building Web3 capabilities into their devices, including crypto wallets into their smartphones and NFT explorers in their latest line of televisions, while also building their own version of the Metaverse. Another example is Bitfarms, one of the biggest crypto mining operations in North America, helping secure Web3 ecosystems through nodes and validators deployment.
Finally, investors anticipating the broad Web3 disruptions likely to develop over the next five to ten years may want to increase exposure to Web3-aligned TradBiz securities. In other words, investing in established businesses that are well-positioned to take advantage of Web3 trends and developments, but that are not exclusively focused on Web3 enablement. Business intelligence provide MicroStrategy, for example, currently holds approximately 130,000 Bitcoin in its corporate treasury, representing the bulk of the publicly traded company’s market value.² This provides some investors with another opportunity to gain exposure from a security, rather than directly holding Bitcoin. Walmart, one of the largest multinational retail corporations, has actively been exploring potential applications of Web3 technologies in both its back-end operations and engaging with customers, including its Food Traceability initiative and current plans on launching its own cryptoasset, NFT collections and Metaverse.³ AMD, on the other hand, is well-positioned to enable the transition to Web3 through the infrastructure and computing products it provides to both institutions and consumers. Another public company in the center of Web3 is Twitter, which is the de facto place where Web3 enthusiasts, influencers and experts engage with each other. The social network has also started incorporating Web3 capabilities into their platform, including the ability to tip people and use their NFTs as profile pictures.
Different investment vehicles are available, with distinctions in risk, use engagement, custodianship, and eligibility requirements. Just like there is an array of cryptoassets and securities providing exposure to Web3 markets, there are also numerous ways to invest in these assets.
Many individuals begin with a self-directed approach, utilizing accounts at crypto exchanges like Coinbase or Gemini to buy, sell, and manage individual cryptoassets. Over time, some investors migrate to self-custodied wallets like MetaMask or Ledger, often using a combination of centralized exchanges and decentralized exchanges to trade cryptoassets.
Others, particularly high net worth investors, may set up managed accounts with wealth management professionals engaged to incorporate cryptoassets into their overall portfolios based upon defined risk-return objectives. While most registered investment advisors currently have limited familiarity of Web3 and provide access to only a few selected cryptoassets like Bitcoin and Ethereum, we expect many more will develop the knowledge and capability to include Web3 investments in the future. Big wealth management firms Morgan Stanley and JPMorgan and Chase offer access to select cryptoasset funds from Grayscale Investments, Galaxy Digital, NYDIG and Osprey funds with some level of restrictions.⁴ ⁵ Goldman Sachs has also stated that they are currently working on cryptoasset services for their high-net-worth clients.⁶ Meanwhile, several crypto-focused wealth management platforms have also emerged, such as Abra and Wave Financial.
Regulated crypto funds that trade as securities represent another Web3 investment vehicle. These include exchange traded funds (ETFs) and trusts providing exposure to individual cryptoassets, crypto indices, and derivatives. While the U.S. Securities and Exchange Commission (SEC) has yet to approve ETFs holding Bitcoin or other cryptoassets in the U.S., ETFs backed physically by cryptoassets already trade on public markets in Canada and elsewhere. The Purpose Bitcoin ETF (BTCC.Canada), for example, was launched in February 2021. U.S. investors so far have been limited to ETFs based upon cryptoassets futures, such as the ProShares Bitcoin Strategy ETF (BITO), which don’t always accurately track the cryptoasset’s actual price. ProShares also provides the ProShares Short Bitcoin Strategy ETF (BITI), designed to give investors a way to provide from declines in the cryptoasset’s prices. The Grayscale Bitcoin Trust provides an exchange-traded alternative for investors seeking to hold cryptoassets within security accounts; however, the trust structure limits redeemability, which has resulted in the trust’s market price trading at steep discounts to the actual value of its underlying assets. Investors seeking to invest in companies enabling Web3, rather than cryptoassets themselves, can now do so through ETFs like the Bitwise Crypto Industry Innovators ETF (NYSE:BITQ), which focuses on crypto innovators and pioneers.
On-chain funds allow investments in indices and managed funds using self-custodied wallets rather than traditional securities accounts. Since these funds use on-chain vaults, they are limited to investors who are comfortable securing their own cryptoassets keys and using wallets like Ledger and MetaMask. The Index Cooperative, for example, provides a number of smart contract-enabled index products, including the Interest Compounding ETH Index, DeFi Pulse Index, ETH 2x Flexible Leverage Index, Metaverse Index, Data Economy Index, and Bankless DeFi Innovation Index. A growing number of fund managers pursuing different active and passive strategies are also emerging. Utilizing vault protocols like Enzyme, on-chain fund managers can easily set up cryptoassets funds with a full set of features, including smart contract-enforced management and performance fees, asset restrictions, and client whitelisting. With the complete transparency provided by the Enzyme protocol, investors can monitor transactions and performance in real-time, and generally can exit their positions in funds at any time.
Investment DAOs provide another on-chain opportunity, particularly for investors who want to collaborate with and benefit from the knowledge of others. These decentralized autonomous organizations enable participants to pool capital with other members, collectively deciding in which cryptoassets to invest. BitDAO, for example, describes itself as a “collective of builders and stakeholders enabling mutually beneficial Web3 ecosystems of people, products, and public goods.” As of mid-July 2022, BitDAO held approximately $US 1.4 billion of tokens in its treasury, having allocated over $US 600 million in investments.⁷ Other notable investment DAOs include MetaCartel DAO, The LAO, FlamingoDAO, and Neptune DAO.
Traditional funds round out our list of traditional funds, including both venture and hedge funds with cryptoassets or Web3-enabling companies in their portfolios. While participating in these funds are generally limited to institutions, family offices, and ultra-high-net-worth (UHNW) investors, they provide further evidence of Web3 progression. Leading venture funds Andreessen Horowitz, Sequoia Capital, General Catalyst, and Bessemer Venture Partners have renounced their standard venture capital status over the last few years, choosing to become registered investment advisors with the U.S. Securities and Exchange Commission. This designation allows them to hold investments other than direct stakes in private companies, including cryptoassets.⁸ Traditional hedge funds are also adopting cryptoassets, with more than a third of traditional hedge funds now investing in digital assets, according to the PwC Global Crypto Hedge Fund Report 2022. PwC further estimates that there are more than 300 special crypto hedge funds globally.⁹
Evaluating the investment attractiveness of Web3 ecosystems requires new and adjusted valuation methodologies. As discussed extensively throughout this series, distributed Web3 ecosystems and their associated tokens generate value differently than TradBiz models. Since these systems generally aren’t designed to generate profits that are returned to shareholders in the form of dividends, traditional valuation techniques aren’t always relevant or need adjustment to be useful. We’ve developed our own set of criteria to identify, assess and prioritize which Web3 ecosystems may have the highest growth potential based upon future market potential, ecosystem health, and portfolio timing and allocation.
We often begin assessing the attractiveness of a Web3 ecosystem by considering what the future market potential could be. This includes examining the project’s use case clarity, assessing the value proposition delivered to users compared to both traditional as well as other Web3 alternatives, estimating the potential size of the ecosystem’s total and serviceable addressable market in 10 years, and excluding cryptoassets that may be scams or which have high degrees of centralization.
Next, we examine the current ecosystem health of each project. Competitive positioning compares the project’s leadership position compared to other Web3 ecosystems with similar use cases. Technology development examines the amount of developer activity, such as the number of GitHub commits over time, as well as qualitative assessments of the ability to realize technology-related targets in published roadmaps. The degree of decentralization and maturity of governance mechanisms indicates the degree to which an ecosystem functions well without the risk of one or a few active parties driving development. Tribe and social criteria draw both from the number of active on-chain users, as well as more traditional inputs like social media followers and market sentiment. It’s useful to understand how established investors and strategic partners are providing financial and other support. We also evaluate security and risk, such as potential 51% attacks, smart contracts, and regulatory.
For potentially attractive investments, we also consider timing and allocation criteria, to help determine entry points and how much relative allocation to include in each portfolio. Some useful tools include NVT ratio, PQ growth, Y+10 inflation, and liquidity. NVT ratio is the ratio of current market value to the current value of transactions in the ecosystem, and therefore is somewhat analogous to company price-to-earnings (PE) ratios. High NVT ratios indicate significant market speculation relative to actual ecosystem activity, while lower NVT potentially represent attractive market entry prices. PQ growth is the economic value of on-chain transactions (price times quantity), excluding exchange volumes, over time expressed in a fiat currency like U.S. dollars. Significant growth in PQ is positive, as it suggests that an ecosystem’s economy, the exchange of value between participants, is growing. Y+10 inflation is the expected money supply inflation and resulting dilution in a token over the next 10 years. All other things being equal, investors would prefer ecosystems with lower inflation rates than those with rapidly diluting tokens. Finally, liquidity measures the efficiency at which a cryptoasset can be converted into fiat or other cryptoassets without impacting its market price, and thus includes the number of exchanges on which a cryptoasset trades as well as its trading volumes.
The transition to Web3 provides many investment opportunities and vehicles from which to choose. We’ve now explored the different opportunities that exist for investing in Web3, including acquiring cryptoassets representing established Web3 ecosystems, DeFi yield farming, liquid venture, and derivatives, as well as investing in the securities of Web3 solutions providers and Web3-aligned TradBiz. Hopefully, you now have an appreciation of the different vehicles that exist for investing, which include self-directed, managed accounts, registered funds, on-chain funds, investment DAOs, and traditional funds. And you’ve been introduced to different methods for evaluating the future market potential, ecosystem health, timing, and allocation of potential cryptoasset investments.
As a next step, let’s take a look at Evidence of mainstream adoption, or how many institutional investors, established businesses, and individuals have adopted cryptoassets to date.
Monchester Macapagal and Kris Caigas of AcceleratingBiz contributed significantly to the research, writing, and production of this series.
Explore other Web3 for TradBiz insights and resources at acceleratingbiz.com.
Click on the links below to progress through the Web3 for TradBiz series:
[1] Web3 for TradBiz introduction
Web3 and crypto foundations
[2] Why embrace Web3 now
[3] Inevitable Web3 future
[4] Crypto and Web3 basics
[5] Advanced Web3 topics
[6] Using crypto wallets
Use cases and value propositions
[7] Web3 use case categories
[8] Decentralized finance (DeFi)
[9] Non-fungible tokens (NFTs) and the Metaverse
[10] Decentralized autonomous organizations (DAOs)
Web3 implications and opportunities
[11] Web3 impact on TradBiz market and business models
[12] Emerging Web3 investment opportunities
[13] Evidence of mainstream Web3 adoption
End notes:
¹ “Coinbase Derivatives Exchange to make nano bitcoin futures available through leading brokers,” Coinbase, accessed July 25, 2022, https://blog.coinbase.com/coinbase-derivatives-exchange-to-make-nano-bitcoin-futures-available-through-leading-brokers-8df2582325da.
² Jordan Tuwiner, “MicroStrategy Bitcoin Holdings Chart & Purchase History,” Buy Bitcoin Worldwide, last updated July 5, 2022, https://www.buybitcoinworldwide.com/microstrategy-statistics/.
³ James Laney, “Walmart’s Blockchain Enabled Food Traceability Initiative,” DataDrivenInvestor in Medium, accessed April 21, 2022, https://medium.datadriveninvestor.com/walmarts-blockchain-enabled-food-traceability-initiative-628b9df5febb.
⁴ Hugh Son, “JPMorgan, led by bitcoin skeptic Jamie Dimon, quietly unveils access to a half-dozen crypto funds,” CNBC, last updated August 5, 2021, https://www.cnbc.com/2021/08/05/bitcoin-jpmorgan-led-by-jamie-dimon-quietly-unveils-access-to-a-half-dozen-crypto-funds.html.
⁵ Hugh Son, “Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds,” CNBC, last updated March 17, 2021, https://www.cnbc.com/2021/03/17/bitcoin-morgan-stanley-is-the-first-big-us-bank-to-offer-wealthy-clients-access-to-bitcoin-funds.html.
⁶ Hugh Son, “Goldman Sachs is close to offering bitcoin and other digital assets to its wealth management clients,” CNBC, last updated March 31, 2021, https://www.cnbc.com/2021/03/31/bitcoin-goldman-is-close-to-offering-bitcoin-to-its-richest-clients.html.
⁷ BitDAO, accessed July 24, 2022, https://www.bitdao.io.
⁸ Kate Clark, “Bessemer Renounces VC Status, Following Andreessen Horowitz, Sequoia,” The Information, accessed July 24, 2022, https://www.theinformation.com/articles/bessemer-renounces-vc-status-following-andreessen-horowitz-sequoia.
⁹ Kent Miller, “More than a third of traditional hedge funds now invest in digital assets, nearly double a year ago: PwC Global Crypto Hedge Fund Report 2022,” PwC, accessed July 24, 2022, https://www.pwc.com/gx/en/news-room/press-releases/2022/pwc-global-crypto-hedge-fund-report-2022.html.
