Closing the Year: Crypto Fund Update

Our strategy for the second half of 2021 was primarily focused on re-balancing longer term crypto investments, adding to our core positions, and focusing on building a healthy cash position to derisk and make more net new investments. In October and November, the crypto market hit new all-time highs and things became overheated. The difference is, this overheating didn't really occur in Bitcoin or Ethereum as many thought was destiny. It primarily fell in Metaverse/gaming tokens and Layer 1s.

Given this, our position in The Sandbox ($SAND) continued to grow to one of our largest allocations in crypto. It went parabolic towards the Alpha release and broader hype and sentiment around metaverse and gaming in crypto. We were glad we positioned into SAND earlier in the year at various times. When the daily volume of SAND outweighed its market cap in a wild parabolic rush, we did end up taking some profit, but still hold a solid foundation for the long haul. We still think this is a more sticky web 3 gaming opportunity. It also has strong synergy with other recent investments like Oorbit, where we were able to facilitate an intro.

Moving into the new year, our core positions and cash position have never been stronger. We also still hold a base of older investments like Solana, Filecoin and Stacks. We were also happy to see YFI begin performing again after going sideways for a long time, as one of our remaining core DeFi positions that we're still bullish on long term. Lastly, we made a mid-sized bet into Chainlink towards the end of the year, which is an asset we've traded in and out of over the years and believe is due for a potential run-up and has the ability to outperform in the short/mid-term.

Simplifying and consolidating the portfolio has been the goal for the back half of the year, as we wrote about in the prior quarter as well. This also gave us more flexibility to reposition into token pre-sales/SAFTs for the next wave. Depending on how the market plays out into Q1 (and concluding whether or not end of year weakness was mostly profit-taking), we will certainly be making more active moves and have many ideas.

CRYPTO OUTLOOK

The consensus across the crypto space seems to be new all-time highs are coming in 2022 and a massive bullish meltup will occur in Q1. We are well-positioned for that outcome given the long-nature of the fund, but are not entirely convinced. The market is now showing close to zero retail volume growth and mostly hinges on institutional demand, which has been relatively flat. It's unclear where and when that's coming and without continuous momentum, crypto tends to drop-off. But in a broader macro sense, it's also entirely possible we are at the upper part of the S-Curve and real adoption will create the demand needed to hold the market up without a major correction being necessary (skeptical, but open to the possibility). With that said, we're also positioned better than ever from a dry powder perspective and plan to scoop up heavily discounted value projects and layer 1s, along with doing more SAFTs and venture deals with future token provisions.

There is also a dilution of activity (both trading and developer-based) across a variety of non-BTC Layer 1 projects, much more than any other cycle. While its true most smart contract developer activity, trading volume, and value locked still exists on Ethereum, there is also a ton of attention being challenged. This is why if there was a "top" to this market, it didn't culminate with a BTC/ETH melt-up, rather a more spread out, diluted price surge as we saw across certain sectors Some layer 1s are still showing strength as of writing this, but many are still 30-40% off all-time highs. It's unclear if that correction is the start of something bigger, or simply a re-pricing before the next move up.

As mentioned above, much of the last mania occurred in specific "sectors" in crypto. The days of late-stage manias culminating in a blow-off top in Bitcoin may be over given USD/USDT/USDC pairs are highly liquid and available and the market doesn't rely on BTC-denominated trading pairs like it did in 2016/17. We still think Bitcoin is an excellent risk-weighted macro bet and wouldn't be surprised if some dominance returns if there are more political/government type catalysts (or a potential spot-ETF). Despite all the noisy criticism of Bitcoin being "boring" (that's kind of the point) we still hold a lot, and invest in a number of Bitcoin-native companies that have performed exceptionally well.

Ethereum is still getting a lot of criticism and hate given fee issues, along with doubts around the Merge/Proof of Stake ever occurring. We still have confidence that the PoS transition will happen, although it might get delayed again. We are also not religiously attached to the idea of PoS solving many issues, and certainly not off the bat. It also probably undermines aspects of Ethereum's security and decentralization, but also gets ESG fanatics out of the argument, which is good. Everything has trade-offs and this probably warrants a separate blog post. We are still bullish on everything going on in the enormous Ethereum ecosystem and think it retains its network effect as smart contract leader for the foreseeable future. Many raises and private rounds are still occurring on Ethereum, even if multichain is inevitable in other ways, Ethereum will likely remain the ultimate settlement layer for web 3 for quite some time (especially as broader EVM interoperability matures).

As for other Layer 1s, we will continue making bets into various L1s that are able to grab real developer interest, bring value into the ecosystem, and enable novel use-cases (gaming, social, etc). Many of these ecosystems are also deploying hundreds of millions of dollars into developer incentives and growth. The risk in these ecosystems is still higher but the upside potential is much higher – we saw this in Solana when we started buying more in Q1 2021. Solana was really the thing that prompted the massive Layer 1 rally due to ease of use/UX, cheap fees, and developer interest. We are considering gettting involved a few other Layer 1s, but also prefer a strong degree of focus over going too wide.

Other areas we are looking at are crosschain infrastructure that will help tie these worlds together seamlessly, along with DAOs. In our opinion, ConstitutionDAO was the lightbulb moment for DAOs and nothing else compares given the organic, memetic, and memorable story that can't be replicated. But generally, enabling capital formation and ownership via unique, viral events and assets is where we see the most interesting DAOs emerging. There is a lot of noise in the DAO space to cut through and a lot of unnecessary tooling being built (you can read our critique of DAOs here), but there are certainly some great teams entering the space.

Overall, 2021 was a strong year for the crypto fund, with aggregate fund growth at around ~2,560% for the year, with winners like Solana and Sandbox carrying the portfolio to new highs. This helps position the fund for 2022 and beyond, ready to do more venture bets and larger active market buying when we feel discounts in value plays begin to materialize.

You can also read our latest venture update here, where we saw a lot of traction.

Happy New Year!

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