Cambridge Associates, the world’s top alternative investment management company, has incomparable influence in the PEVC industry LP circle. After a long and careful study and review by the investment team and management, CA released a research report in early 2019, explaining that the future of crypto assets is bright (focus, this is the report for 2019, don’t get it wrong) .
CA’s message in this research is simple: the blockchain market and the crypto world are real, and LP should take it seriously. In addition, institutional investors need to figure out the rules of the game in the crypto world as soon as possible to ensure that they will not miss potential great opportunities, and will not fall behind in the rapid update iteration of crypto technology.
Two years later, we looked back at CA’s predictions and found that they all came true. If institutional investors want to invest in crypto, these are the roads pointed out by CA. As an emerging asset class, how will crypto appear in the asset portfolio of most institutional LPs? What investment methods will be derived after emergence?
In the longer term, Coinbase, Circle (USDC stablecoin), plus the recent Bullish (of course, this is another word, it is full of coins) all reveal the future of the crypto world. Circle recently partnered with Compound and Fireblocks to allow financial institutions to exchange U.S. dollars for USDC at a fixed rate of 4%. The integration of crypto/defi and tradfi has begun, and this trend will evolve further in the future. Will crypto assets account for 1% to 5% of the world’s important LP assets? Looking back 10 years later, it is very possible, not to mention that many LPs that we know have already invested in crypto through VC.
The crypto assets opened in 2020 are like the high-yield bonds of the 1970s and the technology growth stocks of the past 20 years. Halfway through 2021, the prelude to crypto is over. The reel of the main story is slowly unfolding, and signals of opportunity are constantly being released. Although the coming is turbulent, it is also fleeting. So when the green light comes on, put more horsepower and move forward.
In 2018, investors witnessed the price plunge of various crypto assets. The value of Bitcoin has shrunk by about three-quarters, from more than $16,000 to less than $4,000. The tumultuous storms that have swept across the crypto world have caused people to wonder about the future of crypto assets and the blockchain technology that supports it.
However, looking at the entire crypto investment field, it is still a rising industry and has not fallen into a difficult defeat.
Blockchain technology is like a spiritual stone that fills the sky, filling the digital world with a part that has always been scarce: currency that can be circulated in compliance. With a currency tailored for the digital world, creative innovators can get the rewards they deserve and do more exciting new things. In the past, it was difficult for them to cross the boundary between the two worlds and get paid in the digital world in the real world. In addition, crypto assets simplifies the cumbersome process that spans multiple businesses (such as settlement between banks). In this world, everyone can better control their privacy.
Although crypto is still in its infancy, investors should now start the engine of exploration. In the crypto world, there are many investment options from low-liquid venture capital to highly liquid hedge fund transactions. CA reviewed the development of crypto, expounded their views on various investment strategies, and also discussed the factors that investors should consider when exploring this new field. Although the risk of investing in crypto is high, after walking through this high-altitude wire, some investments are likely to subvert the entire digital world.
The crypto world in full swing
In 2018, activity in the crypto world was once hot. Crypto assets have seen huge price fluctuations (Figure 1), but fund-raising activities have surged (Figure 2), and there are important structural developments. The crypto world is changing with each passing day, crypto futures trading has also begun to emerge, and the custody business, scalability, and other key infrastructure-related projects have made considerable progress.
However, although the crypto world is changing and growing in full swing, related regulatory measures have not kept up.
At the same time, crypto investment activity is also picking up strongly. One of Bitcoin’s largest institutional investors, NYDIG (New York Digital Investment Group LLC) claims that the number of blockchain-related software projects on Github has increased 10 times from 2016 to 2018. Similarly, the data collected by CoinDesk shows that from January to October 2018, the total venture capital financing of blockchain startups was US$3.1 billion, compared with US$1.2 billion in 2017 and US$500 million in 2016.
One of the most typical examples of a rebound in investment activity is Coinbase’s financing. In 2017, after conducting Series D financing at a valuation of $1.6 billion, Coinbase raised $300 million in Series E financing at a valuation of $8 billion. Coinbase said in the fundraising announcement that they believe that “on the way to the next great stage of the Internet (that is, Web3.0), the future of crypto is boundless.”
Traditional venture capital companies are also gradually entering the crypto field. a16z launched a dedicated crypto fund, and Sequoia also made Paradigm’s LP (Later Paradigm will become one of the most influential crypto fund funds). Independent research organization Autonomous Next found that crypto fund assets have climbed to between 10 billion and 15 billion U.S. dollars (data for 2019).
In addition to investment activities, ICE has also established a subsidiary called Bakkt, which will start trading physically settled Bitcoin futures from the beginning of 2019. Previously, in December 2017, Bitcoin futures were listed on the Chicago Mercantile Exchange (CME). Fidelity also announced plans to launch Fidelity Digital Asset Services, LLC (FDAS) to provide corporate clients with custody and transaction solutions. In addition, some projects to solve the resistance in the crypto field are gradually on the right track. The issues of scalability, privacy, custody, crypto asset volatility, interoperability, and governance are no longer deserted by no one.
Unfortunately, these developments do not have a supporting regulatory plan. Although investment managers, service providers and regulators are actively involved in this, the uncertainty of the regulatory environment is still hindering the flow of institutional capital. For example, the SEC has prosecuted many industry frauds and tried to protect investors considering investing in ICOs. The US Commodity Futures Trading Commission and the SEC recommend that Bitcoin and Ethereum are not securities because their networks are decentralized. Despite this, many ICOs will still fall under the scope of securities law and be constrained by the SEC.
Direct investment in crypto assets, starting from three aspects
There are many ways for investors to invest in crypto assets. It can be divided into three main categories:
(1) Buy mainstream coins (GBTC) in the secondary market
(2) Rely on SAFT and other agreements to invest tokens in the primary market (Paradigm invests in UNI)
(3) Equity investment (Coinbase)
Let’s talk about these three groups separately.
In the first category, mainstream currencies are invested in the secondary market. Investors can buy highly liquid crypto assets like Bitcoin. Bitcoin is traded all the time, which means that liquidity will be better than other investment options. However, as happened in 2018, such markets can sometimes be weak, and assets are subject to volatility risks. Investors can either directly buy tokens by themselves and then deposit them, or they can purchase and custody through a centralized exchange, or indirectly invest by investing in an actively or passively managed fund.
The second category is the first-level investment token. This category includes simple agreements between ICO tokens and future tokens (SAFT refers to the investment contract provided by the project to qualified investors and promises to deliver a certain number of tokens when the network or company is running). SAFT allows investors to obtain the crypto assets of the project at a discounted price before the project is publicly released. It differs from standard ICO in that ICO will issue tokens immediately, while SAFT is actually a promise to deliver tokens in the future. What investors buy is the right to purchase tokens issued in the future, not the company’s equity.
ICO projects will have different distribution plans after realisation-some may immediately divide the profits generated by crypto assets, and some may need to wait 24 months. Although the realization time is relatively short, investing in SAFT and ICO is essentially the same as investing in early-stage technology companies. What needs to be said here is that the fund-raising mechanism of ICO has been abused by some people. Most of these projects have problems or are outright frauds.
The third category is equity investment. Investors can invest in companies whose returns are related to asset class growth while maintaining traditional capital structures. The typical example here is the aforementioned Coinbase that does digital currency transactions. Although these companies are affected by a wider range of crypto asset price fluctuations, they should be more stable than any private sector investment. They are long-term, illiquid investments held at cost, which rise or fall according to different financing rounds. The liquidity of this investment is similar to traditional venture capital.
Investment tokens can also take the form of equity investment in companies operating token projects. The main mode is to own the rights to the tokens under development, which will be distributed or sold later. In addition, the operating company holding the token can also carry out other businesses, such as providing services for a specific network, and in this network, investors will have certain ownership.
Under the unstable supervision of ICO and the restriction of entrepreneurs’ fund-raising options, investors increasingly want to obtain tokens through equity, as well as the additional privileges and protection provided by equity relative to tokens.
There are also three ways to invest in crypto through the fund
GP can enter the crypto wealth pool through different investment strategies. The vast majority of strategies currently in the market can be divided into three categories: the first category is publicly offered index funds (ETFs and trusts), the second category is publicly offered actively managed funds, and the third category is private equity funds (with poor liquidity).
No matter which method is adopted, investors should understand that their targets are based on very early technology. Therefore, any investment should be regarded as an early-stage venture capital, although early liquidity has opened up some hedge fund-style trading opportunities. , Such as arbitrage.
The early nature of these investments means that many investments will fail, and of course some big winners may emerge. In addition, due diligence and technical expertise similar to those in the venture capital industry can allow investors to better understand these investments and their long-term return potential. Therefore, investors should regard implicit investment as another form of venture investment. Although coupled with the risks of technology and adoption, it may be more risky than venture capital.
It is best for investors to focus more on the infrastructure of the crypto industry and its emerging financial service ecosystem, or get early equity, or pursue blockchain technology, instead of narrowly focusing on holding public transactions. Crypto assets. This is a way to build a real business rather than speculation, and it can only be achieved through a venture capital strategy.
An influx of institutional investors
At the beginning of 2019, the vast majority of institutional investors have almost never invested in or set foot in the emerging field of crypto assets. Even institutional investors with a wide range of interests tend to invest only about 0.2%-0.3% of their funds in crypto assets.
These institutional investors who have knowledge of crypto assets generally allocate most of their funds to VC funds, explore and invest in some funds from time to time, and leave a certain amount of money to a selected crypto fund.
In the near future, traditional venture capital funds will increase their investment in crypto assets, which also means that more and more institutional investors will invest more money in crypto.
The rise of generalized mining (such as staking)
An interesting phenomenon in the crypto world is that investors will actively weave themselves into the crypto network. With the proliferation of Proof-of-Stake (PoS) protocols and the inflation of mining returns, investors who bought and then held them saw new investment opportunities.
(1) On the basis of the original investment to earn income, they can also obtain additional income in the crypto world (usually in the form of crypto assets);
(2) Participate in voting on the chain by holding crypto currency to influence the ecology of the entire chain.
To give a specific example, some investors have been paying attention to Livepeer (LPT). LPT is an open transfer protocol that promotes decentralized video transcoding on the Ethereum blockchain. Any LPT holder can mortgage LPT tokens, handle transcoding needs from app developers, and get LPT tokens in return (the annualized rate of return in 2019 is 24%).
Such a mechanism encourages and encourages investors to actively participate in the crypto network, and the prevalence of similar models is also prompting some investors to rethink their investment models.
Although investors still determine the funds that can be allocated to crypto assets based on the return of VC funds in portforlio (because it is more convenient to invest through VC), they should consider setting aside a certain amount of money to invest in crypto assets. .
However, the crypto field is very professional and technical. This means that newcomers and non-professionals in the crypto world can’t compete with investors who enter the market early. Investors in traditional venture capital institutions who focus on investing in the crypto world will also rely on their relationships and experience, and eventually spinoff will come out to establish their own crypto fund. (You can come and chat with Suyuan)
To sum up, even if a GP invested by an LP has rich experience in the crypto industry, it may miss a good opportunity in this potentially profitable industry. (You can come and chat with Suyuan)
At the same time, because crypto is new, the overall configuration of crypto assets in more than 1% of the portfolio has become more radical. Like other asset classes, LP still has to seek GP and asset diversification to diversify risks. Diversification can also help investors seize the upside opportunities in the industry, because it is likely that only a small number of companies and projects will bring returns. For portfolios that are small in scale and cannot be easily diversified, investors should consider allocating actively managed funds or index funds to participate in this opportunity.
Facing the wind and waves, embracing the peak
The crypto field allows people to see that in the slow-changing investment industry, there is still a unique perspective. Even though the price of cryptocurrency has fallen sharply recently, the investment activity in the crypto field has been overwhelmed by waves. Investors interested in this industry need to spend a lot of time understanding the crypto field, accept the high risks that may be oncoming, conduct comprehensive due diligence, and allocate funds carefully.
Although the road ahead may still be thorny, we believe that investors are beginning to explore the crypto field as a long-term performance. All of this will be worthwhile, and time has given the answer.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-should-lp-enter-the-crypto-market/
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