My Ever-Evolving Investment Thesis within Blockchain & Crypto
Updated: Apr 27, 2019
Previously, when I was asked the question “What is your investment thesis?” My answer would be relatively vague, explaining that I was interested in just about anything within the crypto or blockchain space. This left things open for me and not pigeonholed within a specific sub-sector. However, throughout my time at both Crypto.IQ and Venture University I came to realize the value in having a specific, thoughtful investment thesis to allow me to focus on the startups and projects that are working to solve the issues that matter most to me within this evolving space.
Before I dive into my thesis, I wanted to touch upon my background and experiences that led me to it. I first heard of Bitcoin back in 2010 when a friend of mine mentioned this cool new digital currency. At the time I was just graduating college and didn’t have too much disposable income to throw into some “fake” currency. However, in late 2013 after reading up a bit on bitcoin, I finally had an opportunity to buy a bit of btc and dive into the rabbit hole of bitcoin and cryptocurrencies. After spending the next few years reading everything I could get my hands on, I made the decision to jump into the space professionally by joining Crypto.IQ, a cryptocurrency startup providing research and trading advice to retail investors. I spent most of 2018 writing research reports on different altcoins in the space.
While suffering through the bear market in 2018, I came to a conclusion that while bitcoin and a few other cryptocurrencies were promising, the space as a whole was filled with a lot of “tourists” just creating coins and conducting ICOs solely for a quick payday with no plans of actually building a viable product. However, among the tourists, there were some brilliant entrepreneurs who were busy building amazing startups within the blockchain community and the opportunity to participate by not only investing in but being a resource for these entrepreneurs was one of the biggest reasons for my decision to get into the venture capital community and join VU Venture Partners. Venture is extremely difficult to break into, but VU has given me an opportunity to gain meaningful VC experience in a relatively short amount of time. Their program allowed me to refine my investment thesis within blockchain and crypto, meet with nearly 100 blockchain entrepreneurs, and ultimately invest in two brilliant teams looking to make waves within blockchain.
My experiences, highlighted above, led me to my current investment thesis:
My focus is on investing in early-stage startups, within the blockchain ecosystem, that provide a better/easier user experience for new entrants into the marketplace.
One of the main issues with blockchain and cryptocurrencies at the moment is the lack of adoption from consumers, retail investors, and institutions. For blockchain and crypto to gain meaningful traction, adoption by these users will be paramount. However, the barriers to entry for the majority of them are too high at the moment. In lowering the barriers through a better and easier user experience, more individuals and institutions will feel more comfortable entering the space.
To me, blockchain adoption has made the most impact initially within the financial industry, which most likely will continue to be the industry leading the way in blockchain adoption. There are a handful of sub-sectors within the financial industry where this thesis is applicable (listed below in no particular order):
Possibly the biggest barrier to entry currently in the space is storage for not only retail investors but also institutional ones. While blockchains are inherently safer from fraud and attacks, investors need a viable option for storing their all-important private keys. For retail investors, the threat of losing one’s private keys or theft has led to the emergence of BYOB (Be Your Own Bank) options for storage. For institutional investors, regulators like the SEC require assets to be maintained by qualified 3rd party storage providers. With the onus on these 3rd parties for the compliant and safe storage of these assets, many firms have focused on providing high-quality custody options for the hundreds of institutional investors currently investing in or looking to invest in crypto.
Examples: BitGo, Coinbase, Copper, Ledger, Trezor
Trading & Exchange
One of the many advantages of cryptoassets and blockchain within financial markets is that they never sleep. Exchanges allow for the buying, selling, and exchanging of cryptoassets 24/7. The first iteration of exchanges was centralized similar to Nasdaq or the NYSE. A movement towards a more decentralized trading platform brought about decentralized exchanges (DEX) where there was no centralized power and users were given the ability to store their own assets and trade directly with others. There is also a move towards tokenizing assets for digital trading outside of just cryptoassets. Now, the notion that real estate, collectibles, and even traditional stocks could be tokenized and traded on these platforms opens up a whole new market within blockchain.
Examples: Polymath, Securitize, Binance, Coinbase, 0x
Compliance & Regulation
For the first time in decades, the financial industry is facing a great deal of innovation and increased competition through the introduction of blockchain and cryptocurrencies. Disrupting this archaic industry has brought about some serious issues about regulation with a significant lack of clear and consistent regulation that has created a barrier for further adoption. Regtech has emerged to address these issues and add additional value to this new innovation to make it not adoption easier, but more compliant than it has ever been.
Examples: Chainalysis, iComply, Elementus, Elliptic, TRM
Blockchain infrastructure, the protocols and networks that cryptocurrencies and other blockchain-focused startups are built upon, is a necessity for blockchain and the first step in adoption. Without a built out infrastructure, all of the other subsectors within blockchain would not exist. The ability to store, process, and communicate data (all essential elements of decentralized computing and blockchain) rely on the underlying foundation and infrastructure that is currently being built to host the necessary applications.
Examples: Bitcoin, Cosmos, Polkadot, RSK, Dfinity, Aragon, Tezos, Augur
Blockchains, as noted previously, essentially allow for the storage, processing, and communicating of data. With hundreds of unique public and (now) private blockchains out there, the amount of data available for analysis is extensive and could provide meaningful information a variety of users including investors, regulators, operators, and more. Having this ability to easily capture, process, and analyze will be essential to the development of this emerging sector.
Examples: Amberdata, Etherscan, BlockCypher, Messari
Payments & Stablecoins
Volatility has been a deterrent for the majority merchants to utilize crypto as a viable payment offering. Until the volatility of the likes of btc, bch, ltc, etc decrease, stablecoins could provide that entry into the digital asset space for merchants and, in turn, consumers. Additional startups providing more user-friendly options for consumers and merchants alike through crypto debit cards and payment processors will make it easier than ever to make everyday purchases with crypto.
Examples: BitPay, Coinbase Commerce, WireX, MakerDai, True USD
Borrowing & Lending
With just about every other asset held globally, there is a marketplace for the borrowing and lending surrounding that particular asset. Whether it is fiat, gold, real estate, commodities, etc. people have been able to borrow against or lend their assets. Opening up avenues for individuals to borrow against their crypto without having to sell their assets (causing unnecessary tax consequences) as well as lending their crypto and earning interest on their long-term assets will only provide more use cases for this new asset class.
Examples: BlockFi, SALT Lending, ETHLend, Nexo
While Financials is not the only industry ripe for disruption by blockchain, I believe this is where we will see the most traction in the coming years and where I am looking for exciting startups and driven founders disrupting an industry ripe for change.