Our brief review of 2018 and outlook for the future

At the start of a new year it is a good time to reflect briefly on what we learned and achieved over the past year and also share some thoughts on what we expect to come next.

Some of the themes we backed in 2018 are:

1. In the realm of programmable money, we have made several investments into projects that are trying to solve the scalability problem at Layer 1 (e.g. Spacemesh, Algorand, Chainspace, Harmony etc.).

2. Private Transactions: In line with our belief that privacy is a major use case of cryptocurrencies, we looked to back some of the cutting edge developments. MimbleWimble is a forward looking technology with pertinent use case and we are proud to be among its leading backers (Beam, Grin support).

3. DeFi: Being a focus area for us, we looked to back projects working to create decentralised trustless financial markets.

4. Payment Bridges/Interoperability: Interoperability of blockchains is crucial for new Web3 use cases and applications. We have thus invested in Kava which enables cross-chain transactions through integration with Interledger.

5. Decentralised Computation Infrastructure: We have been cautious with our approach in this space but were impressed with the team at Hypernet which is building a privacy preserving computing protocol across a distributed network of devices.

6. Exchange: We invested in BitMax which uses an innovative Trans-Fee- Mining token model. The exchange launched during the summer and has been successfully building up volume.

We are interested in components across the emerging Web3 Stack and solutions enabling the broader user-base, which is still hindered by lack of simplicity/usability, poor scalability of the networks and high volatility of cryptoassets. We continue to keep a keen eye on layer 1 protocols with novel approaches to consensus, decentralisation and scalability. We also remain enthusiastic about extensive development at layer 2 such as alternative scaling solutions and payment channel networks.

We are strong advocates of Decentralised Finance and have strong affinity with finance related applications. We are looking forward to open financial systems as described by Joey Krug.

Blockchain infrastructure (security, developer tools, abstraction layers for building applications, node deployment infrastructure) and crypto markets infrastructure (exchanges, trading related tools, analytics) are also two areas of focus.

We are looking at continued innovation in these verticals and we intend to play an active role in supporting the entrepreneurs at the forefront of it.

We adhere to the concept of Generalised Mining (Mining 2.0) as envisioned by Jake Brukhman. In our view, participation and investment are intertwined. The former allows us to be an integral part of what will bring success in the latter. This is not only about keeping the networks safe but also being part of their governance. We will continue our deep engagement with the cryptonetworks we invest in. This engagement ranges from being so-called Keepers to supporting their development, bootstrapping and even contributing to their design in the early stages.

Beyond that, we are excited by further developments in governance and issuance models which use blockchain to its potential with aligned incentives. We expect rapid advances in incentive structures that go beyond network security and engage human interactions leading to on-chain governance, DAOs and Continuous Organisations.

We have embarked on the next phase of our evolution as an institutional grade investment firm through three distinct endeavours and their effect will come online during the course of 2019.

We are establishing the Cryptoassets Initiative to research and study cryptoeconomics, token economics and by extension, valuation of cryptonetworks. We are bringing together industry practitioners, investors, academics and students in an open source effort to further the understanding in this field.

We formed Token Engineering Hong Kong, which is part of a global community creating an opportunity to share, collaborate and discuss topics such as mechanism design and token models, along with their economics and value accretion.

We organised dedicated events with some of our portfolio companies (Algorand, Chainspace and BitMax) assisting them in network bootstrapping and gaining wider recognition in their go-to-market by meeting local developer communities.

We sponsored prominent events such as Dezentral (Berlin Blockchain Week), San Francisco Blockchain Week / CESC and GrinCon0, the first Grin/MimbleWimble conference. Beyond those, the team attended many of the main conferences in 2018 (e.g. Consensus, Scaling Bitcoin, Deconomy). We will continue to attend and support events, particularly those with academic/research focus, with a view of connecting and educating as well as evangelising the technology and its benefits to the broader public.

We became launch partners of Compound Finance and Dharma Lever. As adepts of financial markets, we strive to have a hands-on approach and deploy strategic capital in various parts of the DeFi ecosystem.

Realignment in the Market
The bear market will continue to unfold resulting in a continuous realignment among market participants and projects alike.

Many projects will shut down due to lack of viability on the technical side, complete lack of progress on adoption and/or depletion of capital.

On the investor side there will be a high rate of attrition too. This will be driven by multiple factors such as investment losses, lack of liquidity, inability to raise capital, lack of credibility and inability to be compliant with regulations.

High Quality Teams, Sensible Valuations, Focus on Build
The market conditions have created a filter on what gets funded. The bar is now definitely higher and things are normalising. On the valuation side, a sense of realism is starting to appear though there is still some way to go. Market will continue to rationalise based on extensive research and experimentation. During the course of the year, fresh waves of projects will bring forth strong investment opportunities based on sensible valuations.

Funding
The old ICO model may be dead, but this is not to say that projects cannot be funded by tokens. As stated above, we continue to believe that sensible cryptonetworks (be they tokens issued on a platform or native assets) can be designed and funded. Tokens and equity are not interchangeable, if the token has a meaningful utility in the first place. Some business models don’t need a token, and vice versa funding some cryptonetworks via equity doesn’t make sense either. Token-based funding will evolve with new governance models (continuous organisations etc.).

There will continue to be much activity in the domain of securities token infrastructure and services. STOs are not a panacea however and there are a few misconceptions. As stated by Arjun Balaji, STOs are still in search of a product-market fit and it is not clear who the audience is. They are not a direct alternative to a sale of a utility token or a cryptocurrency for cryptonetworks, but rather a potentially more efficient alternative to traditional equity.

Convergence with VC
Timelines for investment into blockchain projects will continue to converge with venture capital funding. The “fast market” has disappeared, which is beneficial to investors. There is now time to do proper investment work and due diligence. Funding (even for cryptonetworks) is also likely to occur over multiple rounds.

Market Maturity
The market itself will continue evolving into a more mature and sane market. There are still too many price aberrations even in the top 20 market caps that point to highly inefficient markets. It may be too early in 2019 but the market will start to exhibit lower correlations, meaning at least some discrimination between cryptoassets.

It is highly unlikely that short-term outsized returns as seen in the speculative mania will repeat themselves in a similar fashion. 100x+ returns however will absolutely remain possible, but over a much longer timeframe.

At this early stage of the industry, high volatility is here to stay. Many cryptonetworks’ business models cannot yet be valued at steady state and liquidity remains thin and fragmented.

Nascent Asset Class
Crypto will come further into its own as an asset class. There will be a few more announcements indicating institutionalisation of cryptoasset markets. The market will cease shrugging off these news in an excess of bearishness. Meanwhile, we look forward to some of the announcements of the second half of 2018 reaching operational status (Bakkt, various new custodians, ETFs etc.)

Decentralised Finance will continue to be a big theme, with new projects attracting further interest. Cryptoasset markets will gradually start to acquire most features of traditional markets thus becoming more “complete”.

Strong Activity
As the bear market reached fresh lows over the last quarter, some indicators pointed in the other direction. What we saw is a very strong level of activity at grassroots level. Chris Burniske provides great data points supporting this. The number of developers, projects and ideas has never been higher and the building continues apace. This will feed into opportunities for the next wave of growth.

Further Regulatory Interventions
Permissionless fundraising is an oxymoron. It was a matter of time before regulators would want to bring crypto fundraising under the fold. This is not a negative, on the contrary, even if the direction that some regulators are taking may be misguided in seeing securities in absolutely everything. There may be some overshoot in regulation before things stabilise with some sense. As with all innovative technologies, it takes time.

There will be further enforcement actions against bad actors (welcome) coupled with overly aggressive regulatory pushback against the cryptocurrency space at large in some jurisdictions (unwelcome). This will be counterbalanced somewhat by positive developments in some jurisdictions. Regulatory uncertainty will thus remain at elevated levels.

Surprises
Of course there is also ample room for surprises, both on the negative side (e.g. heavy handed action from regulators and governments) and on the positive (e.g. a major technological breakthrough or unexpectedly friendly government policies)

2018 was a year of adjustment following the bubble bursting, a painful and global process that will take a little longer to digest. But remember, the technology itself and the radical improvements it promises are not diminished by the price action. One can draw parallels with the dot com bubble: the fact that there was a bubble didn’t negate the Internet. Its deflation was coupled with heavy attrition but many companies survived and thrived later on (e.g. Amazon). The period during and after the bubble bursting strengthened fledgling companies (e.g. Google) and spawned new giants (e.g. Facebook). Granted, the survival rate in crypto will be lower (lower barriers to entry during the bubble), but there are some gems out there and many more yet to appear.

There are significant expectations of high profile projects that have been in development for years to launch in 2019. If some of them deliver on their promises and provide tangible results of added value, some trust will return.

This, coupled with the major progress on the institutional infrastructure side and the vast amount of new research, innovation and development will help the market stabilise and find an inflection point eventually.

We will continue to actively question the status quo, explore innovative approaches and take calculated risks in supporting the entrepreneurs building the decentralised future.