Disclaimer: The views expressed herein are my own and do not reflect the view of any third party. This is not a recommendation to buy or sell securities or other products and should not be considered investment advice.

I spent the last year going deep down the cryptoasset rabbit hole. (Side note: If you’re just getting started, check out my crypto primer.) Below is my latest thinking on areas I find interesting:

Regulated Moats

The number of cryptoasset holders grew to ~20-25M since 2011. In comparison, the number of banked adults worldwide grew by ~700M over the same period. One of the major building blocks to widespread adoption is to get more people owning (& feeling safe owning) the category. This could take several shapes:

  • Regulated exchanges, particularly mobile-first ones. For comparison, mobile-first banking is what drove the increase of banked accounts worldwide.
  • Financial infrastructure “copies” for crypto: custody, insurance, etc. Things to make institutions feel comfortable investing in crypto.
  • Other forms of on-ramps that provide retail or mass-market investors with access without (1) the need to deploy significant fiat capital and (2) the mental load or fear of not knowing which assets to select. These could be: (a) index funds (cf Bitwise HOLD10), (b) round-up-the-change models (eg. Acorns, but for crypto), (c) investment management (cf. Scout), etc…

Why these are interesting:

  • Regulation makes them hard to build, so they have natural moats.
  • Regulation makes them regional, so there is natural fragmentation & opportunity to diversify.
  • Value is proportional to volume (vs price) and should at-scale be uncorrelated from cryptoasset swings.
  • Value accrues to equity in the corporation and largely uncorrelated from which cryptocurrencies ultimately win.

Products that own the user relationship

Throughout the ages, companies that have created immense shareholder value have: (1) owned the relationship with their end user, (2) had some form of demand-side increasing returns (aka. network effects), particularly if they could create new networks or new network shapes. There’s no reason to believe this won’t also be true in crypto. If you believe, as I do, that the protocol layer will become commoditized over time (cf. John Pfeffer’s paper), then more value is likely to accrue to the “experience layer.” Some interesting potential examples:

  • For utility cryptoassets: “banks” that hold SoV tokens (eg. Bitcoin) and dynamically shift in & out of non-SoV tokens to purchase protocol resources/tokens on an as-needed/spot basis. Think a file storage app that automagically provisions the cheapest utility storage resources behind the scenes
  • For tokenized securities: being the tokenization / administrator layer for tokenized securities (eg. Harbor for real estate, a similar play for tokenized equity). This also puts you in a great position to be the market maker for primary & secondary transactions.
  • For new tokenized assets: Platforms to transact attention, DNA, healthcare records (eg for pharma research), etc…

Reasons these are interesting:

  • Owning the user relationship + network effects are historical great sources of value for businesses. No reason to assume this won’t work in crypto
  • These won’t be quick flip ICOs but will have to be built over the long-run into long-lasting businesses. This hopefully means the entry valuations more resemble non-crypto investments.

A parallel ecosystem in Asia

Technology (search, communications, commerce, …) and finance (currency exchange, banking, credit, etc…) have both historically followed a parallel model in Asia. It’s possible crypto will buck the trend but early signs seem to indicate otherwise. As with non-crypto tech, Asia is a notoriously difficult market to tract but also present potentially enormous opportunities.

What’s not interesting

I’d be remiss if I didn’t state the things I don’t find as interesting:

  • Utility cryptoassets. These may create a lot of value but I don’t see the path for them claiming any of it. It’s the crypto equivalent to undersea internet cables or open source software.
  • ICOs. They’re overpriced, useless, and likely illegal. Why would you want to hoard the crypto equivalent of Chucky Cheese tokens?
  • Businesses that add crypto to places where it’s not value-add to their customers. If your product doesn’t need to be distributed and censorship-resistant, don’t use a cryptoasset. Startups are hard enough. Don’t make a difficult challenge worse. Remember, VCs are not your customers.

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