Investing with Conviction

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After nearly 7 years as a web3 investment firm we are taking the time to reflect on the current macroeconomic market conditions. We maintain deep conviction in the extraordinary investing opportunity for our three strategies (seed, venture, and liquid crypto). As most long term investors have experienced, times of market stress and volatility often create large, differentiated opportunities for those prepared and capitalized to underwrite high quality, long term focused investments. The prospects for digital assets and web3 remain unchanged, fueled by fundamental catalysts such as developer activity, consumer adoption, and broad regulatory de-risking.

While web3 navigates headwinds, including those across the Terra ecosystem, we must also acknowledge the broader market decline has been similarly dramatic. As of Friday, June 10th, roughly 61% of the stocks in the NASDAQ are down more than 50% from their all-time highs. (1) While Bitcoin is down 66% from its all-time high, it nevertheless continues to outperform many equities including Netflix, Block, PayPal, Snowflake, Shopify, Zoom, Doordash, Peloton, Palantir, Pinterest, Opendoor, and DocuSign as of this writing.

While the broad market decline in equities and digital assets this year has been acute, software developers responsible for building the applications of the future continue to move into the web3 space in accordance with past cycles. Across multiple tech bear markets (i.e., 2000 and 2008), passionate developers focused on creating some of the world’s most important and valuable web 2.0 companies. For example, Uber, WhatsApp, Slack, Square, Venmo, and Instagram were each founded in 2009–2010.

On the liquid digital asset side, valuations have been under significant pressure this year. Peak crypto market cap was $3.1 trillion in November and is currently around $1.0 trillion, which is a 68% decline.(2) Our expectation is that valuations of private companies (not just web3 and digital asset companies) will feel this impact over the coming months and quarters as tech and venture investors begin to mark their portfolios lower. Our venture investing strategy benefits from a market correction of this scale, since we believe in measured deployment over a two to three year timeline rather than trying to pick a market window into which to invest. With our venture funds, this resetting of valuations is positive looking forward and, in many respects, healthy.

Regulation remains an important consideration, and we remain steadfast in our belief that crypto is in the midst of a secular derisking. Clear, consistent, and predictable regulation is essential to give entrepreneurs clarity and CoinFund continues to support this process by proactively educating global regulators and policymakers on thoughtful policy design. On May 11th, CoinFund’s President, Chris Perkins, testified at the House Committee on Agriculture alongside Sam Bankman-Fried, CEO and Founder of FTX, Terrence Duffy, Chairman and CEO of CME Group, Walt Lukken, President and CEO of FIA, Inc., and Chris Edmonds, Chief Development Officer of Intercontinental Exchange to provide expert testimony on digital asset derivative market structure (testimony).

In the U.S., we are seeing bipartisan support of regulation designed to keep innovation onshore. President Joe Biden signed an executive order regarding digital assets in March, in an effort to “reinforce American leadership in the global financial system and at the technological frontier,” by instructing government agencies to develop a strategy to regulate digital assets. U.S. Treasury Secretary Janet Yellen also spoke in support of the formation of regulatory frameworks stating that “innovation that improves our lives while appropriately managing risks should be embraced.”

Across the pond, U.K. Economic Secretary to the Treasury John Glen laid out a detailed plan in early April that is aimed at making the U.K. a global hub for digital asset innovation. The proposed legislation, which is yet to pass through Parliament, would put stablecoins on even footing with established payment rules, with a consultation planned for further legislation that will address other crypto assets. In a show of enthusiasm for the technology, the Minister even went as far as stating that the plan will cover the potential use of blockchain in issuing government bonds. In a symbolic gesture, the U.K. also directed the Royal Mint to launch an NFT this summer as the U.K. government seeks to build off of its traditional finance foundation to be a leader in web3. Meanwhile in Germany, the government ruled favorably on tax rules for cryptocurrency investors, an effort that could spark a resurgence in Berlin as a hub for web3 founders.

If in the next 6 to 24 months market conditions stay the same or worsen, we can expect significant changes to the investing dynamics in venture-stage tech and digital assets. Over previous tech bear markets, a downward cycle quickly emerges where funding across all stages gets tighter and valuations begin to fall. Companies then react by conserving cash to avoid having to fundraise during this part of the cycle. They tighten spending by freezing hiring, reducing employees, and cutting discretionary spending on marketing and non-critical software, services, and expenses. This often leads to a softer labor market, ends the rise in wages, and begins to affect the revenues of companies who sell to enterprises. This can be acute in the enterprise software space where tech companies are often the largest set of customers of other tech companies. We believe there is a reasonable possibility this cycle is already starting.

During these unwinding periods and just beyond, less determined entrepreneurs leave the market, weaker companies shrink and even cease operations, and fewer companies seek venture funding. Also, legacy venture funds undertake the painful process of writing down the valuations of many of their portfolio companies. As this exercise is done quarterly, it takes time for these lower valuations to reach investors. This, of course, can lead to tighter fundraising markets for investment funds as well.

Given our understanding of the historical dynamics during these periods, we are confident this is the time to go on offense. We expect stronger companies to emerge from this period, highly-determined entrepreneurs to press forward, and a resumption of focus on revenue metrics and strong business models.

We founded CoinFund during the 2015–2016 bear market, during which Bitcoin maintained a $200–400 range for nearly two years and not much innovation was happening in the blockchain ecosystem. CoinFund made some of its best and most impactful investments in the crypto winter of 2018–2019 . We have seen these cycles before and believe the builders, developers, and innovators will continue to evolve and advance the space. As an investor, we see this market as the next market of opportunity where some of the biggest innovations of the next market cycle will be created.

We are thankful our community shares our confidence in our team and strategies. With that support, we will continue to invest in the most important web3 projects in the coming years.

(1) Source: Bloomberg

(2) Source: CoinGecko


Investing with Conviction was originally published in The CoinFund Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

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