Cold comfort: Is Crypto Winter the right time to invest in Web3?

Transcript

Angie Lau: From a dizzying height of US$60,000, one year is all it’s taken for the OG of the crypto world — Bitcoin — to be reduced to a third of that. As the economic environment turned sour and investors became a whole lot more cautious, venture capital funding also slowed down. Or was it just biding time? There are some who believe that now is the moment to make their mark — that the value one would get by investing in times of crypto chill is second to none.

And today we talk to one such marksman who’s got his sights set firmly on the big prize. Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Well, today we’re in conversation with Gin Chao, founding partner of CVP NoLimit Holdings. He’s got center-court seats in the world of crypto.

Gin, I just had to bring in the basketball reference, because, for our audience, they’re just getting to know you. But of course, former Head of Strategy at Binance, you’re still on the board of Binance… but previous to your career in crypto, you did a lot of interesting deals and certainly led a lot of investments of a different nature. Tell us about your career trajectory and what got you here.

Gin Chao: Thank you, Angie. Pleasure to be here. It’s an interesting career trajectory. I’ve spent the last 13 years in Asia, and that move was really accelerated by the global financial crisis, which at the same time really launched cryptocurrency as a technology, to where we are today.

But during my early years in Asia, I was still coming out of a traditional career trajectory where I’d done management consulting, I’d done internet investment banking in San Francisco, I’d done private equity, and so landing in Asia, doing corporate development for multinationals was a very easy way to get started. I was at Dell Asia-Pacific for a couple of years before getting recruited by NBA China — the National Basketball Association. And so there I led corporate development for six years before joining Binance. And during that time I really got my feet wet in the sports, media, licensing, sponsorship, business models. And NBA was really unique in that it’s a sports league that’s very forward-leaning into technology, and so it comes as no surprise that they were early into NFTs (non-fungible tokens) with their deal with Dapper (Labs) a couple of years ago.

Lau: But also a lot of athletes who led a lot of those developments asked to be paid in Bitcoin, and really brought their leadership in that space by just wanting to participate. You’ve had a very storied experience, in a way, and from your perch at Binance, you’ve had an unparalleled perspective on the crypto space. You continue to be on the board of Binance.US. What led you to start your own investment fund, NoLimit Holdings? What’s the aim and the background of the fund? This is really you going out on your own platform.

Chao: Yeah, it is. And there’s a few reasons. First and foremost, I did lead the Binance Labs team in its early days in 2018, 2019 and early 2020. And at that time, when we started, we had not yet launched the BNB Chain, which has now become a little more central to the investment thesis for Binance, which of course makes sense. That said, I still think that there’s a lot of early adoption to be done, and a lot of the tools that need to be somewhat chain-agnostic to build that.

And so this particular fund — although I’m still a bit biased towards Binance — it does allow me to step out and be as objective as I can possibly be while focusing on sort of early-stage adoption. This time, perhaps less focused on consumer, but with the Web2 trend that we’re seeing this cycle, there’s a lot of traditional industries, a lot of traditional businesses, that are leaning into blockchain now, and I’d like to explore — especially given that I’ve been in that role in the past — whereas Binance, I think, is a little more native crypto. And while they’d love to partner with a lot of traditional companies, they don’t necessarily have the patience to wait for them. So they’re ready to act when the Web2 companies are. But I don’t think they’re really meant to be hand-holding them through this process. And that’s something that I’m happy to do as part of this fund. So that’s the rationale.

And also my role at Binance had evolved quite a bit over the years. After stepping out of Binance Labs, there were a number of acquisitions that were made that were amazing experiences. And then I started moving more towards a governance role. And, as you mentioned, that’s led to my role on the board of Binance.US, and I maintain that role now as an independent board member. But I had not wanted to stay full-time in a governance role, because that’s frankly not my passion — it’s investing, at the end of the day. But it does give me a great perspective on what we’re seeing in regulatory trends and allows me to help the Binance.US business grow at a high level by bringing my network to the table.

Lau: When you think about the returns and your investment thesis, obviously, you and your team come with interesting backgrounds and experience. But how do you really come together and create a thesis that you think can win?

Chao: At a very macro level, this cycle that we’re entering — depending on how you start the clock — we’re about one to two quarters into what I call the fifth sort of major cycle. And this is very similar to mid-2018, late 2018, into late 2019. And during that time, at the end of season one, into season two, incubation seasons of Binance Labs, these are where some of our most successful investments emerge from this sort of crypto winter.

And we’re seeing that same macro environment right now — and even more so, given what’s going on with inflation, interest rates, etc. — globally. So this is really the period where you can really find teams that have already self-selected themselves away from ‘missionaries versus mercenaries’ and have built through a bear cycle … It’s also fortunately a good time to be negotiating on valuation and things like that.

There are areas for structure — layers that are still very, very attractive to investing. And then, at the application layer, two broad thesis: one is DeFi (decentralized finance), which I think is the short-, medium-, long-term killer app across blockchain, and then the other being IP (intellectual property) content, which we’re a little more stringent about (in terms of) our investment criteria. We’re looking a little bit more for established IP creators that can bring immediate traction with users, as opposed to relatively new IP that still has to go out and adopt a fan base.

Lau: I think an example would be that, in the GameFi (game finance) space, Animoca has done a really interesting job bringing on board pre-loved brands, if you will, and then applying a GameFi structure on top of it. It could be an NFT and potentially create a new product. Is that what you mean? It already comes with a pre-baked fan base, and then you’re just elevating that into the metaverse or crypto space?

Chao: Yeah, that’s right. That’s exactly right. I think they’ve done a great job building out both original content as well as now pursuing existing content. And I think we’re starting to see that trend. And it’s not just a gaming company, but it can be IP like sports brands, many other established brands that are not only Web2, but date back to Web1. And they’re now able to leverage the IP that they already have and bring additional utility — in fact, a lot of additional utility — by moving parts, if not all, of their businesses on-chain.

Lau: When you started in this space, we were talking about Bitcoin, Ethereum, and then there were a lot of altcoins and such — Cardano, etc. You had a handful of layer-1s. Now, I’d say that that space has really exponentially grown, with some serious teams, as well, and serious talent. Do you think it’s getting a little too crowded? How do you make your bets?

Chao: Yeah, that’s a great question. I’d liken this a little bit to the early days of smartphones, where you had a lot of different hardware manufacturers that were customizing with their own operating systems and attracting applications to make their service offerings more attractive.

I think we’re in that stage right now, where there’s a lot of different ecosystems attracting applications. It ends up being like the smartphone space, where you kind of have iOS and Android as the dominant operating systems. I think there’s room for a number, given how broad blockchain reaches into different sectors.

So, that said, the way we look at it is fundamentally where the supply and demand are coming from. So, if you have a high supply of high-quality application builders, and you have users that are validating that with upward trending, TBL (triple bottom line), that’s where we want to focus. So, I do think that some of the larger layer-1s today still have a lot of runway to grow and add value. But we also have an eye out on the next-generation layer-1s and some of the talent coming into that space. I think we’re probably talking about some of the same themes, but they’re very interesting. There’s a lot of traction in there. But it’s still oncoming.

Those are areas we want to invest in and we’ll ramp up our check size as there’s more attraction and specific deliverables that we can see that the projects we’re excited about actually build. And then the users that are excited about it actually come to the table. Until that happens, it’s still all early-stage.

Lau: And, as you said, these are potentially some of the most exciting times in the industry. You’ve got a macro environment that’s still very much tight, which means that there’s more disciplined valuation, that it’s not too frothy.

And then, the potential of these layer-1s, like Ethereum, right before the Merge — a lot of people were anticipating, including Bank of America, speculating that it could drive up institutional adoption. Do you see that trend accelerating? What are the conversations, the feeling, the environment in which you’re talking to your network?

Chao: Absolutely. The short answer is that we’re getting there. The longer answer? This is a little bit nuanced. I’d say on the demand side, we’re very much there. This cycle, there’s a lot of demand that’s ready to be unleashed, if you will. The supply side? We’re very close, I think. So it depends on what part of the world and jurisdictions and regions you’re looking at. But we’re anywhere from very much there to perhaps 12-18 months out, I would say.

If I were a betting man, this is sort of ‘drip,’ I guess — and I wouldn’t call it a flood — but I’d expect to see a steady flow by the end of this cycle. And I think that’ll really drive both the liquidity depth — which has already gone up orders of magnitude over the past cycle — into an area that’s comparable with equities and other very established asset classes.

Lau: I want to learn more. We talked about the institutional clients coming in. They’re ready, you say. What’s holding them back, if you will? If they’re already preserving cash and they want to come in, what’s the hesitation right now?

Chao: I’d still say that at the larger institutions — and particularly in Western Europe and the U.S. — there are still compliance issues to work through around custodying this asset class for their clients. And I’d say that that’s in different stages, depending on what part of the world you’re in. It’s probably a little further along in, say, South America, emerging markets, Southeast Asia. But when you have these very established and mature financial environments like the U.S., it’s really on the compliance side — getting comfortable and getting all their SOPs (standard operating procedures) established for being able to custody assets. So that’s the key blocker at this stage.

And then, to no fault of theirs, they need to keep an eye on how the regulatory winds are shifting. So, over the past year, we’ve seen both positive and negative indications. And then, going forward, there are going to be questions a little bit more into what is and is not a security. And part of that has to do with a little bit of jockeying between the regulatory agencies that are claiming oversight here. So, you have different perspectives, whether it’s the (U.S.) CFTC (Commodity Futures Trading Commission) or the SEC (Securities and Exchange Commission).

Lau: And you mentioned that you’re really seeing DeFi at an incredible application level. But right now, we’re seeing a growing number of DeFi exploits, likely still among the biggest concerns for institutional-grade investors. We had a total of nearly US$3 billion drained from DeFi protocols this year alone. Are these exploits a major hurdle for institutional investors?

Chao: Yes, there are still some infrastructure areas for improvement, obviously, and that’ll always be the case. I wouldn’t call it a weakness — but an area for improvement is some of the cross-chain bridges that allow users to access different DeFi protocols. And we’ve seen that recently with a number of hacks and things like that.

Generally speaking, it’s not the technology itself — for example, the actual bridge or the actual underlying chain — that’s being attacked. It’s usually the implementation of the APIs (application programming interface) in that case. If you look at the overall funds that have been hacked versus the cost of maintaining a highly-regulated process. The costs are there. And if you’re learning how to fix things and improve things through a US$100 million hack, is that over time cheaper than having heavy regulatory processes in place that may cost hundreds of millions a year for the whole ecosystem? That’s debatable, but I do think that that’s what we’re looking at. And I’d say all the projects I’m talking to are quite collaborative in trying to solve these weak links as quickly as possible.

Lau: It is the cost of doing business as we innovate quickly and try to fix things? Besides cross-chain vulnerabilities, do you see other gaps in crypto and Web3 infrastructure today that can be improved?

Chao: Arguably one of the things that still are being addressed is just the basic UI (user interface) and UX (user experience), which is pretty (high) friction for the average tool to come into this space. And so there’s a lot of effort put into a lot of the content ecosystems to say, ‘Ok, well here’s the normal behavior. We’re going to introduce this to the user.’ But the behavior will not change, and then we’ll gradually introduce them to wallets or incentivize them to take that next step into downloading a wallet and making that UI as easy as possible. It’s still a high-friction point, but I think some of the ways that projects are incentivizing users to do that are much better than they were a few years ago, where they had this big hurdle to do first before they can kind of get started. Now, it’s, ‘Ok, let’s get them started. Let’s get a bunch of rewards or incentives in place so that process, that step, is much less painful for them.’

Lau: I would absolutely agree that even though it’s meant to be seamless on the back end, there’s so much onboarding friction when it comes to the actual retail experience. And, to your point, the regulatory part seems to be also hopefully accelerating and converging with a number of bills in the U.S. facing Congress right now. If we take a look at the regulatory landscape around the world, do you think that if there’s this clarity on both of those fronts, what can happen and how quickly do you think that we’ll see clarity?

Chao: Overall, it’s actually quite varied across the world. Parts of Asia are actually still relatively loose, and so central banks and sovereign regions are actually dealing with the current macro environment in different ways. And so, because of that, the regulatory environment is just as nuanced.

If you look at the extreme ends of the spectrum, you have some governments in South America that have made Bitcoin legal tender. That’s one extreme end. And on another extreme end you have, for example, China, that has basically outright banned active business applications for crypto. You have countries like India, that have actually gone back and forth a number of times on an outright ban versus legalizing with a tax structure that’s fairly punitive, and then going back into a gray area and then back out again.

So I think the U.S., actually, is a little clearer in that they’re pretty intent on encouraging innovation in this space. Again, from a global timing perspective, I’d think that we’ll see a lot of progress in this cycle — and again, I’m referring to the next three years. I hesitate to speculate beyond that, but I think we’re going to be in a much better place in a few years than we are today.

Lau: Well, when it comes to crystal ball gazing, people make bets on your crystal ball gazing very clearly with your venture capital fund. And so I want to talk more about your crypto market predictions for 2023. This is the time of year, Q4, we’re heading into, I guess, the ‘Crypto Winter year.’ We’ve seen a lot of Web3 companies, Gin, downsizing due to this year’s market conditions — crypto exchanges like Coinbase and Gemini have let go a lot of their workforces. Crypto market capitalization lost trillions of U.S. dollars. What lies ahead now as we’re on the cusp of a new year? Do you see light at the end of this tunnel?

Chao: I do. It may not happen this calendar year, but I do think that we’re following very similar trends. And the people that have been in this industry for a while, I think, are quite calm about what we’re seeing because it’s what we’ve seen before. If you look at the rest of cycles and cycle-on-cycle, people are pretty happy, I think, with the results. We’re going to continue to see this volatility until there’s mass adoption or early mass adoption. But in the meantime, I don’t see any major changes from what we’ve seen in the past. What I mean by that is generally from a cycle low to a future all-time high. You’ve seen Bitcoin do that within 18-24 months. And so, depending on where you think the low is — if you think maybe last mid-June or this past June was our low — then I’d argue we’ll see another all-time high late next year, early into 2024, if prior patterns hold. And it could get a little extended because of the overall macro environment we’re in. But I don’t think we see anything that would completely break this pattern, that would say, ‘Ok, we’re not going to see another all-time high for five years.’ I don’t think that.

Lau: I think what’s interesting about where Bitcoin and Ethereum have emerged in terms of a lot of people’s thinking is that, right now, there’s a spillover effect. It’s very much correlated and seen as a risk asset, if you will. How do you think the overall market is going to view the narrative of crypto like Bitcoin and Ethereum and all the rest?

Chao: I’ll tie this back a little bit with our discussion on institutions, because what I find interesting is that institutional demand has very different reasons for coming to this market. So just by portfolio theory alone, I’ve seen people interested just saying, ‘Okay, I need to put 2% to 5% — depending on where you are in your risk profile — into this asset class, regardless of whether or not I believe in it.’ And then you have people who actually do believe in it, want their own businesses to adopt blockchain, and see some practical business applications. Then you also, on the retail side, see certain events like the conflict in Europe, where this has been a safe haven for people in extreme situations. When you have a ‘black swan’ event in your life, you start realizing all the benefits that people talk about — the ability, the transferability, how to get wealth very, very quickly from one place to another when you’re on the run for circumstances that are beyond your control. Fortunately, that’s not most people, but it does seem prudent to at least consider this as a solution to a potential black swan event, regardless of what region you’re in, because that threat seems to be unfortunately realistic in a lot of parts of the world right now.

And then there are, of course, your hardcore crypto guys that have been in this since the beginning and still see this utopic future — one foot in that land and one foot a little more in the pragmatic world of, ‘Ok, what’s investible now over the short, medium term, regardless of what the long-term fate is of this technology?’ It’s a bit of a long-winded answer, but I do see that — especially from the institutional side — there’s a gray scale of belief. But regardless of where you sit on that, there’s interest in this asset class, no matter what.

Lau: This is an incredible story to cover, and there are so many aspects of it, but I’m thrilled that you’re able to share some of that perspective with us. There’s so many angles to cover, and it was just great having you on, Gin. And for sure, we’ll have you on again in 2023 to see if some of those predictions, and more, come true.

Chao: Thank you very much. Always a pleasure, Angie.

Lau: Thanks, Gin. And thanks, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Forkast Editor-in-Chief. Until the next time.