June update


The road ahead…

In the month of May the market capitalization of the blockchain sector broke 100b which was outlined as the first goal in the fund thesis:

Screen Shot 2017-07-03 at 1.17.26 PM.png

Over the past few months the market has come to agree with this sentiment. For context, this means the sector is valued as much as McDonald’s or Boeing. While Microsoft/Amazon/Google are all five times more valuable. Although this feels premature from an investment perspective, it’s certainly not unrealistic. Never underestimate the markets ability to get ahead of your predictions. This leaves us with one final goal, as written in the thesis:

Screen Shot 2017-07-03 at 1.18.58 PM.png

To reach this kind of value at least one of two things to happen in the next decade:

  1. Digital currency (such as Bitcoin) needs to be adopted globally by several percent of the world’s population. This adoption includes indirect exposure to the currency via ETF’s, mutual/pension funds or through invisible application and payment layers (services with “cryptocurrency in the background”).
  2. Distributed applications become widely adopted by a sizeable percentage (10% or more) of internet users.

The reasoning for #1 is trivial, it follows from the fact that more value flowing through a finite set of coins per unit time will result in more value attributed to the individual coins. If people try to transact 1 trillion new dollars in Bitcoin the price must expand.

To clarify why #2 would take us beyond 1 trillion, it’s important to imagine this as a large ecosystem of distributed applications, which in aggregate will steal a large chunk of users from the existing centralized services (the market cap of the largest internet companies is worth several trillion today and could reach ~20 trillion). Perhaps even more important is the fact that blockchain will play a key role in enabling the coming “internet of things” – a world with a network of machine to machine interactions communicating via transactions on internet enabled (“smart”) devices. IBM is well aware of this,

Blockchain is beginning to play a major part in the Internet of Things by enhancing security, enabling inclusion of low-value devices to be increasingly viable and making managing a device easier for decades to come.

If both #1 and #2 occur we will have reason to look beyond 1 trillion dollars. For now we can simply look at them as independent areas of growth and hope for one winner.

Valuing a network

With prices soaring across the board it’s important to reflect on how to value the individual coins beyond a default indexing approach. Remember, if you hold a larger proportion of a coin than the market does (for example the market holds 25% Ethereum as of this writing) that means you think Ethereum will grow faster than the market. This is a much higher bar than simply asking whether a coin will go “up or down” in the future. It is also why Bitcoin has continued to fall as a percentage of market, even though the price has been increasing across the last few months.

Screen Shot 2017-07-03 at 2.18.52 PM.png
Link to chart

Instead of using individual metrics such as market capitalization we are developing a new metric called Network Value. At the highest level it’s important to think of a coin as a network. So the Network Value of a given coin takes into account several pieces of information unrelated to price – such as:

  • # network nodes (how big is the network)
  • # network transactions (how active is the network?)
  • average trade volume across 30d (how interested is the market?)

Along with many other factors we can use this data to better understand how to rank the “networks” we are investing in. This has resulted in several adjustments to our holdings, here are the two most notable changes:

Decrease holding in Ripple to 5%

Ripple has done very well for the fund since inception and was recently ~10% of the fund (which was in line with it’s 10% dominance of the market). However we’ve decided to under-allocate in Ripple by 50% in the short term due to a lack of adoption signals. The most important metric here is the amount of money that banks are transacting daily on the Ripple network. As of this writing the network is doing around 6 million a day in bank to bank transactions on average (compared to the 50 million a day on exchanges). This chart shows the difference between bank usage and speculation (trading of XRP). The blue is banking activity – that’s what we care about:

Screen Shot 2017-07-03 at 2.24.24 PM.png
link to chart

As soon as we see an uptick in this blue line we will increase our Ripple allocation back to default. Long term we are bullish on Ripple.

Increase Ethereum holding

By all measures except market capitalization Ethereum is the most valuable cryptocurrency in terms of the Network Value. Ethereum has over 25,000 network nodes compared to Bitcoin’s ~7,000, it does more transactions per day and has the largest and most active development community. For this reason it seems clear that Ethereum will soon become the #1 coin by market cap and could outpace the growth of the sector. For this reason we’ve increased our holding in Ethereum to ~30%.

Understanding the layers

We’ve taken on many new holdings in the last month which are informed by a layered understanding of this sector. While this sector began as a single “digital currency layer” it has grown to include many new niche and application layers. Here are a just a few we are excited about.

Micro transaction layer – Currencies which specialize in rapid settlement of smaller-value transactions (currently it’s a niche that’s being filled by coins such as Litecoin).

Stable coin layer – These are coins which are pegged to a real world asset and will play a key role in making this a functioning market long term. Soon we will have a suite of cryptocurrencies pegged to assets such as gold, land as well as currency baskets. For this reason we’ve increased our holding in DigixDAO (DGD), which is a proof of asset protocol for exchanging things like gold on a blockchain. That is, we are investing in the protocol via DGD based on the thesis that if these stable coins become popular, the value of the network supporting them will increase. It’s not an investment in physical gold. Another technology we are watching is Maker (MKR) which is a protocol behind stable tokens such as Dai and pegged to the IMF’s international currency basket.

Anonymous currency layer – Simply put, coins which are easier to hide the transactions of, such as Monero and Zcash.

Oracle layer – We’ve biased our holdings in the positive direction for prediction markets Augur (REP) and Gnosis (GNO). This is because prediction markets provide the link between blockchain and “real world data” by acting as an Oracle – as explained here.

The need for oracles arises due to this gap between the world of blockchain code and real world events. An oracle, in the context of blockchains and smart contracts, is an agent that finds and verifies real world occurrences and submits this information to a blockchain to be used by smart contracts. This agent can be software, hardware, or human.

Attention layer – Our online attention is valuable (people will pay to know what we do online). However, that value is currently hidden from us, because our data is collected by and sold to third parties (via Facebook/Google/Amazon). New technologies such as the Brave Browser aims to put us back in control of our online data, and pay us directly (instead of Google) if we choose to give it up our browsing patterns. Brave is behind the Basic Atttention Token (BAT) which we’ve included in our fund and biased strongly in the positive direction. We also hold the other technologies focused on this problem (such as Synereo).

There are many more to consider, such as the File Storage Layer, the Computation Layer, and the Logic Layer. But the point is, an understanding of these layers will help orient investors looking at a growing sea of new coins to invest in.

New holdings

We’ve taken new positions in coins such as Status (SNT), Antshares (ANT), Waves, Basic Attention Token (BAT) and Numeraire (NMR) – we’ll report more on these new holdings in future letters.

Looking Ahead

We remain bullish on the sector and do not believe that this run is over across the rest of the year.

Looking ahead we’ve adjusted our USDT (tether) allocation strategy accordingly. At present time we hold 0% USDT and will begin adding to “cash” once the market crosses 120b. If the market breaks 170b we will aim to hit 25% USDT.

We look to July with the following allocation:


Here is a list of our holdings:




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