Investing In The Future

My takeaways from Cathie Wood, Chris Burniske, and Yassine Elmandjra

As always, these topics are meant as a foundation for further conversation. Therefore, I invite anyone to provide their evidence-based responses and research. Also, none of this should be interpreted as investment advice. Please DO YOUR OWN RESEARCH!

Last Monday, Cathie Wood, Chris Burniske, and Yassine Elmandjra went on the Bankless Podcast to talk about “investing in the future.” Whenever people such as these get together, I tend to carve out some time to listen and hopefully find critical takeaways to explore and build on. 

Just in case you don’t know who these three people are:

Cathie Wood is the founder of ARK Invest, the prominent investment management firm that specializes in disruptive technologies. 

Chris Burniske is a former analyst at ARK and the current founder/partner at Placeholder, aVC firm that invest in open blockchain networks and web3 services. He also co-authored the book Cryptoassets, which is a staple for anyone looking to get a better understanding of the crypto industry. I go back to my copy constantly. 

Yassine Elamndjra is a crypto/blockchain analyst at ARK Invest.

Below I reflect on:

  • Investing in the Future

  • Fear of Change

  • Bitcoin and On-chain Metrics

  • Following the Developers

  • NFTs

  • Ethereum’s Value Narrative

  • Yields, Loans, Banks, and DeFi

  • Capital Distribution

I conclude this post with a thought from Chris Burniske on crypto’s biggest challenge - Something I also think will be important for the future of the web3 community. 

Investing in the Future:

Investing in the future has never been more attractive. The rate of innovation is happening faster than ever before, and it continues to compound YoY. This velocity of innovation has also been enabled by collapsing prices for tools needed for innovation, such as computing power and data storage. As a result, it’s becoming cheaper to innovate. 

As a refresher, ARK is currently investing in five different sectors:

Genomics

Artificial Intelligence 

Robotics 

Energy Storage

Blockchain (Crypto) 

The chart below is based on the “lift of productivity technologies.” Ark put this chart together in 2019 by evaluating the market cap around the world associated with “truly transformative innovation,” which at the time was $7T - less than 10% of the global equity market (public equity). 

This doubled in 2020 to $14T. Based on their models, ARK believes that in the next 5-10 years, that number will be north of $100T. Thus, you can see the “ARK 5” hitting the exponential growth stage of their s-curves simultaneously.

(Source)

On Fear of Change:

Most of today’s investors have only experienced this kind of exponential growth during the tech and telecom bubble, which ended badly. Therefore, the majority of traditional finance has significant PTSD to any type of innovation or surging valuations. This has resulted in legacy institutions looking more backward than forwards and react negatively towards any progressive ideas or change. Unfortunately, models that are far too archaic for predicting the future have also emerged from this thinking. 

Because of the institutional investor's mental incapacity to look forward caused by the telecom and tech bubble, retail investors have a real opportunity to outperform the institutions using the emerging supply of open-source research. In addition, tools for better community coordination such as social media platforms like Discord, Telegram, Twitter, and Reddit help elevate the value of the emerging open-source research, where everything is critiqued and broken down from different viewpoints and risk tolerance. 

Bitcoin and On-Chain Metrics:

ARK views Bitcoin as a global rules-based monetary system, which they view as a very positive thing for the future of geopolitics. Chris Burniske wrote about this thesis back in 2015 when he was at ARK, titled “Bitcoin: A Disruptive Currency.” I highly recommend giving it a read.

Crypto itself has been qualitatively validated with the participation from nation-states, institutions, and corporations. It is also becoming more apparent that crypto is an entirely different asset class requiring more suitable valuation processes. One of the significant benefits of evaluating a cryptoasset is its open-sourced nature that provides us with data to help us understand the network's health and the user’s behavior. This can be done with the on-chain metrics such as hash rate, transaction volume, minor revenue, etc., that the blockchain provides. 

Yassine Elmandjra wrote a framework for evaluating on-chain data for bitcoin that is worth reading.

(Source: link)

Follow the Developers:

BIG TAKEAWAY for me during this conversation was the 'follow the developer' comment from Cathie (which she emphasized three times). I couldn’t agree more. Developers will lead the investors to the best investment decisions. Anyone not analyzing developer behavior is just gambling on crypto, not investing.

“If you follow the metrics that show what the developers are doing, Eth is off the charts.” - Cathie Wood

This is something I’ve been focusing on a lot the last two years. It’s actually what lead me to crypto. Right now, I’m down the rabbit hole on the emerging value and talent shift towards using the Rust language.

One way you can track developer behavior is by spending a ton of time in GitHub. GitHub enables the ability to track stars and forks on open source projects, included with rankings. 

For those who don’t know, GitHub stars are used to show developer interest in open source projects. Developers will ‘star’ a project to save it, so they come back to it. 

Forking is the act of copying the open-source code and then building on top of it without affecting the original project. Forking is incredibly common in crypto/blockchain development. 

I had a good question from a twitter follower who asked me “How do you think about projects that index well on dev behavior, but lack a corresponding narrative?”

That brings up an excellent point that I think is important to remember. Even the strongest datasets in the world don’t necessarily spit out an answer. It’s all just suggested context, or inputs - some are stronger than others. The important thing is that the inputs are accurate and the weights of your models are properly balanced. In the end, the valuation is a human decision. However, the quality of that decision usually depends on the condition of the information used. 

The weather app tells you the temperature; it doesn’t tell you whether or not to wear a jacket.

On NFTs:

NFT's are an excellent tool for capital coordination, especially for creators (who have gone unrewarded for far too long). There has been plenty of talk about the valuations of NFT’s lately, but we have to also remember that NFT’s can be and will be used in a variety of ways. The fundamentals of NFT’s are about:

  • displaying proof of ownership

  • building communities

  • rewarding creators

Don’t let your perception of overvalued pieces of digital art pervert your view on NFTs. The best inventions are the ones that solve problems - there are clear problems NFT’s are solving. 

Eth's Value Narrative:

Ethereum’s investment narrative is going to continue to evolve. One challenge is that people want to compare Eth to a physical commodity, similar to Bitcoin with gold. You can probably compare Eth to many physical commodities at once, but a singular is impossible. In the end, Ethereum is a digital commodity that serves many purposes and needs. Its value narrative is going to continue to evolve the more developers build on top of it.

“What excites me about Ethereum is this ever more globalized world where we’re increasingly connected to each other. There is going to be demand for cooperation on an equally global scale. Especially one that doesn’t rely on traditional means of identity or legal assurances.” – Yassine Elmandjra 

Yields, Loans, Banks, and DeFi:

ARK is 'bullish on Ethereum.’ One of the many reasons for their bull case is the provided yield from DeFi. There is a giant hunger for yield in the market, and that’s clearly something DeFi is delivering to people. Evidence displayed in the conversation pointed to the fact that DeFi could already be hurting the bank's expected growth with attractive yields and more efficient & democratized loan programs from DeFi assets. Cathie shared her thoughts on this. 

“I think the regulation talk in the US is because of the yields that have attracted so much interest that the banks themselves are starting to feel it. I have been shocked. I listened to a JP Morgan call – which is a staple for understanding what’s happening in the banking industry – and Jaime Diamond said their loan growth would be negative through the end of the year. I said ‘WHAT?!’ 

Cathie then had a thought on whether DeFi is already affecting the banks.

“I began to think, could it be that what’s happening in the Ethereum world already be impacting banks?”

Cathie elaborated more on this:

“You know prices are determined at the margin and so this could be really hurting the banks. I’m going to take a very close look during the next few earnings seasons to see if we can dimension it. I believe the traditional bond market, especially the corporate, are a bubble. I can’t help but think other people may feel the same way. So, people are looking elsewhere for yields, especially hedge funds.”

Cathie then drops one of the bigger bombs from the interview:

“I think the regulatory heat is coming from the banks realizing how much this is going to hollow them out.”

Chris builds on the statement Cathie made about “prices being set at the margins.”

“There was a really key thing Cathie said about prices being set at the margin and I would layer in another thing that I learned from her – What really matters is the share of incremental growth. So, you have a very large base, and you could look at the banks and be like ‘well how could this little crypto industry disrupt these very large based banks?’ – But if you look at cryptos growth rates in the hundreds of percents, if that is eating the incremental growth share, that starts to weigh on the banks growth expectations and all the assets are priced on based expectations. So that’s where these seemingly small things that are hyper-growth can have a significant impact on the growth expectations of a much larger asset base. – So, when you think about the yield market you have the people who are lending and then also the people who are borrowing. If you think of something like MakerDAO, I can take out a loan 365 days a year 24/7. It’s a flat rate. Everyone gets the same rate, there’s no preferential treatment. That whole world is mushrooming.”

Capital Distribution:

With the combination of crypto’s open-sourced nature, collapsing cost of computing power, and data availability – we are entering an age of tremendous upside for the investor and the ability to combine currency & capital to the participants of these networks. Chris Burniske touches on this by explaining how the sharing economy, which seems like an outdated term, is really just getting started but still faces two challenges.

  1. The capital is all owned by a concentrated set of shareholders: We’ve seen this with Uber & Lyft. The value accrual doesn’t go out to the supply-siders or the demand-siders, the people who actually create the network. 

  2. A lot of the sharing economy to date has been ‘meat-space’ focused and has to go region by region. 

Crypto can improve these challenges and provide a deserving amount of capital distribution by implementing strong token economics and accurately aligned incentives inside the decentralized network. 

Cryptos Biggest Challenges:

I’m just going to include Chris’ statement here as it was the most thoughtful answer of the whole conversation. 

“I operate from a place where crypto is inevitable. It is the new financial economic coordination rails for the digital world and it’s going to be absolutely pervasive in a way that we can’t imagine in 20 to 30 years. So, where I spend a lot of my time is thinking about where the power and capital is going to concentrate within this inevitable future. So, while I think nothing is holding crypto back from this pervasiveness, I think what’s holding crypto back from its maximum societal impact is the way that power and capital have gravity and a tendency to corrupt. I see it throughout crypto. I started much more as an idealist in 2014-15, and now as a VC, seeing how concentrated ownership is in some of these networks is really sad. When you look at the scale of the returns and who those returns are going to – like most of the LPs of large institutions are also large capital allocators who manage for high-net-worth individuals – so there is almost this inescapable truth that capital is created from capital, just as life lives off life. So, when you have things go through 100x or 1000x, you need to make sure that’s distributed as much as possible before the 1000x happens, otherwise, you just enriched a very small group of people enormously versus enriching a very broadly distributed set of people very well. Nothing is going to stop crypto, crypto is inevitable. But the amplitude of societal impact will be controlled by our own self-control.” – Chris Burniske

I couldn’t agree more.