While the key to generating outlier returns in any asset class is to be non-consensus-and-right, the “right” can take a long time to play out. Case in point: Bitcoin.
With inflows into Bitcoin ETFs gaining momentum, the price of Bitcoin has reached ~$52k. Driven by tailwinds of broad-based institutional and retail adoption, a $100k price point appears to be an eventuality, with the imagination of believers now extending to $500k levels (Cathie Wood’s Bitcoin price predictions don’t seem that outrageous anymore!).
Was recently discussing this with an old friend who has been a super-early adopter of Crypto (from the $100-200 BTC price days!). As I congratulated him on what I presumed were “giant payoffs from his early conviction”, he said something interesting:
Even those who got into Bitcoin very early, very few of them have been able to hold on to it during the down cycles.
He was alluding not just to people holding Bitcoin, but even those holding Coinbase stock, including employees who worked there. As the SEC cracked down on the company, combined with the FTX scam and plunging price of Bitcoin, even the most ardent believers in Coinbase ended up selling.
Since then, the US landscape for Crypto has completely changed (read my post: Bitcoin ETFs and The Challenges of Digital Gold). With Binance out of the equation and the regulator proactively bringing all Bitcoin activity onshore and under its domestic purview, Coinbase has emerged as the dominant exchange infra backbone for Bitcoin. This has resulted in the stock being up ~128% in the last 6 months!
So why am I doing this hindsight analysis? I think it highlights a concept I think about a lot, especially given its relevance to my job as a venture investor:
To generate asymmetric returns, you need to have the capacity to stay in the ring long enough for your high-conviction yet non-consensus beliefs to play out.
As I wrote in my post ‘An Investing Framework to Find Startup Diamonds‘, the key to generating benchmarking-beating returns in any asset class is to be non-consensus-and-right. However, there is a hidden nuance in this. The “right” can take a long time to play out.
Benjamin Graham, the Guru of value investing, has taught us that any security’s price should ultimately converge to its intrinsic value (calculated by discounting its future cash flows or DCF). However, he doesn’t give any guarantees as to when this convergence will happen. As the OG investor Joel Greenblatt says:
If you do good valuation work, the market will agree with you eventually. You just don’t know when.
This is a critically important point. Having a strongly held, non-consensus belief is necessary but not sufficient. Translating this belief into actual returns requires having enough staying power (personal and professional) to withstand the gyrations of Mr Market till its view converges with your own.
This also applies to the frequently discussed topic of the importance of timing for a startup. Essentially, in hindsight, every outlier startup seemed to have started at just the right time to be able to get massive market adoption from some sort of secular tailwind. Think of Uber as leveraging that moment in time when smartphones got GPS capabilities. Or Zoom leveraging the rise of remote work through Covid lockdowns.
I have a strong view on this. I believe narratives around timing are all post-facto. Even the best founders and investors can at best, only build strong conviction on a long-term secular trend from first principles. It’s impossible to predict exactly when this trend will reach a tipping point. Brian Armstrong (Coinbase Founder) and Fred Wilson (USV, first investor in Coinbase) spotted the power of Bitcoin early. Still, they could never have predicted the continued prevalence of zero interest rates for a decade, rampant money printing, rise in national debt, and ultimately, Covid as a tipping point for Crypto.
However, what was in their control was having the conviction to stay in the game and keep building for a decade till the market started agreeing with them. For startups to survive this long, this means:
(1) Founders need grit,
(2) Investors need patience; and
(3) The company needs a continuous cash runway.
That’s why the more outrageously non-consensus the founder’s thesis is, the more I advise such founders to watch their burn as:
Having enough runway is key to staying in the ring. Runway comes from either the ability to periodically access capital markets and/or control burn to make the capital last longer. The former is often not in the founder’s control. The latter always is.
I use this Bitcoin/ Coinbase mental model to keep reminding myself to be extraordinarily patient with my non-consensus bets as a venture investor and also to keep reminding portfolio founders about the importance of staying in the game. From a picking perspective, this means indexing on “grit” as a critical founder trait while evaluating new investments.
Want to leave you with this quote from John Maynard Keynes, the father of modern macroeconomics:
Markets can remain irrational longer than you can remain solvent.
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From anti-immigration and de-globalization to tech org restructuring and vertical SaaS headwinds, Tech is staring at a drastically different world going forward.
Was chatting with a VC friend earlier this week where we were discussing the US-India corridor and what the future looks like for cross-border SaaS from India.
During the convo, I ended up saying this – “I can just feel that the ground seems to be shifting in a big way for tech and most people aren’t fully recognizing it”. Btw, I repeated this line to my better half the next day in some other context too.
It just feels like a lot is changing at the same time, both macro and micro, and we as tech workers caught up in the daily grind of keeping the ship afloat in our businesses and personal lives, aren’t fully realizing how big some of these shifts are and how they will massively impact our futures.
Consider this laundry list of things unfolding as I write this (sorted from macro to micro, but in no particular order of importance):
1/ Military conflicts
As the world barely came out of Covid, it’s now faced with multiple global conflicts – Russia-Ukraine, Israel-Hamas, Red Sea, and now Iran has frikkin’ fired missiles at Pakistan (who would have thought?).
In the medium to long term, we are also staring at other potential standoffs like China-Taiwan, China-Japan, India-China, and more fronts in the Middle East.
While they might seem distant, these geopolitical tensions can have an indirect economic impact, especially on inflation and cross-border activity.
This tension has powerful political and economic actors at the center and therefore, can have a second-order yet decisive political impact, especially with the 2024 Presidential elections around the corner.
In times of weak macros, high inflation, and a rising perception of hardship, I expect immigration to be a major election issue this year, particularly in the US.
Candidly, I have been a big beneficiary of massive tailwinds of globalization starting in the early 2000’s. Many of the companies I worked for in India served US customers. The venture firm I worked for had US LPs. I moved to the Bay Area and became a global expansion operator. My startup had a distributed team across 4 countries.
At present, it definitely feels like these globalization tailwinds have weakened considerably. I am reading about Indian founders struggling to get US visas, the EU clamping down on migration, and China falling out of favor in terms of global trade and people movement.
If these tailwinds continue to weaken, this is a massive change in a key assumption that underlies the career plans of many global tech workers, especially those from emerging markets. To get a sense of this, check out this awesome thread on X that shares how Indian Masters students in the US will struggle to find jobs this year.
5/ The decline of China
China has come out in the open as an overtly aggressive competitor to the West. At the same time, Xi is executing a drastic socio-economic reset domestically that has decimated an earlier-vibrant tech sector. Noted economist Ruchir Sharma recently cited how in its peak years, China used to attract ~$100Bn of FDI in a single quarter, and now, its FDI has de-grown in Q3’2023.
I remember being in awe of China’s infra, talent and execution focus while working at Alibaba. That just seems like a dream now. I never imagined that I would read headlines about 21% unemployment and disillusioned youth in an energetic economy like China.
What are the repercussions of this? As Western companies pull out investments from China, this is an opportunity for other emerging markets like India and SEA to capture parts of this supply chain being diversified.
From operating in a near-zero interest rate environment for more than a decade since GFC, the Fed has now executed the steepest interest rate ramp ever.
When the cost of capital is low, an economic party begins. Public stocks appreciate given the denominator effect. People borrow more so housing demand goes up and homeowners feel richer. Companies lever up and aggressively invest in physical infra and talent.
At the same time, investors start searching for higher yields given low risk-free rates, thus boosting illiquid-high-return asset classes like venture capital and private equity.
While this post-GFC ZIRP party was in full swing, Covid took it to a new crescendo courtesy of additional QE and stimulus packages. As everyone in the party reached peak highs, a neighbor (inflation) called the cops (Fed), and the party abruptly ended (interest rates rose from 0.25-0.50% in Mar’22 to 4.75-5.00% in Feb’23).
While the highs of the ZIRP party have been gradually coming off through 2022 and 2023, who knows what the long-term impact of this prolonged loose monetary policy will be? Millennials like me have largely worked and grown up in ZIRP, creating our goals, expectations, and lifestyles according to what we saw. Are we ready to re-configure our lives in this new era of higher interest rates?
7/ Tech org restructuring
The recent Big Tech layoffs in the Bay Area are much more significant than many people imagine. For the last 15 years, this compact region has been used to massive jobs getting created by default, salaries rising on auto-pilot, and major equity upsides being captured by RSUs and options. Forget layoffs, anyone working in the Valley since 2010 has only seen an era of multiple job offers and compensation ramps.
This scenario seems to be changing at a highly disruptive rate. Elon catalyzed it by doing deep RIFs in X, including eliminating entire functions altogether. Across mid and large tech companies, am now seeing orgs getting drastically flatter, classic white-collar functions like product management, ops, program management etc. either getting extremely lean or even going away altogether.
I fear that unless a tech worker can either build (code) and/ or sell, they will struggle to see adequate demand for generic tech ops skillsets. At the minimum, this will reflect in drastically restructured compensation packages.
8/ Rise of AI
I am lucky that as a venture investor, I get to see cutting-edge products before the world has even heard of them. From what I am seeing in terms of AI-powered products, both infra and application layer, I fear that many jobs as we know them will get automated away rapidly.
Individual developers and software dev shops have already started using AI for testing and debugging code. This was a job typically done by entry-level IT services talent in offshore centers like India.
Making creatives for digital ads and other low-complexity design tasks are being automated away rapidly.
Google has been drastically cutting down on its ad sales team, expecting a lot of that work to get automated by AI.
Ever since I entered tech in 2011, I have seen engineers be the kings both in startups and big companies. While outstanding engineers will always be gold, the last decade saw even mediocre engineers with basic skill sets reap massive financial rewards mainly due to the supply-demand imbalance.
As we enter the age of AI agents, I am not sure if this will be the case going forward. PS: for more insights on how the AI landscape is playing out, check out my AI Musings series – #1 How The Odds Are Stacking Up?, #2 OpenAI DevDay and #3 LLMs for Beginners.
9/ Bitcoin becomes legitimate
The biggest news of 2024 already is the SEC green-lighting Bitcoin ETFs (see my post ‘Bitcoin ETFs and The Challenges of Digital Gold‘). From being an edgy piece of technology for innovators in 2013, to being discovered by early adopters like myself in 2017, hitting all-time-highs in 2021, then seeing large-scale frauds like FTX in 2022, the SEC suing Coinbase in 2023, and now, getting recognized by the same SEC as a mainstream asset class – whew, who would have thought?
Again, I don’t think most people realize the significance of this move. Over a decade, pure, grounds-up, community-driven adoption of Bitcoin by common people has created a new asset class, helped it travel from Silicon Valley to Wall Street, and forced the regulator to recognize it.
What does Bitcoin going mainstream say about our current monetary systems? Will it change the balance of power between the wealth hoarders (Boomers) and the wealth aspirers (Millennials and Gen Z)? With cash fading away globally in various respects, is this the dawn of pure Internet money? Are there going to be any other ripple effects of the expected mainstream adoption of Bitcoin going forward?
I feel these are open questions with massive implications for who will hold wealth and power over the coming decades.
10/ Startup and VC shakedown
The last 2 years have been the most turbulent for the startup ecosystem since GFC. Venture financing in the US has been on a major downward slide, from ~$348Bn in 2021, to ~$242Bn in 2022 and then, another estimated 30% drop to ~$171Bn in 2023. Startup shutdowns have hit all-time highs, and given the drastic reset in public market comps, valuations in both early and growth-stage financing have drastically come down.
As recently as Q1 2022, just 5.2% of new fundings on Carta were down rounds. In Q3 2023, that figure was 18.5%, continuing a nine-month stretch in which nearly one out of every five rounds raised by startups resulted in a decreased valuation.
This shakedown is reflected in the VC ecosystem too. A major Boston-based VC firm OpenView with $2.4Bn in AUM abruptly shut down in Dec’23. More recently, hard-tech VC firm Countdown Capital wound down operations, stating the following reason – “funding industrial startups is not inefficient enough to justify our existence, and larger, multi-stage venture firms are best positioned to generate strong returns on the most valuable industrial startups”.
I believe that the 2023-25 vintage of startups will be built with very different philosophies, fundamentals, and capitalization strategies. In parallel, the 2020-21 vintage startups will need drastic re-wiring that in most cases, might just not be possible, leading to large-scale write-offs (read my post: Cheetah in the Rainforest: 2021 Vintage of Venture).
Another related view that I recently posted on X – “access to capital was widely considered a competitive edge but it now looks like a view that should be carried with contextual caveats eg. applicable only in low cost of capital macros and in specific types of startups like those with network effects”.
11/ Vertical SaaS headwinds
Within the venture landscape, I wanted to do a quick double-click on vertical SaaS.
With weak macros and the rise of AI, most point SaaS solutions have seen intense customer headwinds over the last 3 years. Startups selling to other startups have been hit particularly hard (many YC companies fall in this category), given the customers themselves are doing brutal cost-cutting.
Enterprise customers too, have been under pressures of layoffs and reducing general opex, hence creating push-back on the per-seat pricing model. See this prescient thread from David Sacks in late’2022 when SaaS was bottoming out.
Based on anecdotal conversations, am also seeing many customers now focusing on reducing software fragmentation and trying to consolidate tech stacks to bring down costs and complexity. In a sense, this seems to be a move away from buying a portfolio of unbundled SaaS solutions, and towards buying bundled software that addresses multiple use cases from the same vendor. In fact, I feel there is an understated opportunity here for startups with strong PMF to really push up their ACVs by solving multiple use cases for customers.
The biggest question mark is on the future of Covid-boosted products. Hopin, one of the poster children of the era, sold for peanuts to RingCentral. Point SaaS products in productivity, sales enablement, and workflows accelerated in 2020 but with the current customer behavior, it remains to be seen if they are vitamins or painkillers, and whether their differentiation and value to customers is strong enough to justify their independent existence.
Closing thoughts…
It’s probably the January-effect but this week got me organically thinking and connecting the dots on all that is unfolding in the world right now. The venture investor in me is part-excited for all the new opportunities this change is going to bring with it, and part-concerned for how both myself as well as existing portcos need to navigate this massive change.
Having adaptability and a growth mindset is going to be key. I have a strong resolve to be on the right side of this change, and also working to transfer this conviction and learning to the founders I work with.
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While the recent approval of Bitcoin ETFs is a landmark, there are challenges in the way of Bitcoin truly serving the role of ‘digital gold’ in investor portfolios.
Feels great to be back in action after a year-end break. Hopefully, a few weeks of “no-writing” would have energized the brain to put out even better content in 2024.
In my view, US regulators have shown remarkable foresight by going this route. Bitcoin had already become too mainstream, with massive institutional and retail exposures via crypto exchanges, many of them offshore. By bringing it as a formal asset class within the mainstream of asset management, the SEC is actually protecting the interests of investors by getting Bitcoin investments to flow through regulated trading platforms on US soil that are under necessary regulatory oversight.
I loved how Vijay Boyapati captured the significance of this event on X:
One of the big positives of Bitcoin ETFs that is often overlooked is the massive reduction in KYC inertia that investors so far had to go through while buying directly on crypto exchanges. This itself should unlock a massive set of new adopters.
Now that we have discussed all the positives, let me highlight one concern I have been thinking about. While Bitcoin’s value as a potential non-government medium of exchange, or ‘digital money’, has always been played up by early believers, it’s looking more unlikely by the day. In fact, in light of the FTX blowup, Binance pleading guilty to Federal charges, and now this regulatory approval, access to Bitcoin’s monetary system is becoming increasingly dependent on existing systems controlled by the government. In this scenario, it’s highly unlikely that governments of major economies will let Bitcoin emerge as a decentralized alternative to fiat currencies.
If this is true, Bitcoin’s main value proposition for investors then becomes similar to that of a scarce commodity, a sort of ‘digital gold’ with supply capped at 21 Mn Bitcoins, and with characteristics (durability, fungibility etc.) that humanity at large finds valuable (like shiny gold or sparkly diamonds).
Taking this line of thinking forward, Bitcoin then is expected to compete with physical gold in terms of allocation within investor portfolios. Except, it suffers from one key drawback vis-a-vis gold. I believe that one of gold’s standout features is its relative lack of volatility, as well as physical illiquidity. Bitcoin lacks both of these qualities.
Over the last 1 year, the per-ounce price of gold has oscillated between a high of $2,078 and a low of $1,809. Even over the last 3 years, the price action has been between $1,618-$2,078. A fairly tight price band, compared to Bitcoin oscillating between $10k and $40k!
That’s why, barring institutional trading desks, retail investors don’t tend to minutely track their gold exposures. Asian households, especially Indians, tend to also store gold in the physical form via jewelry, bars, and coins. Given its lack of divisibility, and low ease of transportation, storage, and selling, physical gold is also considered largely illiquid and more like a rainy-day reserve. I have never seen an Indian household run Excel math on the valuation of their physical gold reserves like they would for their stock portfolios.
This relative lack of volatility and liquidity is actually a feature, not a bug, for physical gold. It helps in its uninterrupted compounding and acts as a multi-generational store of value for families. In practice, people either buy or inherit gold, and then forget about its valuation. This is the best way to accrue compounded returns for any asset.
However, Bitcoin as digital gold won’t demonstrate these features. It’s perhaps the most volatile asset class out there, traded and marked-to-market 24 x 7, 365 days. Now with ETFs, an average joe investor can continuously track its price action, and trade in or out of it. This will also lend it much more to FOMO trading.
If this investor behavior plays out with Bitcoin ETFs, it will be more akin to day trading or F&O rather than traditional gold investing. Whether this is good or bad depends on what an individual’s goals are.
Keeping this risk in mind, I would urge new retail investors into Bitcoin to clearly articulate their goals behind investing in it, decide their investment stance (trading, buy-and-hold, frequency of inflows etc.), and manage their exposure as % of overall net worth. This would ensure that Bitcoin can truly play the role of digital gold in your portfolio.
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