Tag: Crypto

Staying In The Ring Long Enough

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.

Joel Greenblatt

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.

John Maynard Keynes (via a Howard Marks memo)

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Negative Expectations Often Lead To Surprising Positives

How expectations versus reality has unfolded over the last couple of years—from inflation and recession to Google and crypto—prompting me to share an interesting working theory.

Well, that’s a surprise! Contrary to all expectations, the US economy grew 3.1% in 2023, compared to 0.7% in 2022. The stock market continues the rally from 2023-end – the S&P500 recently hit all-time highs, powered by the so-called ‘Magnificent Seven’ BigTech stocks.

I remember the OG Stanley Druckenmiller telling CNBC he’d be stunned if a recession didn’t happen in 2023. Going against all such predictions and in the face of interest rates being at 23-year highs, the fact that the economy is poised for a soft landing has got me thinking about market expectations and their bearing on how things eventually play out.

I have a working theory on this – based on observation, I believe that when the market has too much of consensus expectations around a negative event, it somehow reduces the probability and/or the intensity of that negative event.

Let’s play out some thought experiments on this…

#1 Inflation

In 2022, the market (including the Fed) had a consensus expectation that inflation would remain sticky and continue to rapidly increase, thus explaining the steepest rate hikes in history.

However, given this widespread expectation, both consumers and businesses likely started to proactively tighten their belts, managing demand, reducing costs, and improving productivity to increase supply. The combined impact of this proactive action perhaps brought down inflation much faster than the Market expected?

#2 Recession

The market expected that given the steepness of rate hikes and how that has played out in the past, a recession was imminent. This widespread expectation likely prompted both individuals and businesses to proactively become more fiscally prudent, improve their productivity, and essentially, start doing more with less. These efforts perhaps contributed to avoiding a recession and creating a soft landing instead?

#3 Google

Post the launch of ChatGPT in Nov’22, the market held a consensus expectation that Google’s search business would be rendered irrelevant in the new chat-based AI paradigm. The stock hit a 52-week low in early’23, with the likes of Brad Gerstner (Altimeter) proclaiming that Google’s monopoly was over.

However, the rise of OpenAI and negative market expectations likely woke up Google from its slumber, forcing the management to focus, play its hands in AI (Bard, investment in Anthropic), and do some tough belt-tightening (unprecedented series of layoffs and org. flattening from a company that has been considered as a safe haven for employment over the last 15 years).

#4 Crypto

With the SBF scam, and the SEC cracking down on Coinbase and Binance, many thought that the US is completely closed for business in Crypto. In fact, I remember this being explicitly mentioned in one of the All-In Podcast episodes. However, less than a year after these events, the US has approved Bitcoin ETFs, bringing crypto to the mainstream as a legit asset class (read my post “Bitcoin ETFs and The Challenges of Digital Gold“). As it turns out, the SEC crackdowns were not to shut down Crypto but to clean it up so that it could come into the mainstream.

Connecting the dots…

It seems like widespread negative expectations have a tendency to catalyze a chain of mitigating actions by various stakeholders. In this era of social media, this happens even faster than expected. Perhaps, the human behavior of “loss aversion” creates a sense of urgency, precipitating tough decisions and better execution.

Modeling future scenarios…

Let’s use this mental model to run a few more thought experiments on things the market has negative expectations on right now.

#1 AI taking away jobs

The market has a widespread narrative that AI will end up taking away most knowledge jobs as we know them. However, workers are already aware of this shift and are working to counter it eg. upskilling themselves, starting side hustles to create financial buffer etc.

In parallel, universities are already realizing that their coursework might be outdated soon. They are frantically working to upgrade content, get more AI practitioners involved, and introduce coursework that requires “building” as a way to learn.

Enterprises too, are keenly aware of how a post-AI world will require a different set of skills and are already starting to re-train and upskill employees. Further, in less than a year of ChatGPT’s launch, govts. across the world are proactively thinking through the socio-economic ramifications of AI, including how to stay nationally competitive as well as re-distribute wealth in an increasingly unequal world.

Contrary to current market expectations, all this could create a positive surprise on productivity and job creation in an AI-driven world.

#2 China

The market has overwhelmingly negative expectations of China, including how Xi is taking the country back to its communist roots, the population is de-growing and it’s getting geo-politically discarded by the West.

However, this multitude of adversities could actually rally the CCP to undertake path-breaking reforms, the general population to become more productive, and the country generally coming together more effectively to come out of this mess. Again, more likelihood of a positive surprise from here on.

#3 San Francisco

The market consensus is that San Francisco is America’s Gotham City, a decaying region that the next generation of talent is unlikely to choose to live in.

However, these dire circumstances are already putting massive pressure on local political leaders, forcing corporate leaders like Marc Benioff to speak up against how the city is being run, large budget deficits bringing administrative incompetence to the fore, and the city’s residents finally deciding to speak up and drive political change. I won’t be surprised that all this drives a positive change in SF faster than anyone expects.

#4 Commercial real estate

I watched the recent 60 Minutes episode that talked about how commercial real estate is getting decimated in cities like NY, with even marquee buildings at all-time-high vacancy rates. The market has a consensus expectation that work will become overwhelmingly remote and the concept of offices will cease to exist.

However, this rock-bottom could perhaps force developers and landlords to innovate and re-think what the concept of an “office” should be going forward. And, even force cities to upgrade regulations on how urban buildings can be converted to mixed-use. Irrespective of technology, the human need to connect and collaborate with others, as well as be outdoors to refresh and re-energize, remains the same.

Closing thoughts…

Of course, these are just probabilistic thought experiments. As a disciple of Howard Marks, I am always wary of forecasting. However, this working theory that consensus negative expectations often end up seeing a surprise on the positive, is a useful mental model. It helps in not getting overly carried away with the crowd’s narrative, thinking through the likelihood of various scenarios playing out, and positioning yourself optimally.

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Blockchain & Crypto – my aha moment!

Admittedly, I have been a bit behind my Silicon Valley colleagues & friends, in terms of ramping up on Blockchain & Crypto-currencies. Being deep in the eCommerce operating trenches, combined with frequent trips to Asia, has pretty much consumed all my bandwidth over last 2 years. However, with developments in the space evolving to levels that can’t be ignored, I finally decided to start researching on it.

Over last 2 months, I have studied all the core white papers (Satoshi et. al.), read numerous blogs by both the bulls and the bears, discussed it with numerous VCs in the valley, listened to many podcasts and seen numerous fireside chats on YouTube. While I got the mechanics of it early on, I have been waiting for my ‘aha moment!’ on it. All gigs throughout my career (IB, VC, tech startups) have pretty much involved ramping up on new sectors/ companies/ investment opportunities extremely fast (ranging from Oil & Gas, med-tech and enterprise s/w to search, eCommerce and logistics) and building an actionable POV. While furiously consuming content around these topics, there is always an ‘aha moment!’ I wait for. That point where I truly ‘GET’ the problem statement & the proposed solution in a very basic, first-principles kind of way. It just goes into my soul and from that point onward, I either become a strong ‘believer’ or ‘non believer’.

My ‘aha moment!’ on Blockchain & Crypto happened yesterday, while I was listening to this beautiful podcast by Andreessen Horowitz. I connected the dots between some of the points made in this piece, and some of my own learning and experiences. The following insights have turned me into a believer in Blockchain (& Crypto):

  1. Users able to capture value that they helped generate in the first place — In all centralized marketplaces today (social, commerce, ride sharing etc.), it’s users like you and me that generate value for the marketplace (you and I post pics, buy and sell products, hail and give rides etc.). In these so-called “Supply-Demand” systems, you and I bring both supply and demand. However, think about it — do we really capture any economic or monetary value out of this (aside from the emotional utility)? I mean, I have been posting pics and content on Facebook for 10 years; in that period, Facebook has become a $500Bn market cap company. What has been my tangible gain out of it? Zilch! Of course, besides giving a social boost to my ego :). If the same products & systems are built on Blockchain, you and I would be rewarded with economic incentives (tokens, which can be used as so-called “currency”) for participating in them. Essentially, ‘supply-demand marketplaces’ will become ‘P2P networks’. The broker (read — companies that run these marketplaces), who took a fat commission for running the place (read — ad revenue, subscriptions, market cap), gets eliminated. Economic value, instead, accrues to users who are anyway, driving and generating value in the network.

2. Skin-in-the-game — I have been a big fan and follower of Nassim Nicholas Taleb, ever since my Investments prof. handed me a copy of ‘Black Swan’ 10 years back. Just finished reading his new book ‘Skin in the Game’ — this concept has always come naturally to me and something that I feel, is poorly understood in the venture ecosystem (implications for angel/ VC deals, advisory gigs, CEO comps, founder equity dilution etc.). Connecting the dots, decentralized networks create perfect skin-in-the-game’. You participate in the network, contribute value to it, help to keep it going, and for that, you get awarded economic incentives accordingly. In this scenario, you can’t blame a broker/ intermediary/ 3rd party for f**king things up. As Nassim Nicholas Taleb says in the book — “it’s much easier to macro bulls**t than micro bulls**t”.

3. Economically-viable biz models now possible for open source — open source has arguably been one of the biggest movements of human-collaboration and generosity in last 20 years. We wouldn’t know the Internet the way it is today, if it weren’t for OSS. Sadly, due to lack of economic viability of several open source projects, they have been typically run more as ‘academic’ or ‘enthusiast’ projects, rather than commercial ventures that attract the requisite talent and capital (personally for me, the decline of Mozilla has been extremely sad). This all changes via Blockchain-based projects, wherein the participants who contribute and drive the project, get economically rewarded with ‘tokens’. Also, as an investor or even just a supporter of a particular project, you can ‘invest’ in a project alone (no formal ‘company’ incorporation is required) via buying these tokens. The network driving these projects can now potentially raise institutional capital — as the protocols being created by these projects start getting traction, the tokens go up in value. The ability for open source projects to be transformed into commercial ventures that can attract resources, is huge!

4. Reverting to the ‘Tribe’ — human beings are essentially wired to operate in ‘Tribes’. Be it our desire to stay in communities, create social groups or even what we call “herd mentality”, the tribe manifests in all these ideas. At a meta level, I am viewing Blockchain as a tech manifestation of ‘human tribes’ — people getting together to build stuff & deciding how it should work and grow, and using the tribe to drive progress of humanity. It resonates with the basic DNA of humanity!

Is Blockchain the right technology for re-imagining every problem? Definitely not. Will crypto-currencies replace traditional fiat in near future? Probably not. Will Blockchain based systems completely replace traditional enterprise s/w? Looks unlikely, especially given its nascence and untested scalability.

Blockchain, or any technology for that matter, isn’t a silver bullet. But now that my ‘aha moment!’ has happened, I have at least started thinking around Blockchain & Crypto in terms of the “what-ifs?” and “why nots?”.

Closing words — real-life use cases, and not the technology itself, will decide the future of decentralized systems. Remember, use cases always….always win over just a technology!!

Bonus point on investing in crypto-currencies as an asset class — they are volatile, no-one can time them or predict future movements (for that matter, no one can also time the stock market, interest rates, inflation etc.), no one really knows which currency will survive after 10 years (you can see individual market caps to check out relative adoption as of today). Agree with all this, but I really like how Chamath Palihapitiya puts it — the beauty of crypto-currencies is that it’s completely uncorrelated to all other asset classes (like stocks, bonds, real estate, gold etc.). And as any finance guy will tell you, that’s a beautiful hedge to have in life. Just in case the world goes to s**t (the current financial systems almost got wiped out in 2008, and from what I see, the same risk-taking behaviors, derivatives, inflated valuations etc. are still around), even a small, really small allocation of personal networth in crypto-currencies could save the day!

What has been your ‘aha moment!’ on Blockchain & Crypto? Are you a believer, non-believer or ‘on-the-fence’? Do share your thoughts.

PS: Thanks Robin Sharma for educating me on the concept of Tribes and Naval Ravikant for inspiring me to ramp up on Decentralized Systems.

Disclaimer: the above views are personal and don’t represent those of any organization I am part of.