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Ruud Smets, Theta Capital
Ruud Smets, Theta Capital

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Why there is a generational investment opportunity in blockchain infrastructure 

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Ruud Smets, CIO, Theta Capital, writes that we know that blockchain technology developments move in cycles in which price plays a very important role. 

Typically, prices start to rise. They attract new interest. There’s new buzz and projects that have been building through the bear market launch. Because the market is more receptive, it attracts new developer talent that build new projects, and those plant the seeds for the next cycle. And that flywheel continues until you hit the exuberance stage. Then you get into a bubble and prices collapse. The excitement is gone and it’s back to building again until the new cycle. 

What we’re seeing now is that we’re now clearly in the early stages of a new cycle, which is actually the fifth such “price innovation cycle”, as we call them. So liquid prices are moving up. And, as typically is the case, it’s led by bitcoin. We’ve seen the first seeds that were planted in the last cycle go live and unlock new possibilities. Very clearly this time around, it’s around scalability of the technology, which opens up the technology to new use cases such as gaming and social and entertainment.

So now bitcoin is at a new high, but most other liquid prices are still well below 50 per cent off from their peaks. And if we look at previous cycles for some indication, we would expect things to heat up over the next 12 to 18 months, probably hitting peak excitement somewhere next year. Estimates of where the market cap outside of bitcoin can go is from the current USD1.3 trillion in liquid markets to somewhere between USD4 and USD10 trillion. So this is an enormous opportunity.

We believe that an even better way to invest in this technological revolution is not through the liquid tokens but through backing the founders that are building the future blockchain networks, in their earliest, private funding rounds. Blockchain technology is the foundation for a trustless economy, and most of the new infrastructure is still to be built. It will disrupt the trusted intermediaries that today are needed for people to transact with each other and will propel our financial systems and commerce into the digital age, much as the previous generation of internet protocols revolutionized information and media.

Accessing the private funding rounds is difficult though, and requires both deep, specialised knowledge and value add to founders. As a result, the most promising projects are fully funded by a relatively small group of crypto-native venture capital firms. And in contrast to the liquid markets, the private market structure still very much reflects a bear market. All generalist VCs are still gone and early-stage valuations remain attractive despite an initial increase from the troughs. 

The best way to think about the attractiveness of the early, private rounds is the stack of structural advantages that largely stem from the nascency and the uniqueness of this industry and how counterintuitive it is, all factors that keep most traditional investors still at bay. 

Most importantly, there is a massive knowledge gap. Very few investors have the deep technical know-how that is required to know what needs to be built and to diligence the founders that claim to build it.  Another point is that, as a founder, if you build a decentralised protocol, by definition, you cannot hold on to complete ownership. 

You have to distribute ownership early on. So founders will sell part of the future protocol early on to those that provide the most added value and also the strongest signal to the community to which they they look to distribute the protocol. And then there is the early liquidity compared to traditional venture investments. Most protocols take one to four years to be built before they are launched publicly. For the private phase VCs that offers the choice of holding on to the liquid tokens in the public phase or to realize the investment early. 

Over six years ago we identified the attractiveness of investing in this new infrastructure in the earliest, private-stage phases. Since then we have relentlessly focused on building deep relationships with all the top specialised VC firms and many of the industry’s leading founders. This has given us early, private-stage access to the vast majority of successful projects launching over the past years. While accessing the best early-stage deals is getting more and more competitive as the industry matures, the industry is still quite nascent and our approach demonstrates that it can be done with conviction in the technology.

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