In the cryptocurrency market, narratives often play a key role in driving price increases. Whether it’s the recent frenzy over meme coins or the previous hype around AI token projects, narratives are closely related. This article is based on Regan Bozman’s article and is compiled by “白話區塊鏈” (“Simplified Blockchain”).
Table of Contents:
1. Contrarian Investing
2. Differences Between the Cryptocurrency Market and Traditional Market
3. Conclusion
In the venture capital (VC) industry, it is widely accepted that profits can be obtained by holding views that are contrary to the mainstream but correct. However, in the cryptocurrency market, the focus is more on project attention rather than cash flow. The best investment strategy is to predict the hot topics in the next one to three quarters, rather than investing in stagnant projects as defined in the traditional sense of “contrarian investing”.
The only important thing is whether you can predict the direction of market sentiment in advance. Here are some chaotic thoughts about what we call the memetic economy:
In venture capital, being logically correct is often not enough–if many other investors hold the same view, the market will price it accordingly. This perspective more or less applies the efficient market hypothesis to the private market.
Let’s take a deep dive into B2B companies as an example. They are the largest category in venture capital and the easiest to value. Typically, B2B companies supported by venture capital:
(a) Do not have a large amount of assets
(b) Are growing rapidly
Therefore, we can assume that their valuation is based on future cash flows. Obviously, this is not always correct. In a booming market or industry, investors are willing to pay a higher price for a particular cash flow. But I think this is correct in terms of direction.
“Contrarian investors” refer to people who oppose or reject prevailing opinions. Therefore, in the context of venture capital, becoming a contrarian investor basically means looking for the largest difference between the expected future cash flow of a startup and the actual future cash flow.
When you hear a storytelling venture capitalist talking in a podcast about how they discovered a $10 billion company in the early stages, there are usually anecdotes explaining that the company’s first round of financing was not well-received. The investors made the right contrarian bet. In practice, there are several ways to make contrarian investments.
(a) Investing in overlooked geographic regions or verticals.
(b) Knowing something that others don’t.
I think option A is much easier than option B, so it is more common. For example, defense technology has long been unpopular for investment. If you have foresight and can foresee the growth of this field, you will get substantial returns. There are many reasons why people don’t like this field–limited potential customers, extremely difficult sales cycles. As the potential of this field becomes more apparent, more and more people enter, leading to more intense competition. It may be more difficult to make money now compared to 2017 or the seed round of financing for Anduril. Transactions are more expensive, and companies face more competitors, and so on.
In venture capital, “being right” usually means some kind of liquidity event has occurred. For example, a company has conducted an initial public offering (IPO) or has been acquired by another company. If you are making seed investments, in most cases (but not always), you still need large funds to enter after you because it usually takes a lot of money to develop a company to a certain scale. All these market participants more or less focus on future cash flows.
Of course, there are exceptions. Some intellectual property (IP) may not be profitable at the moment but may be in the future. Acquisitions can be strategic rather than purely financial. But in general, “cash rules everything around me” (CREAM). If you make a contrarian seed investment in a less popular industry and prove to be correct, sometimes that industry will become hot. For example, Anduril is likely to become a $10 billion company, and seed investors will get a good return. This is why defense technology is becoming more and more popular for investment. However, industry popularity is not a prerequisite for making money.
If you support a B2B software-as-a-service (SaaS) company in Iowa and the company achieves an annual recurring revenue (ARR) of $100 million, someone will acquire the business and you will get a good return. You don’t need Iowa or B2B SaaS to become popular. Kaspi, a Kazakh financial technology application, went public last year with a market value of $20 billion. This is a very good result for early investors. Kazakhstan may still be an inactive market for venture capital, but Kaspi generates billions of dollars in revenue each year, so it doesn’t matter. Many people entered the cryptocurrency market with their Rivians from Sand Hill Road or Wall Street and failed completely because these markets operate differently:
Different market participants
Different things of value in the market
If you make seed investments in the startup investment field, you will focus on several aspects:
People who can add value to your shares (later-stage investors)
Potential acquirers (exit liquidity)
People willing to buy company stocks when they go public
If a company can generate cash flow, it is a huge opportunity. If you make seed investments in the cryptocurrency venture capital field, you will focus on several aspects:
People who can add value to your assets (later-stage investors)
People willing to buy tokens in the open market (exit liquidity)
Although there are also some later-stage investors, their numbers are not many. In the past twelve months, 11 funds have led or co-led rounds of financing of more than $10 million. There are too few later-stage investors. This makes the performance of tokens in the public market more important because cryptocurrency startups cannot exist in the private market for ten years like traditional venture capital.
Considering the relatively small capital market in the cryptocurrency space, public market participants become more important. Yes, some institutions participate in cryptocurrency trading, but if you exclude Bitcoin (BTC) and Ethereum (ETH) from the cryptocurrency market, what percentage of tokens do you think are held by retail investors? Over 80%. Therefore, your ultimate liquidity comes from retail investors. Whatever you do in the seed stage, you need to ensure that retail investors will be excited to buy the token in the open market. This is completely different from the traditional venture capital field in terms of liquidity.
This leads to the second important difference between cryptocurrencies and venture capital. What does the cryptocurrency market value? I can give you a hint—it’s not cash flow. The cryptocurrency market values attention. What does attention mean? It means that you are part of the current narrative. It means that the cryptocurrency community is talking about you. It means that retail investors want to own your token. It means that your community is creating interesting memes. It means that other projects want to establish “partnerships” with you. Just look at DEPIN and $HNT to understand this. Becoming an industry leader helps integrate you into the narrative, which is arguably more important than actual cash flow. Perhaps this is not how these markets will always operate, but it is how they currently operate.
You can look at DEPIN Ninja and easily see this or review the top 100 on Coingecko and look for the correlation between global circulating market value (FDV) and cash flow. But it doesn’t exist.
I mentioned earlier that in the venture capital field, being successful in a different category does not require that category to become popular. If a company has stable cash flow, investors will pay attention. Obviously, this perspective does not apply to a market that does not value cash flow. In a market based on attention, you absolutely need the category you invest in to become popular at some point. Therefore, the best venture capital strategy is to try to predict the development trends of narratives. “Predicting narratives in advance” means what? Entering them earlier than others. This is somewhat different, but not entirely the same. It means that attention has not yet emerged. It does not mean that attention has emerged and been rejected.
Let’s go back to the definition of “contrarian investors”: “Contrarian investors are people who oppose or reject prevailing opinions.” In the current cryptocurrency market, true contrarian behavior would be to invest in a stagnant ecosystem, such as Polkadot, Tezos, and ICP. This is likely to be a good way to lose money. Most experienced market participants do not do this because they know it is a bad strategy.
The cryptocurrency market values attention and highly evaluates new things. Therefore, you should invest capital in areas that you believe will reach consensus in 1-3 quarters. There are also some exceptions—for example, buying SOL and supporting Solana after the FTX collapse was not popular, and kudos to those who did. They got returns. But I think if you start putting capital into SOL or the Solana ecosystem in early Q3 to adapt to risk-adjusted returns, you may achieve equally outstanding performance because this trade becomes more consistent with the venture capital field.
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