The following is part two of a multi-part series on the state of crypto liquid markets based on several conversations with liquid funds.
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Yesterday’s 0xResearch coverage looked at how the institutionalization of bitcoin and an altcoin supply glut has made it harder to invest in any crypto asset that isn’t bitcoin.
What are liquid funds doing about it? How are they adapting?
Of the eight liquid funds I spoke to, seven mentioned the importance of “fundamentals.”
“Crypto can only grow if it attracts institutional capital, and institutions care most about fundamentals. This is still limited in pockets but is improving within crypto in meaningful ways,” Pantera general partner Cosmos Jiang told me.
Fundamental investing is a lot like painting a mosaic — what is sometimes called “mosaic investing” in traditional equities, he said.
“Fundamental investors are building a mosaic of all the data points that exist today — both qualitative and quantitative — to predict the earnings power of this business in the future. What matters is not today’s metrics, but the cashflow potential of a business three to five years from now.”
What these metrics are, and how much they matter, depends largely on the context of the token’s business.
For instance, ParaFi Capital founder Ben Forman thinks valuable metrics for L1/L2 blockchains are “the total stablecoin and real-world asset supply issued on the chain” and “the velocity that those tokens are circulating.”
“Vanity metrics like TVL, which are often showcased by L1s but often involve wrapping of their native token, will be meaningfully less significant in the future,” Forman said.
While professional investors and data wizards still can’t agree on which metrics matter most, there is at least a common belief that narratives are no longer all that matters.
“In 2021, the majority of capital being deployed was not being done so through a fundamental lens,” Theia Fund’s Noah Goldberg argued in a previous X space with 0xResearch. “There was a lot of momentum trading, and retail capital that isn’t price-sensitive…Whereas today, I would say that a lot of capital in liquid markets is concentrated in the hands of funds,” he said.
One investor I spoke to pointed to how tokens with strong fundamental metrics tend to suffer less of a drawdown in a market crash.
The focus on fundamental investing also forces crypto to confront the industry’s most sacred narrative: the Bitcoin halving and four-year cycle.
Some, like Defiance’s Arthur Cheong, believe the four-year cycle of crypto has “officially ended.”
“As the marginal impact to supply of each successive halving event decreases, it will have less impact on the price going forward,” Cheong wrote in an investor letter.
Other funds dismissed the halving as irrelevant, since their mandate involved holding liquid tokens over time horizons longer than four years.
Another fund called the four-year cycle a “meme,” pointing to interest rate cycles as the real risk-on and -off toggle.
Pantera’s Cosmo Jiang saw bitcoin’s historical bull rallies as simply having coincided with global liquidity cycles, like the Eurozone debt crisis in 2012, Brexit in 2016 and Covid in 2020.
In the third and final part of this series, we’ll finally dive into some of the crypto sectors that liquid funds are looking at.
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