You can buy Bitcoin for 70% fewer rapidly-losing-value US dollars than 9 months’ ago. Equity markets are headless-chickens-dancing-or-in-death-throes.
It feels like a good time to take a deep breath, keep dollar-cost averaging, and reflect on what just happened.
I recently read Sebastian Mallaby's superlative history of venture capital, The Power Law.
Venture returns are not normally distributed, but instead follow a power law curve: a small number of firms capture a large share of the profits.
The portfolios within those successful funds also follow a power law curve: a small number of underlying investments drive a large share of the returns.
(This idea is so powerful that Mallaby named the whole book after it.)
What drives the success of those winning funds?
The sordid truth (if you're a professional investor, like me) is that venture investing is one part skill, three parts luck.
The best-performing venture funds are those that have backed successful founders, earned themselves a halo, and can attract the best new founders.
You can't get access to the best founders, or raise enough funds to be relevant to the best founders, without having a certain reputation (if you're lucky, like me, you can borrow the halo by joining a top-tier brand).
Still, skill plays more of a role in private markets than in public markets, where even being really skilled doesn't help you beat the market average return.
As an institutional venture investor, if you don't have a track record or a whole lot of relationships, you can still get lucky. Serendipity matters: getting started in private markets investing is all about increasing your surface area for luck to strike.
With crypto investing, both skill and serendipity are at play.
If you put in the time to understand a web3 project and its market, you can generate outsized personal returns. There's a much closer causal relationship between effort, skill and judgment; multiplied by serendipity.
In the olden days, investing in crypto was like being a pioneer immigrant. The frontier called most to the very curious; the gamblers; and those with little to lose (particularly in emerging or inflationary economies). To embark on an investing voyage, these adventurers had to create their own on-ramps, contend with the total lack of retail services and consumer protections.
In the same way that typhus struck down sailors before they even made it to foreign shores, getting started and finding initial success in crypto was part luck. For many early investors, Bitcoin's late-2017 rally was the ticket to life-changing wealth, and a foothold in this new promised land. Upon arrival, there was further upside to be gained based on skill and effort. A small amount of capital could be multiplied by research labour into serious returns.
The enticing, democratic lore underpinning crypto is that the everyman participant has just as much ability to discover new projects, participate financially as they come together, access information (including by having an open channels to founders via Twitter and Discord), without any prior connection other than shared interests and energy; without co-location. And without sharing their identity.
This was the golden age of solo crypto capitalists.
It changed lives. Like the Kenyan student who put himself through school on the back of Bitcoin wealth to become an activist environmental lawyer. Or the nerdy teenager who became a millionaire, skipped university and went straight to philanthropic investing. Or the twentysomething tech operator who could quit his day job to launch a passion podcast and engross himself in urban planning.
These outcomes weren't evenly distributed, and they were much more likely to happen to people who look a certain way (young, male, Asian). But, they were beautiful in their own way.
What created this golden age of opportunity?
Crypto is a different proposition for individual investors than other asset classes - even other private assets - for a few reasons.
Vanishingly few opportunities to invest regular-person amounts of losable money (let's say $5K per company) exist in traditional startup land. Even if you can hustle to meet high-quality founders at the moment they're fundraising, with $20 or $30 or $100K to invest, you may not be worth their time. You need pockets of a certain depth, since you often have to meet a sophisticated investor test in order to participate in early-stage private rounds. The result is that most high-quality opportunities are out of bounds unless you're an institutional VC that can lead rounds, or you have white-hot operational experience that commands respect from founders.
These barriers come down in crypto: if you spend the time to build up a picture of who's trustworthy and who's not, then you can get alpha. And you can act on it by getting in at inception where the potential upside is highest - even with a smaller dollar total to invest.
Early investors in the likes of Bitcoin and Ethereum look like geniuses now (and many of them are extremely wealthy). But they simply got paid for the risk they took: it wasn't inevitable that crypto would take off. Crypto could have been regulated out of existence; there could have been a 51% attack that extinguished activity forever. Tether might still fail and scupper the subdued momentum that remains today.
Most of those pioneers probably also invested in a bunch of shitcoins; they succeeded because they took a basket approach like the best VCs. They could construct index portfolios - something that's impossible in other private startups.
The golden age benefited crypto founders too. The market force seemed pleasingly pure. In theory, the anonymous, global-first nature of crypto investing means the best projects attract funding on their merits, regardless of the founder’s ethnicity, gender, age or location.
Transaction costs can be much lower: a one-to-many offering; fewer lawyers to worry about.
First believers - users and investors - can be rewarded with air-dropped tokens delivered at marginal cost.
But the reality is more complicated for founders and investors of all sizes: many projects still need big chunks of institutional capital to get off the ground, so there's no way around the VC roadshow. Fund-scale investors \without vesting requirements can dump tokens acquired on the cheap at the expense of retail investors. Like any unregulated Wild West there is criminal bad behaviour, which tends to hurt individual investors most.
And then there's the fact some things that looked safe - like the stablecoin Terra - turned out to be fictions.
Via Fintech takes:
"There were more than 250,000 cryptocurrency addresses that had deposited TerraUSD to Anchor Protocol before TerraUSD crashed. The top 1,000 or so of those wallets owned more than 80% of the total supply of TerraUSD, which means that the remaining 249,000+ of those wallets likely weren’t owned by crypto whales, but rather by ordinary consumers”
The times, they are a-changing:
Regulatory protections for non-professional investors are needed and coming
The skill window - the ability of individuals, doing their own research, to capture heaps of alpha - was already coming to a close with the rise of dedicated crypto funds
The crypto bear market combined with the equity market downturn and higher cost of living due to inflation, will subdue most would-be travellers from embarking on new journeys
The golden age of solo capitalism in crypto is over.
More on the Power Law:
Lilian Li on the Chinese experience: “When you witness mundane and somewhat inept (which is to say, ordinary) people achieve unbelievable success, it normalises that such outcomes are available… China has replicated this mindset through its 30 years of unprecedented growth, which has inspired a belief in the future's potential in a way that is unparalleled at this scale. That being said, the flip side of this growth is a deep streak of instability that drives a particular breed of a scarcity mindset”
Listen to Sebastian jam with Tyler
Some other bits and pieces:
What makes public therapy so compelling?
A recipe for failed state control
Fusion is so hot right now