Currently tons of money flowing into crypto equity. That's much safer/easier for institutional investors from an operational/regulatory point of view. But...I think people may find out the hard way that crypto infrastructure is ultimately a derivative on price. /1
2/ "rent extraction" can't grow all that much without the asset base growing. What's the "pie"? For CEXs and DEXs, it's trading and borrowing fees. That only grows sustainably with volume, and volume mostly grows with user and mkt cap growth.
3/ I just spent a minute trying to think of infrastructure companies that can support sustainable and meaningful valuation growth without crypto market cap growth...maybe a few small exceptions, but can't think of anything that makes it into unicorn territory.
4/ I'm not at all saying that crypto equity is a bad investment. It's an opportunity for savvy investors to generate alpha through asset selection and hands on support. Just noting, I can't see the recent round of sky high valuations producing good results w/o raging bull.
5/ on that volume<->market cap growth relationship - it's not perfectly synchronous. Volume tends to spike during crashes. But...then it dies. Volume can grow in a flat market, but almost certainly with severe margin compression over time.

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More from @AriDavidPaul

22 Jul
To add a "meta" comment: a lot of crypto projects face the same existential problem today - massive balance sheets on paper, but...not really. If the treasury holds 30%+ of the project's own circulating market cap, they can't sell a meaningful chunk without crashing the market.
2/ This problem isn't at all unique to Sushi. In bull markets, everyone wears rose glasses and talks about very long-term treasury liquidation plans, sometimes even multi-decade. Then price crashes 70%+ and projects realize they actually might need some cash far sooner.
3/ CMS' suggestion to have some kind of systematic selling program set up makes a lot of sense. Real-time governance is likely to get this wrong for the same reasons that token prices boom-bust.
Read 7 tweets
15 Jul
A quick thread on the current state of crypto regulation. This is going to be broad and superficial, probably nothing terribly surprising. @coincenter should be your go-to source for reliable, insightful, and minimally biased info. Will touch on ETFs, defi, Diem, and more. /1
2/ On US ETFs - everyone is just guessing on possible timeline. SEC likely doesn't have concrete plan. Most likely path is that first we get more law/regulation related to exchange oversight, then ETF proposals get seriously considered.
3/ Defi - not on the SEC agenda for rulemaking in next quarter, probably not in next 2-3 quarters. And...it's unclear if SEC thinks new regulation is even needed, or if existing rules cover it. Lack of new regs doesn't mean lack of enforcement however.
Read 10 tweets
15 Jul
There's some truth to this critique; at least it accurately reflects some niches of the crypto industry. How much emphasis you place on those pieces depends heavily on where you fall on the libertarian/progressive spectrum of individual freedom vs collective coordination. /1
2/ for me it's pretty simple. Every important freedom is constantly abused. Freedom of speech mostly protects disgusting, hateful, stupid, and malicious speech. But we tolerate that because even if only 1% of protected speech is valuable, it's *really* important to us.
3/ Same for financial freedom. Sure, financial privacy supports all sorts of bad behavior. It's also what allows political minorities to finance opposition newspapers and political campaigns for example. It's the safety valve for those persecuted by both national governments
Read 7 tweets
8 Jul
A simple thread on investment fund structures (basic ops/legal/regulatory stuff). The starting point is the 1940 Investment Company Act. The premise of a "hedge fund" is specifically that it's exempt from this burdensome regulation because it limits who can invest.
2/ The 1940 act makes it very costly to run a regulated company or investment firm and requires SEC registration to operate. It also places all sorts of limits on the kinds of investing allowed. Most VC funds and hedge funds are exempt, by adhering to specific rules.
3/ The dominant exemptions arise from who's allowed to invest in a fund. Basically the government says, "we need to protect average investors from unscrupulous investment managers, but wealthy and sophisticated investors need less protection."
Read 15 tweets
8 Jul
2/ VC funds are typically marked quarterly and report returns to investors quarterly. Marking illiquid assets is inherently subjective and there's a few different legitimate methodologies. Generally though, VC marks lag public markets by about 2 quarters and are beta 1.3-2.5.
3/ When public markets are trending upwards, projects can generally raise new rounds quickly and at higher valuations. But closing deals takes time. If public markets rise 30% in a quarter and then a project raises money the following quarter, then gets marked at end of that...
4/ similarly on the way down, marks are very "sticky." VCs don't typically mark projects down unless there's a compelling reason to do so (meaningful economic impairment, a down round, etc). So public markets may trend down quarter after quarter for a while before private
Read 8 tweets
6 Jul
"Rent seeking" and the rise of middlemen occurs organically wherever there's any space for it. Miner extracted value (MEV) went from mostly a theoretical topic 18 months ago, to MEV-GETH representing 75%+ of ETH hashpower and most ETH blocks containing a flashbots bundle. /1
2/ in the past year, we've gotten a long list of mitigations and partial solutions to MEV including layer 2 mitigation strategies like Arbitrum's FSS. BlockTower has invested in some of these mitigation strategies, some of which have their own "rent extracting" middlemen.
3/ I'm a beginner when it comes to MEV, have some colleagues more in the weeds. I don't have strong opinions around how this plays out, but I certainly hope the long-term minimizes middlemen/extraction. Hard to imagine substantial MEV as part of any competitive stable state.
Read 4 tweets

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