Thread by @cmsholdings

Liquid crypto is probably the single biggest untapped investable segment for crypto funds and represents a huge opportunity that will almost certainly get no inflows couple thoughts why and how it feeds into VC outsizing and general animosity from wider market

1. Important to define what I mean as liquid here im going to define it as funds trading/investing in already liquid names where the assets aren’t encumbered as opposed to venture which for the most part is defined by illiquid positions sometimes with a mark but not actionable

2. The single biggest issue is fund performance on a MtM basis. Liquid funds can’t smooth this with any trickery they need to punch the drawdowns as much as the euphoria, this means you’re likely at some point every other year sending an email update down 50% on a q/q basis

3. Venture can play dumb, you invest in a equity/token warrant at 1bn in the bull market even if aggregate crypto market goes down 80% many can and do mark this at cost if there’s no liquid mark against

4. AND let’s say some of that is liquid often your tokens are still locked you def want a high fdv low float so you can continue to mark your position up and take the victory lap of outperformance with LPs

5. Does this actually result in pnl for LPs no but it does make everyone who is a capital allocator who has a boss to answer too look great that they invest in VC funds verse liquid since they don’t have to have those convos why they’re down 80%, they have plausible deniability

6. What changed post 2022 is those illiquid positions could actually be used as a basket of collateral with lenders which ended poorly but is something I miss dearly that will probably never come back, the death of the lending market hurts liquid tremendously

7. Liquid has another lurking bogey in that positions that don’t exist can’t be stolen, every liquid fund is basically running constant tail risk of assets being stolen and or counterparties / exchanges falling down

8. You also have repetitional risk with liquid LPs that you just have to wear. For example if you were a liquid fund and active in 2022 you would have had funds on ftx and you would have had to send that email that those funds were potentially all gone and that sucks

9. And the recipient of that email has to go back to their boss and explain it and hey btw it’s all in the headline for the next year to remind everyone what you did and put our money

10. I will say some of the prime brokerage products like hrp and falconx and galaxy that are being built or built smooth a little of this risk over

11. Other issue that specifically exists now is the ETFs. They are a liquid extremely low fee alternative. A liquid fund has to beat the etf net of fees in a market that still unfortunately trades very lock in step for risk assets

12. For the reasons above I think liquid is will just continue to be dominated by proprietary capital out of Chicago and Asia

13. Even then you need a partner who has conviction you need the decision to do this to come from the top shops with big risk tolerance puke this when outside managers try and run it like Passport / SAC / Millenium etc there’s a long list of failed starts at reputable shops

Point72*