We believe cryptocurrencies, digital assets and blockchain are revolutionary technologies, which will change and disrupt our society.
Main disruptive features of blockchain are:
- decentralized governance (no single entity is in control)
- immutability (miners or stakers make sure the state of the network is irreversible)
- trustless computation (every party interacting with the network can trust that it will execute automatically as promised)
- open access (everyone can access the network and review the code without permission)
- public verifiability (data are public and transparent, lowering the costs for audits and proof of reserves)
Thanks to these features, we will start bypassing inefficient, rent seeking trusted third parties. Decentralized crypto-networks (computer layer) will replace centralized authorities (human layer) with trustless, decentralized protocols. That will lead to much higher social scalability. Think human-powered bell towers being replaced by automatic mechanical clocks.
Let’s divide our investment thesis into four segments.
1. Stateless digital money
Cryptocurrencies, such as Bitcoin are the first and simplest use case of blockchain, while also utilizing other technologies like asymmetric cryptography or Proof of Work (mining).
Although still nascent and volatile, we believe that existence of open, digital, uncensorable, sometimes transparent and sometimes fully private cryptocurrencies is inevitable at this point. They do not necessarily need to overthrow our current monetary system. However, they provide a healthy experimentation ground for alternative monetary policies. They also provide non-sovereign safety belt – alternative for people to escape to in case sovereign (government backed) money and monetary policies fail.
Unseizable, private cryptocurrencies could also provide a safe haven for capital from offshore and Swiss bank accounts, which are slowly losing their ability to protect privacy of their clients. There is a popular comparison, saying that Bitcoin is comparable to “digital gold”, but more liquid and easier to store and transfer.
Sub-theses of this thesis are also “sound money thesis” (supported by austrian economic school) and “ideal money thesis” (concept pioneered by inventor of Game Theory, John Nash). Arguably both sound money and ideal money should be independent of central banks and individual nation states.
Apart from Bitcoin, we monitor couple of other cryptocurrencies, such as Monero, Zcash or Grin. The reason why they may make sense from investment point of view is that their monetary policy is usually deflationary and their adoption is still nascent. If their adoption starts growing with exponential rate (as we expect with such networks), it will mean the price (nominated in inflationary fiat currencies) will rise significantly.
2. Open, decentralized financial systems (#DeFi)
DeFi means stack of technologies that allow transparent, open, programmable and decentralized financial services (apart from just money). Services such as creation of assets and derivatives, lending, insurance, exchanges… are currently provided by institutions. Thanks to blockchains, they will be provided by decentralized protocols and smart contracts that are enforced by the network incentives, rather than law.
In order to get exposure to success of DeFi, we can invest in tokens of underlying smart contract protocols (such as Ethereum, Stellar, EOS), if we believe that these bedrock protocols will accrue most of the value.
Or we can invest in tokens of middleware protocols, that enable specific services, such as MakerDAO (“decentralized central bank”) or Augur (prediction market that allows creating “bets” = markets on almost anything).
Digital assets (tokens) of these protocols are designed to economically incentivize all participants of the network to act on behalf of the network. Thus, if designed correctly, they should accrue value and grow in price if protocol/network will become successful, even though there is no authority – state or private firm – to govern and manage them.
Last but not least, we can invest in equity (or tokenized equity) of companies, building centralized customer facing services on top, such as cryptocurrency wallets.
We at Sigil are looking to invest especially in decentralized tokens of underlying and middleware protocols, which we believe can accrue a lot of value from the new digital financial systems being created on top of them. In couple of years, when technology will become more mature, it will make sense to look into tokenized equities of companies as well.
3. Web 3.0
This term indicates evolution of structure of the internet. Web 1.0 were first simple HTML websites and communities fragmented among various discussion forums and chat boards. Web 2.0 is what we have now – majority of online traffic and online commerce is increasingly under control of corporations such as Google, Facebook, Alibaba or Amazon. These corporations have access to all our data and can even influence our behavior (e.g. Google can alter our shopping habits and desires by showing us customized targeted ads), thus becoming increasingly powerful.
Web 3.0 is a pushback against increased surveillance and centralization of internet and online commerce. Paraphrasing Peter Thiel – when pendulum swings too much in one direction (centralisation) over-correction in opposite direction (decentralisation) is imminent. Web 3.0 consists of technologies that enable users to reclaim control of their data and possibly monetize them on their own terms. Web 3.0 will be powered by decentralized protocols and crypto-networks, using technologies such as cryptocurrencies, smart contracts and encryption anonymization tools.
In other words, Web 3.0 will become a more decentralized, privacy oriented and open version of internet. We can invest in Web 3.0 thesis by betting on alternative decentralized networks such as FOAM protocol (decentralized community built GPS competitor) or nuCypher(privacy infrastructure). Many of these projects also employ tokens to align incentives of their decentralized networks.
4. Decentralized governance
Governance basically means ways and processes on how we organize our societies and make collective decisions about them. Today we mostly rely on governments and private companies protected by enforceable laws. Decentralized digital networks enable us to create new ways of organising our cooperation on large scale (as Nick Szabo argues), by transferring some of the rules and processes from our current systems to automatized, digital and decentralized networks.
Blockchain governance is still a very nascent topic. We see many experimentations in this area, solving mainly these questions:
- How we govern decentralized protocols and networks
- How we use decentralized protocols and networks to enhance large scale cooperation
- How we create new types of organisations and entities such as DAOs, COs
- How we can experiment with alternative forms of governance (such as Futarchy, Liquid democracy or Radical markets)
We believe that decentralized blockchains, that will succeed in the goal of creating new types of governance, will accrue significant amount of value, if they tie the governing system to usage of their native tokens. Some of the early examples of such networks are: Decred, Tezos or EOS. These tokens can then become a means how to capture political power within whole ecosystems.
Combining our theses together – Open Digital Economies
These are the main four theses, that we are currently covering in our investment portfolio and approach. They are not contradictory to each other, but rather complementary. If at least some of these visions materialize and get mass adoption, we should think about them as whole new open digital economies with their own currencies, markets, rules, decision makers and services.
Open Digital Economies will be built on top of unbundled primitives and allow for frictionless digital markets, more transparent governance and permissionless financial services.
In conclusion, decentralized crypto-networks will change the way how we transfer value, conduct contracts, deal with data…, creating unstoppable protocols, which are solving some of the most pressing issues of digital age (such as centralization of digital services, surveillance, censorship, data ownership…).
Our Investment Strategy
We are on the mission to seek and invest in the best opportunities in crypto-space, which provide asymmetric high risk – high yield dynamic. However, current cryptocurrency and blockchain markets are full of noise. Therefore we believe that by careful analysis we can find undervalued projects with long term growth potential.
We do not know, which particular technology and decentralized network will succeed in the end (no one does). We are building our investment portfolio in a way, that let’s us profit from almost all possible outcomes, by smart diversification between various technologies and communities.
Majority of our capital is allocated in balanced portfolio of long positions for various cryptocurrencies, tokens and other digital assets. Part of our portfolio can be allocated also in equity shares of companies from the crypto/blockchain industry (public stock or private equity). In rare cases we may also hold short positions, if we conclude that given asset is strongly over-valued by the market and correction is imminent.
Investment horizon for our positions is usually 2 – 10 years. However, we adjust the size of our positions more often by rebalancing the portfolio. From time to time we decide to take short term trade opportunities if they emerge based on our data analysis.
We believe in power of data. Our team of analysts and programmers is creating proprietary data mining and analysis tools for quantitative analysis.
Investing in new asset class such as crypto-assets brings many challenges. There are very few valuation models and metrics that investors can use. We see it as an opportunity to be one of the pioneers in this emerging industry, testing our own models and participate on creating future standards together with other industry leaders.
Currently, our edge comes from strong focus on fundamental analysis:
- Technology – code review and activity of developers in Git repositories.
- Team – due diligence on core team members, ideally direct contact.
- Community – quantifying the size and engagement of community on social networks.
- Decentralisation – in case of cryptocurrencies it’s important to assess consensus, governance and ownership distribution.
- Economic viability – estimating the potential upside by market analysis and assessing whether it´s viable to utilize cryptocurrencies or blockchain in given market.
- Quantitative analysis – we utilize advanced models for analysis of market and non-market data
- Macro analysis – for entry and exit timing we monitor state of the overall market, like media awareness, regulatory risks and sentiment
- Evaluation of cryptoeconomics – our team has reviewed more than 200 crypto projects and participated in many crypto rpojects as core advisors first hand. As such we can evaluate the quality of cryptoeconomics model (equivalent to business model in traditional world) and its potential to increase in value over time based on hiqh quality fundamentals.
We believe, that this approach will help us capture maximum upside from emerging crypto-asset markets while mitigating the downside by focusing only on projects with high chance of success.