Why is Goldman Sachs completely wrong? On Crypto Investment from the Perspective of Assets

Author: Token Terminal

Translator: Li Yi

Although this article does not list Goldman Sachs’s criminal evidence list, it must refer to the investment recommendations made by Goldman Sachs on its customer conference call on May 27. In a word, customers are not recommended to invest in cryptocurrencies. This article attempts to overturn Goldman Sachs’ judgment by analyzing data and cases. Regardless of what is right and what is wrong, the information is worth knowing!

— — Typto

executive Summary

This article is mainly aimed at institutional investors and other professional investors who are considering investing in the field of encryption. The article analyzes the best practices of global institutional investors in the field of encryption. In this article, crypto investments (crypto asset investments) refer to investments in tokens. The article excludes traditional equity investments that use blockchain technology for entrepreneurship.

Investors interested in the attractive new asset risk-return ratio need to consider other technical and operational requirements related to token investment.

The first part of the article focuses on the latest developments in token trading and custody market infrastructure. Therefore, more institutional investors can invest in tokens. The second part outlines the technical and operational requirements of token investment. The third part introduces the investment methods that institutional investors interested in investing in tokens can choose.

Development of the crypto market

The number of people participating in regulated professional markets is rising

In the early stage of encryption (2009–2013), the trading of tokens and the escrow market infrastructure did not meet the requirements of institutional investors. In the past few years, the maturity of institutions and regulatory services has made it possible for more professional investors to participate in the crypto market.

Fidelity Investments of the United States is one of the leading institutional investors in the crypto sector. Fidelity is a global asset management company established in 1969, serving well-known institutions and high net worth individuals. According to a Fidelity report in 2019, 22% of US institutional investors have invested in tokens in the past three years. Nearly half (47%) of investors participating in the survey believe that token investment is part of their overall investment portfolio. Fidelity saw bitcoin mining as part of its internal R&D work as early as 2014. Today, the company provides token trading and custody services for its institutional clients in the United States and Europe.

Examples of other well-known technology and traditional financial services companies investing heavily in the cryptocurrency market:

• Andreessen Horowitz (Andreessen Horowitz): In the summer of 2018, Andreessen Horowitz launched their special crypto investment fund a16z crypto (asset management size: $300 million). In April 2020, the company raised a second investment fund in the crypto sector (asset management scale: $515 million).
• Venture capital company Sequoia Capital (Sequoia Capital): In 2018, Sequoia Capital former partner Matt Huang and Coinbase co-founder Fred Ehrsam founded the crypto sector investment company Paradigm (asset management size: 400 million US dollars).
• In addition to Sequoia Capital, investors in the fund include Yale University Endowment. David Swensen, the fund’s chief information officer, is known for creating an investment strategy focused on alternative investments.
• Chicago Mercantile Exchange (Chicago Mercantile Exchange): The Chicago Mercantile Exchange included bitcoin futures in its services in December 2017. The company launched bitcoin options trading in January 2020.
• The parent company of the New York Stock Exchange, the New York Intercontinental Exchange (Intercontinental Exchange). In 2019, Intercontinental Exchange launched Bakkt, a token trading and escrow platform.

Intercontinental Exchange Group operates its own token trading platform Bakkt.

The performance of native Internet companies can be measured by the financial indicators used to measure traditional companies. Source: Token Terminal

Token investment in the native Internet environment

There are several differences between investment in native Internet companies (token investment) and venture capital investment. Native Internet companies are based on open source software and mainly developed on the Internet-originally developed by a small core team and later developed by members of the global online forum.

Daily development activities are mainly concentrated on online forums such as Twitter, Discord, Medium and Github. Because native Internet companies are based on open source and open data, their trading activities can be monitored in real time. In addition to trading activities, investors also need to be able to track the development work of the core team and the popularity of investment objects among third-party developers to analyze the operation of their investment objects. Investors need to actively participate in these online forums to obtain relevant information and partners.

Examples of different native Internet companies or token projects. Source: Token Terminal

A professional and focused investment team in the field of crypto is best suited to find the most promising investment objects.

Token investment in practice

The early stage of the token market tends to combine long-term strategies with active trading investment strategies

Token investment combines the investment strategies of venture capital and hedge fund investment and prefers the former. In the early development stage of a project, even though the ownership shares of native Internet companies can already be freely traded on the Internet, in reality, only a few projects have truly meaningful liquidity. Venture investors enter the market with a long-term strategy, which is not as susceptible to market fluctuations and low liquidity as hedge fund strategies.

When investing in tokens, institutional investors have three investment options: one is internal investment, the other is investment through passive management funds, and the third is investment through active management funds. The challenge of internal investment comes from the demand for internal resources — in many cases, internal resources are often disproportionate to the scale of token allocation. After all, token investment should only account for a small portion of the overall portfolio of institutional investors. And because the current market inefficiency includes some low-quality assets, passive index funds (such as the top 10 indexes) often perform poorly.

Therefore, most fund managers in this area have chosen a closed-end fund structure, that is, the geographical span of investment business exceeds 7 time zones, which is often the case for most of venture capital. Even though the token may be in a vibrant secondary market, the token project is more similar to a startup company than a listed company. The early secondary market liquidity of native Internet companies is a novel phenomenon because it may allow managers of closed-end venture capital funds to rebalance their investment portfolios during fund cycles.

Due to the non-traditional investment objects and investment process in the encryption field, many traditional venture capital funds choose to invest the funds in the fund in other venture capital funds that specifically invest in the encryption field.

There are currently several active venture capital funds in the crypto sector operating globally.

The complexity of the asset class in the crypto sector, regulatory issues and rapid development have all made the crypto sector investment suitable for a long-term and active investment strategy. Blockchain technology is more similar to the Internet in many respects. It belongs to a technology that affects different industries rather than a single vertical. This is why a successful investment operation often requires a dedicated team.

For the above reasons, the most common form of investment in the crypto sector has been tilted towards venture capital funds in the specialized crypto sector. Fund managers who operate token funds are often younger than traditional fund managers, but have less experience.

Token Terminal provides financial and business indicators on protocols in the encryption field-we often see these indicators applied to traditional companies, such as the price-earnings ratio. Protocols in the encryption field operate like traditional businesses, except that they are conducted directly on the Internet.