Bits and Bytes: Opportunities in the Blizzard
Over the past year, the crypto industry has faced unprincipled management, financial fraud, and avaricious behavior. Do Kwon, SBF, 3AC, and centralized lending operators’ careless oversight paints a false narrative of blockchain and decentralization. Despite this, crypto today still has some of the brightest developers building on this novel technology. Unfortunately, certain centralized operators have manipulated crypto assets to a point of near extinction, causing the retail market to lose trust.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” — Warren Buffett
Macroeconomic headwinds persist in a rather dire environment. We expect interest rates to remain high while liquidity is sucked out of the market. We expect interest rates to remain high while liquidity is sucked out of the market and retail investors choose to hold cash in their bank accounts as they have given up on investing. The economy cannot inflate away its problems and such a strategy would leave an overwhelming majority of Americans worse off. According to Hoisington Investment Management’s Q3 2022 review, “[f]ailure of the Fed to achieve its inflation target would also have the consequence of allowing an emergent money/wage spiral to become entrenched. The Fed’s mettle will be tested because over-leveraged institutions will fail as they have in the past.” We hold a similar sentiment, with the latter having already played out in crypto over the past year.
It took the S&P 500 12 years to return to its Dot-com Bubble high from 2000. This was during a historic period of technology growth and the introduction of quantitative easing, a monetary policy that is not out of play during this economic cycle…
Source: Factset, S&P 500 | (accessed) November 2022
We believe that the business of venture is to bet in emerging sectors before the flow of institutional funds reaches that sector. That being said, we still hold a strong belief that smart contracts and decentralized systems represent a long-term pervasive investment theme in venture capital. Our thesis on crypto remains the same — R/Capital’s multi-faceted investment approach focuses on blockchain-enabled gaming, emerging market financial infrastructure, and decentralized ecosystems with application-specific purposes. In our opinion, autonomy, openness, and transparency are all facets of decentralized technology and the two crashes of 2022 were the opposite of those characteristics.
While the crypto market has significant headwinds in store, R/Cap has two thesis-driven narratives that we believe are staples in our venture investing practices.
Blockchain-enabled Gaming: Interoperable value transfer enables when projects build their technology stack on a blockchain and gaming is a prime use case for this. While blockchain infrastructure facilitating consumer-facing experiences is still maturing, blockchain-enabled gaming creates a form of bi-directional value transfer. In turn, tokens within games can incentivize loyalty and create sticky customer retention through shared ownership and governance. Financially aligned user bases through a decentralized marketplace is a sub-use-case that we predict will be prominent in most Triple-A games moving forward.
By launching games where the players cannot tell that there is blockchain technology in the background, crypto could onboard millions of users without them even knowing. Once gamers start to get curious about how much their assets are worth, they will begin to explore blockchain technology via ramps and other chains as well.
Gunzilla: R/Capital led Gunzilla’s seed round with a $2M check into the private token round. Gunzilla’s Off The Grid is a Triple-A gaming studio that plans to launch Off the Grid in 2023. Off the Grid is a cyberpunk battle royale game compatible with all platforms built using Epic Games’ Unreal 5 engine.
Gunzilla plans to build an Avalanche (another portfolio company of R/Capital) subnet within the game. Since Avalanche subnets give web3 games complete control with their customizable networks, without sacrificing security or decentralization, we remain confident that Avalanche is the most suitable blockchain partner in our opinion for Gunzilla. Thus, this builds on our wider thesis of creating “spider webs” within our portfolio companies here at R/Capital. Our main focus is to create ways to marry portfolio companies that are building alongside the same mission and goal.
Emerging market financial infrastructure: We expect crypto prices to remain down as retail liquidity is low and retail confidence has withered. However, there is still a strong utilization of crypto present in emerging markets. Due to the desideratum for financial infrastructure present, we believe these markets will drive crypto demand Emerging markets with high inflation and no banking services can use crypto financial rails to process P2P transactions at a significantly cheaper cost than ACH or Western Union.
Busha: Busha has given us hope in terms of its resilient management style. R/Capital invested $400K into the Nigerian-based crypto application’s Pre-Series A. Busha is a vertically integrated crypto application that provides a suite of products and solutions that enable their customers to onboard easily into the crypto economy, thereby accessing financial opportunities that they would have otherwise been closed to. Generations of Africans have grown up with aggressive wealth erosion due to the devaluation of their local currencies. The financial borders make it difficult to access more stable global assets, condemning people to poverty.
Low levels of liquidity, lack of institutional fund flow, and austere regulatory guidance are issues that crypto will face for years to come. However, the asset price is not a fundamental metric to value the developer activity happening in the space.
Source: Alchemy Web3 Development | 2022
We expect to see a continuous talent migration from web2 to web3. Developers will flourish during a cold winter as they continue to build applications on decentralized technology stacks. In fact, we believe that this downturn benefits developers. Additionally, the crypto developers’ continued maturity gives us hope that the necessary infrastructure is now present to use any coding language for smart contracts. Compatible software development kits (SDKs) across multiple layer-1 platforms give developers access to infrastructure that wasn’t present two years ago.
Our team at Republic Capital will continue to work with our portfolio companies to take a more strategic and hands-on analysis of the evolving situation so they can come out stronger than ever.
This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third-party sources and we cannot guarantee the accuracy or completeness thereof.
