Memoirs of a Big Player in the Crypto World (Part 1): Reflections and Thoughts of a Blockchain Investor

This article was published on June 27, 2019, on the personal Weibo of Xu Yingkai, founding partner of BlockVC.

The article is roughly divided into the following sections:

1. How to complete the launch of primary market projects?
2. The Thousand Coin Plan and the $200 million acquisition fund
3. Suggestions for project parties from the perspective of the secondary market
4. Regrets about missing BNB and continuously increasing HT
5. Reviewing trading ideas for mainstream coins
6. How to view the high volatility of Bitcoin?
7. Strategic planning for the next year
8. How to make the right choices?

Looking back, 2017 was a turning point for the blockchain industry. Any climax in the development of a plot is based on huge contradictions and conflicts. The market frenzy and global regulation made the whole world aware of blockchain and digital currency overnight. However, things that are too brilliant are generally very short-lived. After a period of irrational prosperity, the crypto market entered a bear market that lasted for a year. This complete bull-bear cycle also made me re-examine the development and evolution of the entire industry from three dimensions: blockchain projects, exchanges, and investment institutions.

Since the beginning of 2019, BlockVC has gradually transformed from a follower to a participant, and then from a participant to a leader in the industry. After experiencing so many ups and downs, I have continuously analyzed and summarized some immature reflections and insights, hoping to share them with everyone to better understand what stage the entire industry has developed to, where the future market opportunities lie, how to establish a correct investment perspective, and so on.

This article is a semi-annual summary for 2019 (January 2019 - June 2019). In the future, I will gradually release more series of articles from multiple perspectives, including primary market investment theory, secondary market analysis framework, and the crises and challenges we encountered.

The article is roughly divided into the following sections:

1. How to complete the launch of primary market projects?
2. The Thousand Coin Plan and the $200 million acquisition fund
3. Suggestions for project parties from the perspective of the secondary market
4. Regrets about missing BNB and continuously increasing HT
5. Reviewing trading ideas for mainstream coins
6. How to view the high volatility of Bitcoin?
7. Strategic planning for the next year
8. How to make the right choices?

### 1. How to complete the exit from primary market projects

In 2018 alone, BlockVC completed the review and due diligence of over 800 blockchain projects, publicly disclosing investments in 64 blockchain token and equity projects, of which 8 projects were listed on Binance and 20 projects on Huobi. In terms of quantity, the exit rate on Binance and Huobi exceeded 43%. Regarding the selection of targets and investment strategies in the primary market of blockchain projects, I will write a separate article to introduce our original "Primary and Secondary Market Interaction Philosophy," "Three-Layer Investment Matrix," and "Four-Dimensional Screening Criteria."

Key data for BlockVC in the blockchain investment field in 2018

In the first half of 2018, the exit strategy after investment was mainly focused on holding and recovering costs. However, starting from the end of May 2018, we began to significantly reduce our holdings of altcoins. After 2019, we basically did not participate in early ICO projects' private equity investments, and the exit strategy was relatively simple:

• For new targets with a large initial circulating market value and good liquidity, we choose to hold them long-term, such as ATOM, etc.;

• For projects with good quality and small market value that have the ability to be listed on larger exchanges, especially IEO projects on Binance and Huobi, we generally complete the exit during a period of price increase after they are listed on major exchanges;

• For projects with average quality and teams that have lost market competitiveness, as long as we can withdraw tokens or transfer quotas, we absolutely do not wait until the tokens are issued, and we complete the exit as soon as possible after the tokens are issued.

The logic behind this mainly has two levels: macro and micro:

• From a micro perspective, regardless of the token's use case or the stage of technological development (in fact, most technologies are very early, and most ideal technologies cannot be realized, and even if realized, there is no possibility of large-scale landing in the short term), most projects use ERC20 to issue tokens and design relatively long lock-up periods, which is a disguised rapid inflation design without any value support. As long as it is a game of the existing market, the short-term release of locked tokens brings continuous selling pressure and an increasing circulating supply. For projects that cannot land products within a certain stage, cannot create demand for token usage, and cannot significantly enhance consensus, the only new funds participating in holding are retail investors in the secondary market. For such token structures, without an industry bull market, the only result is a continuous decline, and after the release ends, the value will be assessed based on the project's growth.

• From a macro perspective, we previously predicted that based on historical data, it usually takes about a year from the peak of a bull market to the bottom of a bear market, with a decline of 80%-90%. The period around the Spring Festival in 2019 was predicted to be the bottom of the bear market and the starting point for the industry's recovery. Therefore, before this, market funds were in a state of continuous escape. According to historical patterns, for bubble-type assets, once trapped, there is no reason for them to be released in a new cycle. For value-type assets, new funds will first flow into leading assets and then gradually into growth assets. We conducted a comprehensive analysis and evaluation of thousands of blockchain projects on the market and found that only 7 currencies remained from the last bear market and still had strong global consensus and liquidity: BTC, ETH, XRP, LTC, XMR, DASH, and XLM.

Based on the above two judgments, we constructed a very simple and straightforward strategy for exiting ICO projects, and it was precisely this strategy that helped us maintain a large amount of cash and liquidity without the risk of project holdings going to zero. It is also because of this primary market exit strategy that we have re-recognized investment and allocation in altcoins. Thus, in January 2019, we internally promoted the "Thousand Coin Plan," which is also the embryonic form of our $200 million "acquisition fund" investment structure.

### 2. The Thousand Coin Plan and the $200 million acquisition fund

First, let me answer a few main questions:

Q: What is the relationship between BlockGroup and BlockVC?

A: We have always described the relationship between BlockVC and BlockGroup as similar to that between today's headlines and ByteDance. BlockVC is our capital product, establishing a vertical brand through BlockVC, and then elevating the dimension to BlockGroup to build a broader ecosystem in the crypto world. BlockGroup's clear counterpart in the international and industry context is DCG (Digital Currency Group).

Q: Does the acquisition fund really have $200 million, or is it just boasting?

A: It is indeed real, and we ourselves are the largest investors in the acquisition fund. Half of the positions in the acquisition fund have already completed external investments. After all, the market value of altcoins is limited, and a large portion of our positions is held in mainstream coins, most of which were built below $4200 in Bitcoin.

Q: Did you really invest money in projects, or was it just for PR?

A: We did invest in projects, but due to confidentiality requirements, we cannot easily display the holding accounts. However, the average single investment is around $1 million to $2 million. Some were purchased from project parties or foundations, while others were directly bought in the secondary market. In the future, we will also choose suitable opportunities to continue investing in project acquisitions in the secondary market.

We have always divided the entire altcoin market into two parts, just like the equity market is divided into early-stage VC and later-stage PE.

Most of the certainty in primary market returns comes from liquidity premiums. Once quickly listed on large exchanges, especially in the ICO model and bull market, the liquidity and irrational expectations of the secondary market can lead to significant premiums for investments. What everyone is trading is project expectations, and the driving force behind value establishment lies entirely in expectations. However, in reality, projects require a long time for research and promotion to reach a commercially usable state. Even projects like ETH and EOS still face many technical bottlenecks that cannot be overcome. Therefore, holding a new project (especially a public chain project) to bet on it becoming an industry standard has a relatively high opportunity cost.

On the contrary, when many projects have been filtered by market conditions, their growth potential will gradually emerge. Heavy investment during oversold conditions or when they stand out is a stable way to achieve investment returns, and it can accommodate a larger amount of capital. On the surface, it may seem like buying at a high point, but in reality, when the industry is in a cyclical trough, even the best-looking projects may face issues such as price collapse, team dissolution, financial tightening, and technical delivery problems, or even encounter significant operational errors. However, if the industry recovers, laying out these high-growth, high-market-cap, and strong project capabilities before the recovery will allow investment in the best assets in the industry. Once the industry recovers, these assets will become the leading stocks in the rise and will have a certain large return, even leading to a Matthew effect. Therefore, most of the certainty in secondary market returns comes from high growth potential.

In the first quarter of 2019, coinciding with the right side of the bear market and the left side of the bull market, it became the starting point for the recovery of the blockchain industry, naturally becoming a key opportunity for laying out high-growth investments, leading to the emergence of the "Thousand Coin Plan." We spent three months conducting a comprehensive analysis and evaluation of the public data of nearly 1,000 blockchain projects on the market and communicated with the founding teams of 150 projects, ultimately filtering down to 30 oversold projects as candidates for investment and acquisition. Admittedly, we did not invest large amounts in many of these projects because the market depth and liquidity were indeed too weak, and the teams and other investors were not willing to transfer. Ultimately, we completed investments in 17 projects, with NULS, IOST, IOTX, and NEW already disclosed.

Investment projects disclosed by BlockGroup's acquisition fund

When we screened projects, we summarized that projects capable of crossing bull and bear markets and becoming leading assets in the next cycle possess the following characteristics:

• The founding team is stable and has international capabilities. The core team possesses complementary professional abilities, and projects now need an international background to demonstrate their horizontal expansion capabilities. The blockchain world has been internationally distributed since its inception, so international capability is key;
• The project has good development and landing capabilities. It can continuously promote project development and upgrades, maintaining technological leadership, with frequent effective code updates on GitHub;
• It has a global consensus community. It can continuously gather, strengthen, or even expand the community of believers, developers, and business partners, providing support for the project's long-term vitality;
• It has good financial knowledge and financial management capabilities. It can provide continuous funding support for project development and ecosystem construction;
• It has excellent business development capabilities. It can continuously help the project establish landing scenarios and partners, thereby creating a gradually strong and rich business ecosystem;
• It has a high market value and global liquidity. Listing on major exchanges and global liquidity is crucial for a project's survival. Only with true global liquidity can a project effectively resist shocks and impacts from the market, policies, or malicious third parties, and provide good financial support to expand the project's global influence.

The embryonic form of the Thousand Coin Plan

The projects we have participated in have basically completed investments in January, significantly outperforming the overall altcoin market. If Bitcoin experiences a second bottom within the next three months, the altcoin market may face another decline, and we will continue to increase our positions in these projects. Since the projects we disclosed have seen significant increases in the secondary market after the announcements, they have attracted considerable media attention, even leading to events like "The $200 million BlockGroup acquisition concept," "Investment leads to skyrocketing! Who will be the next to be picked by BlockGroup?" and "Some projects falsely use the name of BlockGroup's acquisition fund to pump prices," which can be seen as a form of recognition and appreciation for our correct value investment strategy. However, I do not recommend everyone to go all-in on the projects we announced; this is somewhat like publicly calling out trades. If the price does not rise or falls after the call, it may be met with ridicule. However, it is important to note that our holding prices, cycles, and standards differ significantly from others. The announcement is merely a summary of past actions.

BlockGroup's acquisition actions have been widely reported and hyped by various industry media

Various opportunities exist in the market, and everyone has their own investment strategies. FOMO and following trades may bring returns in certain instances, but only by having a complete strategic system can one win first and then seek battle, rather than seeking victory after engaging in battle.

### 3. Suggestions for project parties from the perspective of the secondary market

We once discussed an internal question: For a cryptocurrency project, what signifies the death of a token issuance project?

During the discussion, there were many viewpoints, such as:

• Team dissolution
• Technology cannot be realized
• Financing failure
• Wallet theft
• Commercial failure
• Price collapse
• ……

However, the consensus we ultimately reached was: the depletion of token liquidity = the death of the token issuance project. This abstract conclusion applies to any token issuance project.

Due to the inefficiency of the cryptocurrency market, which is still in its early stages, using artificial intelligence and quantitative algorithms can detect and capture enormous trading opportunities. Due to the high volatility of crypto assets, project parties and investors have a strong need for reliable asset management solutions to hedge market risks. Due to the inadequacy of infrastructure, many assets lack liquidity, and liquidity brings more market premiums and asset value discovery (Liquidity has value. No liquidity means no Premium and the Premium is bubble).

From the perspective of this systematic project of market making, the three basic conditions that determine the difficulty of market management are: market conditions, financing structure, and trading platform.

Market Maker Management Framework

Therefore, from the perspective of the secondary market, we provide project parties with three main suggestions:

1. Continuously seek opportunities for listing on major exchanges and accurately identify the liquidity of exchanges and market segmentation;

Generally, we classify currently liquid exchanges into three categories:

• Global mainstream exchanges: Binance, Huobi, OKex;
• Regional fiat exchanges: Upbit, Bithumb, Coinbase, etc.;
• Liquidity supplement exchanges: Gateio, Bittrex, etc.

By listing on exchanges, project parties can achieve three strategic objectives for their tokens:

• Through the liquidity and depth of the secondary market, relieve the financing liabilities of the primary market;
• Help the project continue to develop and provide operational funds; good exchanges can enhance the token's ability to realize appreciation;
• Global liquidity can turn tokens into hard currencies, transforming them from usage rights to monetary asset attributes;

Regrettably, I must inform everyone that most blockchain projects will not have landing capabilities and profit models in the next 2-3 years, and the secondary market may become the only evaluation metric and source of profit. Exchanges are both tools and leverage, beneficial for accelerating project development and standing out.

Only with broad global liquidity can tokens shift from speculative attributes to investment attributes, transforming from usage rights to asset attributes.

2. Use various methods to elevate market value to the top 100 globally, occupying a favorable position;

Through extensive data analysis and observation, the correlation between the trends of mainstream coins and projects ranked below 100 in market value has become very low. If there is no opportunity to climb into the top 100, the difficulty of attracting new funds into projects when the market recovers will significantly increase. If a type of asset cannot rise more than BTC when BTC is rising and falls more than BTC when BTC is declining, then there is no reason for the market to allocate this type of asset.

Regarding the recently popular staking model, most projects that engage in staking can see a rapid price boost in the short term due to a quick reduction in circulation. However, most projects that adopt staking have inflationary designs in their circulating supply. If future marginal demand is less than marginal supply, prices will continue to decline. Both surges (greed) and crashes (fear) can lead to the rapid collapse of the staking model because of extreme imbalances between demand and supply, which may lead to capital overflow. The failure of the staking model is often due to diversion. The strength of BTC lies in its consistent demand exceeding supply, creating a multiplier effect similar to the stock market, where profits increase alongside PE multiples. Therefore, from the perspective of token models, BTC is likely to outperform most coins in the long run.

Deflationary token models are the best choice for most projects with a large initial circulating supply. Of course, it is also possible to maintain the token's circulation structure and use a dual-token system (such as issuing GAS) to create more incentives and holding demand.

3. Manage project cash assets well and carefully examine the flow and preferences of funds;

The previous ICO model led many projects to only conduct one-time financing. Besides managing their own project tokens, effective cash management is particularly important, as it determines the length of the project's operational cycle. We have seen too many cases where converting the raised ETH into USD at a certain point in time avoided over a 50% capital drawdown. The most important thing is not how much money is made in a bull market, but how to survive in a bear market. In the real world, most scenarios still require fiat payments, and retaining sufficient operational funds is essential for a project to remain undefeated.

Original link: https://weibo.com/ttarticle/p/show?id=2309404387807945730822