Dialogue Coin Capital Wangxi: Signals and Noise in Blockchain Investment

This article is an original piece by Chain Catcher, authored by Wang Dashu.

Bixin Capital is part of the Bixin ecosystem. Bixin is a Bitcoin wallet development company that has been established for over six years and is also a large Bitcoin miner. Therefore, in essence, Bixin Capital is more like an investment department under the group, primarily relying on its own funds rather than LPs. Compared to pure crypto VCs, they have a relatively unique gene and perspective, for example, they prefer to invest in targets that have long-term value for the industry's development without needing to consider exit issues too much.

Recently, Chain Catcher had an in-depth conversation with Wangxi, the head of Bixin Capital, who reviewed the investment journey of the past three years and discussed how he filters out industry noise to identify real problems in the industry, hoping to inspire you.

1. Smart individual investors always exist

Chain Catcher: Every industry has its cycles. What cycle do you think the blockchain industry is currently in?

Wangxi: I believe the industry is still in a relatively early and primitive stage for three reasons.

The first reason is that every year there are significant difficulties in the industry, during which everyone tends to be pessimistic and wonder if the industry is about to disappear.

For example, last year on March 12, everyone judged that the pandemic was quite severe, global assets were shrinking, and Bitcoin, as a safe-haven asset, should have risen. However, it turned out to have a high correlation with the U.S. stock market, and its price elasticity was even greater than that of the U.S. stock market. When the stock market fell, it plummeted as well. This contradicted what many people previously thought about Bitcoin being a good safe-haven asset.

Then there was 2019, when the blockchain industry was not doing well at all, with only Bitcoin in a bull market. At that time, the primary market was quite dull, and many people were focused on Bitcoin mining, leading to a pessimistic view that perhaps the blockchain industry only had Bitcoin.

Additionally, in 2018, after the ICO bubble burst, the industry fell into confusion, which also proved that blockchain+ was a false demand because adding blockchain to any industry would completely transform it into that industry.

The second reason is that there is relatively little communication between blockchain practitioners and the outside world, making them distant from mainstream society. People still hold instinctive misunderstandings about blockchain and Bitcoin. Of course, these situations are gradually improving, and there is still a lot of room for improvement in the future.

The third reason is that although sovereign funds, pensions, and university endowments have begun to recognize the value of Bitcoin in asset allocation and are starting to invest, their proportion is still very small. Therefore, looking at all aspects, the industry is still in an early and primitive stage, and given the nature of the industry, this "early stage" will continue for a considerable time.

Chain Catcher: But many viewpoints suggest that this industry is maturing, and both upstream and downstream are becoming institutionalized, making it increasingly difficult for retail investors to make money?

Wangxi: I don't quite agree with this viewpoint. The blockchain industry is very different from stocks and other traditional financial markets. In the stock market, there is a significant information gap, and those fund managers with a lot of information can easily outperform individual investors.

However, in the blockchain industry, due to the characteristics of decentralization and information openness, as long as you are willing to dig, almost all information is public. In the past, I have seen many smart individual investors who perform much better than funds and so-called institutions in their investments. They delve deeply into projects, while many institutions may not have even interacted with well-known DeFi contracts, so smart individuals always exist, and poorly performing institutions are also quite common.

Chain Catcher: Crypto VCs like Qianfeng Capital and Multicoin Capital, which focus on industry research, have been performing well. Does Bixin, as an important part of the Bixin wallet ecosystem, feel anxious about being less vocal than these crypto VCs?

Wangxi: Not really. Bixin has been a Bitcoin wallet for over six years and is also a large Bitcoin miner with significant Bitcoin computing power. Bixin's investments are just one of many ecological businesses; essentially, it is more like an investment department under the group rather than those specialized investment institutions. We primarily rely on our own funds for investments rather than depending on LPs, so compared to them, we do not face much external pressure. Therefore, when we see good projects, we actively reach out rather than relying on high visibility to source deals.

2. Reviewing the investment journey of the past three years

Chain Catcher: In fact, Bixin Capital has invested in underlying public chains and participated in popular DeFi products in the past. Can you review the investment logic and practices from the past?

Wangxi: First, regarding investment logic, we had a principle in selecting projects: the project should either be small and beautiful, meaning it has a low valuation and a small narrative, able to solve a small problem with little money; or it should be particularly large, meaning those well-known good projects with strong teams and backgrounds.

In the past three years, we have successfully invested in some excellent large projects, such as Mina and Algorand; we have also discovered some small and beautiful projects at their inception, such as Arweave, which we invested in at the primary level. It had a very low valuation but is a great decentralized storage solution used by many projects, maintaining a stable market cap at the forefront. Other examples include epns and xDaichain, and the investment logic is similar.

Now, regarding investment practice, during 2017-2018, we invested in some industry infrastructure projects in public chains, storage, security, etc. At that time, we believed these should be the foundational basis for the future development of blockchain, and good solutions should be utilized, such as Arweave. In 2019, Bitcoin's market was quite good, so we spent a lot of time assisting the company's mining business and looked at relatively few projects, investing in about 5-10 projects like xDai, Cere, and Marlin throughout the year. In 2020, Bixin Capital began looking at DeFi, where we saw another certainty in blockchain beyond Bitcoin and stablecoins—its native financial attributes, which was very exciting.

Chain Catcher: According to your investment principles, Polkadot, which has been a focus of the industry, should be considered a project with a large narrative. Many investors who have experienced the downfall of EOS believe Polkadot will face a similar fate. What do you think of this judgment?

Wangxi: Such a comparison is very disrespectful to Polkadot. Polkadot and EOS are fundamentally very different.

First, EOS has had issues since its inception because it sacrificed security for efficiency, which has proven to be a misguided approach. The direction was wrong. However, Polkadot places great importance on security, using a relay chain to ensure safety and parallel chains to solve flexibility issues. Currently, this logic appears to be correct.

Second, Polkadot's support for its ecosystem is far better than that of EOS. The Polkadot Foundation has funded hundreds of projects, and entrepreneurs receive very positive responses when they email the Polkadot Foundation. Additionally, Polkadot's technical architecture is very friendly to developers, which has led many entrepreneurial teams to transition to the Polkadot ecosystem.

In summary, it is difficult to predict whether Polkadot will ultimately succeed. Whether Polkadot's entire narrative can be fully realized may take another two to three years to see. However, in my view, Polkadot is already much stronger than EOS in terms of whether it can achieve its grand narrative. If it were to fail like EOS, it would still be a more graceful failure.

Chain Catcher: One more thing I'm curious about is how you managed to reach these small and beautiful projects early on?

Wangxi: One method is to spend years mingling in overseas communities to discover projects from these communities; another method is that we often communicate with some small crypto VCs that are very close to the native crypto community.

Overall, there are relatively few project parties that actively seek out Bixin for investment; many of the projects we invested in were actively sought out by us. Of course, there is also a category of well-known good projects that everyone knows are good, and people use them every day, just like how people use Haitian Flavoring and Jinlongyu in A-shares for cooking daily; they generally won't be too bad. So, using this logic, you can think about what are the things that DeFi citizens are using in the DeFi world.

Chain Catcher: You mentioned that some projects were obtained through communication with overseas crypto VCs. In your view, what are the differences between these overseas crypto VCs and local Chinese crypto VCs?

Wangxi: There are roughly three points. First, overseas crypto VCs are worth learning from because they do solid foundational research, such as building detailed valuation models. Second, they are very good at independent thinking; for example, when researching the same thing, different institutions may reach completely divergent conclusions, which is very valuable. They rarely rush to collectively endorse something. Third, they are more native, for instance, during this wave of DeFi, many Western crypto VCs I encountered deeply participate in community governance, provide liquidity as LPs, and engage in economic model adjustments and other aspects.

Chain Catcher: These differences are indeed worth learning from. So, in practice, what commonalities do the projects that Bixin Capital has invested in, which are not profitable, share?

Wangxi: High valuations, overly grand narratives, incorrect directions, team divisions, lack of practical use, etc.

3. Discussing industry hotspots like DeFi

Chain Catcher: Finding signals amidst the noise is also a key aspect of investing. How do you do this?

Wangxi: For me personally, a good way to filter out noise is to look for projects created by people with a geek spirit. I seek out such individuals. Their basic characteristics are that they are very capable but not inflated, just like the founders and core engineers of these leading DeFi projects, who might live in a wooden house on the outskirts of a small European city, leading a simple life and pursuing excellence.

Moreover, I believe the best way to filter out noise is to trust the market, not to be misled by so-called market manipulation theories, and not to think that the manipulation theory is correct. We need to delve into the community and find the most native good projects there.

Chain Catcher: I agree. The success or failure of everything depends on people. As you mentioned earlier, the development of DeFi is exciting. Bixin Capital has also invested in some related projects. From your observation, what stage is this field currently in?

Wangxi: Overall, various tracks in DeFi have produced some leading projects, such as UniSwap in DEX, AAVE and Compound in lending, as well as Chainlink as an oracle, algorithmic stablecoins, and insurance, etc. It should be in a relatively mature stage. However, the development of each sub-track still needs further observation, such as whether lending and fixed rates can be improved, whether there are more opportunities for credit loans, and how on-chain credit can be better executed.

Additionally, I think a significant challenge is that Ethereum's gas fees are currently quite high. Although I personally do not see this as a serious obstacle, it seems to be a major barrier to achieving inclusiveness in DeFi. Ethereum 2.0 is still far away, and Layer 2 solutions will see significant application in 2021. A large amount of liquidity is dispersed across Layer 1 and Layer 2. In this case, how should aggregators operate? These are future challenges.

Currently, leading projects like Uniswap and Compound are developing their applications on Layer 2. In the future, Layer 2 solutions like zkrollup and optimistic rollup will develop, leading to migrations similar to Layer 2, and we hope that interoperability between different solutions will be resolved or alleviated, which will greatly improve the performance bottlenecks caused by Ethereum.

Chain Catcher: Indeed, the rotation of various sectors brought about by the bull market has heightened everyone's enthusiasm. Therefore, whether in expectations or in the exploration and discussion of hot sectors, there is an increasing amount of discourse. In your view, what are the true issues worth discussing and contemplating?

Wangxi: I believe the true issue is that we cannot sacrifice security in pursuit of so-called efficiency. The objective security brought by decentralization is the core proposition of blockchain because large funds do not care whether transaction fees are high; they care about whether the chain is secure, whether it is sufficiently decentralized, and whether it will be controlled in the future. To put it directly, we need to avoid situations where financial institutions quote prices in the physical world, and now they are quoting prices on-chain.

Chain Catcher: But this bull market has already been defined as an institutional bull market, and the market has high expectations for Bitcoin's price.

Wangxi: The discussions about Bitcoin's surge may stem from price illusions. In fact, over the past three to four years, Bitcoin's compound growth rate has not been exaggerated. People may think the price is high due to the illusion created by the absolute price.

However, we do not make price judgments about Bitcoin, nor do we view its fluctuations in terms of fiat currency. We define Bitcoin's value unit as a "bit" or "satoshi." After all, Bixin is the home of Bitcoin and has always been a community of Bitcoin believers. Many of Bixin's users and employees are Bitcoin-centric. They do not see Bitcoin as a trading commodity but as a standard commodity, similar to the existence of the U.S. dollar and the Chinese yuan. So from this perspective, we believe that only when Bitcoin appears in the asset allocation of thousands of households will its foundation be more solid.

Chain Catcher: What do you think will be the major trends in 2021?

Wangxi: DeFi will definitely be a trend, but we will look at it more subdivided, such as micro-innovations in the DeFi derivatives track. This will also be one of Bixin's investment themes in 2021. Of course, we will also pay attention to and participate in native crypto community phenomena like crypto art.