Hash Global founder KK: Value Investment Practices in Web3

Source: KK, Founder of Hash Global

Editors: Yifan, Kevin, Moonshot Commons

Since 2023, the winds of change in the crypto world have become increasingly fervent in the diverse and developing soil of Hong Kong. In April 2023, the Web3 Carnival, hosted by HashKey Group and Wanxiang Blockchain Lab, grandly opened in Hong Kong, covering core topics across various Web3 fields and inviting over 300 influential and promising speakers along with more than 100 popular Web3 projects, communities, and media to participate. Additionally, the Web3 Carnival also invited representatives from major investment institutions and regulatory bodies to deeply analyze regulatory policies and outline development boundaries. This article will focus on the valuable experiences and industry insights shared by KK, the founder of Hash Global, during the 2023 Hong Kong Web3 Carnival regarding the paradigm shift in Web3 value investment.

Hash Global is a crypto asset investment institution based in Asia, with a business scope covering the global digital asset and blockchain ecosystem. Since 2018, Hash Global has been dedicated to investing in global Chinese entrepreneurial teams, with a particular focus on early-stage blockchain projects that integrate Web2 and Web3. Hash Global was one of the earliest supporters when Moonshot Commons was established and is an early investor in numerous projects such as RSS3, Mask Network, SeeDao, EthSign, imToken, Debank, Matrixport, Hashquark, and Meson Network.

Value Investment Logic in the Web3 Field

"New business models supported by new technological paradigms require new value assessment systems." Hello everyone, I would like to share Hash Global's six years of value investment practice in the Web3 field.

Before we entered the crypto asset management industry, I worked in commercial banks, investment banks, bond asset management, and stock asset management companies. I found that everyone advocates value investing, but the concept of value they discuss is not the same.

Let's take a look at the history of value investing: companies first emerged as vehicles for capital formation in 1602. The value investment methods that are now regarded as the Bible, such as PE/PS, have actually existed for less than 100 years. Buffett began practicing value investing and the cigar butt theory in 1965. The options valuation method emerged in 1973, and Bill Gross started practicing value investing in the bond investment field in 1982, using duration and other valuation methods.

Before him, investors in bonds typically held them to maturity. And friends who play Texas Hold'em know that Doyle Brunson only proposed the value system of positive EV and negative EV in poker in his book "Super System" in 2002. However, knowing is easy, but doing is hard; he didn't execute it thoroughly, as he particularly liked to play the trash hand 10-2. What I want to say is that the concept of value and its valuation methods are also constantly evolving; they are not static.

Let's look at a case of failure in value investing. I personally respect Buffett and Munger and also enjoy Munger's "Poor Charlie's Almanack." But the confusion about "what is value" also occurred with them. Amazon went public in 1997 with a market value of $430 million. At that time, Buffett said Amazon's profitability was weak and its valuation was high; in 2008, he said physical retailers had an advantage in competition and looked down on Amazon; in 2011, he was still saying Amazon's valuation was high; by 2017, Amazon's market value reached $1 trillion, and after the secondary market rose 2,500 times, Buffett finally understood Amazon's value and began investing in 2019.

Amazon was not a quiet unicorn making a fortune; it went public in 1997, and Jeff Bezos wrote a letter to shareholders every year. If you read carefully, it's not hard to find that this is a great internet company that always maintains a "Day One mentality." They have been continuously creating value for 30 years, but they are not presenting it in the way that Wall Street is accustomed to with PE/PS, nor according to Buffett's value logic. Amazon is creating value with new internet technologies; new technological paradigms create value, and new business models or new things supported by new technological paradigms require new value assessment systems; otherwise, you will lose badly.

Source: Hash Global

After years of experience in the investment field, we have summarized three principles to share with you: Principle One: The "value" of new things will not be recognized by the mainstream value judgment crowd at the time and may even be denied.

I have a good friend who is a bond fund manager. We have discussed several times whether Bitcoin has value, and now he basically doesn't talk to me anymore. I once met a well-known private equity fund big shot on a plane, and he said he was eager to learn and very open to new things. He asked me to explain Bitcoin to him. During the flight from Shanghai to Chongqing, I talked for two hours, but in the end, I felt I still hadn't made it clear. I consulted my former boss, Xiao Feng, about this, and he told me that stock value investors must adhere to their unchanged value investment framework, so it is really difficult for them to understand Bitcoin.

Principle Two: The formation of a new value assessment framework for new things needs to mutually promote and evolve together with the new things themselves.

Investors propose new valuation methods and logical frameworks to understand Bitcoin, Ethereum, and Web3; meanwhile, we have seen Web3 entrepreneurial teams in recent years striving to create value in ways that investors can understand and realize value. The market will gradually form a consensus in this process.

Principle Three: The formation of market consensus on the valuation model of new things takes time, and this process presents huge opportunities.

The market consensus on valuation methods is determined by mainstream capital in the market. The consensus process for PE/PS valuation methods took decades, and this consensus is still continuously adjusting and optimizing. The valuation methods for bond duration took about ten years. Web3 has just begun, but in this formation process, especially in the early stages, there are huge opportunities for investors.

Source: Google We started learning about crypto assets in 2016, reading reports and various papers. In 2017, I read John Pfeffer's "A View on Crypto Assets from an Institutional Investor," which greatly shocked me. The article is quite long, and I read it about five or six times, unable to put it down. Let me share a few sentences:

"Although the father of value investing dismissed Bitcoin as 'rat poison,' the first principles of value investing are based on independent thinkers with reliable valuation logic. When new assets first appear, there is no corresponding valuation logic; value investors should strive to discover new valuation logic.

I believe that distributed ledger technology (blockchain) has permanently changed the foundation of capital markets. Systems supported by the internet, in terms of their global scale, have the lowest costs. Therefore, we believe that in the not-too-distant future, the vast majority of investable assets will be supported by distributed ledger technology. In crypto asset investment, the term 'crypto' will eventually be forgotten."

Just as internet e-commerce no longer needs to mention the word "internet."

Web3 Valuation and Investment Practice

"Strive to discover new valuation logic." Next, let's talk about Web3 investment.

First, Bitcoin. There are already several valuation models in the market, such as the S2F model and the Commodity model. Then there's Ethereum, which, after transitioning to the POS consensus mechanism in September last year, has become a "currency" with a total supply that is continuously decreasing. There are also several valuation models in the market.

BNB is the platform token of Binance, and for us, the valuation challenge is not as great as that of Bitcoin and Ethereum. Its value sources include trading discounts, profit buybacks, staking on the BSC chain, and staking on the Greenfield storage network, among others.

For the valuation of BNB, we respond to John Pfeffer's call: "Strive to discover new valuation logic." We use currency valuation equations, combined with DCF and other valuation methods for valuation. Let's take a look at this formula:

MV = PQ

PQ is like the GDP of a country, representing the total economic value of the Binance ecosystem. M contains two factors: the price of BNB multiplied by the number of BNB. V is the circulation speed of BNB within the ecosystem. The biggest challenge here is how to estimate the circulation speed of BNB within the ecosystem.

I pondered for several days and finally came up with a method at a Starbucks near my home: we need to propose two assumptions:

1. Assume that the circulation speed of BNB on centralized exchange platforms can replace the circulation speed of the entire ecosystem;
2. Because we have historical price data, we assume that the market price is reasonably accurate, allowing us to backtrack the circulation speed from last year. We assume that the circulation speed remains unchanged, so we can estimate this year's reasonable price of BNB based on this year's ecosystem value. Of course, there are assumptions involved, but this valuation model is the first attempt in the market to incorporate various value factors of BNB into one model. We also hope that market peers can optimize this basis and propose better methods. Source: Hash Global

In the past few years, we have produced four reports. In March 2019, we published the first report, believing that BNB was undervalued; at that time, the coin price was 19, and we predicted it would reach 106. Zhao Changpeng saw it and said he liked it and forwarded it. When Zhao Changpeng was in Shanghai, he was my poker buddy. He asked me to invest when it was at $0.12, but I didn't understand it and didn't invest. By the time it reached $20, I finally understood. I missed out on the previous 150 times. We continued to analyze and actively entered the market. In 2021, we saw it reach 655, and it later peaked at 691. We also became one of the earliest 21 nodes of BSC.

The valuation challenges in this field are significant, and market consensus is far from being formed. The valuation fluctuations between the primary and secondary markets are substantial. Well-known public chains like Filecoin and ICP are examples, which I won't elaborate on. Source: Hash Global

For the NFT field, we have also developed a new valuation method internally, which we call the DRIC model. To elaborate, it evaluates community IPs like Azuki or the total valuation of valuable blue-chip NFTs from four value dimensions: Drop (airdrop), Right (rights), IP (brand), and Community. As you know, NFTs also have the value factor of rarity. We invested in a team called NFTGo, which has developed a method for calculating rarity parameters. Using their method, we calculated the reasonable floor price for Azuki based on the total valuation. We believe the floor price for Azuki should be 22 ETH, while it is currently around 14. You might consider buying one.

DRIC model for NFT asset valuation: Azuki, Source: Hash Global The primary investment methods in Web3 are also quite different from traditional VC. There are two methods for project financing: token financing and equity financing. One of our main investors, Liang Xinjun from Fosun Group, told me a few years ago that we could use the ratio of the token amount of the team plus investors to convert the corresponding valuation of equity financing, which is very useful. We have reasonable grounds for discussing fair valuations with project parties.

There are many differences between Web2 VC and Web3 VC, which I won't elaborate on.

In addition to VC investment, we also manage and operate a secondary market fund. This fund operates entirely according to the investment methods of stock funds, investing in leading projects across various tracks. We qualitatively analyze value from five dimensions and then quantitatively analyze the value of tokens from various business perspectives. We assess a target price for each token we build a position in to guide our investments.

This is our summary of various valuation methods for new assets in Web3.

Source: Hash Global

Conclusion

"Breakthrough in cognitive paradigms."

Finally, I would like to share a quote that I use to remind myself not to cling to existing knowledge frameworks, which was said by Voltaire in 1729:

"All paper money that is regarded as treasure will ultimately return to its intrinsic value, which is zero!"

Due to time constraints, I did not discuss some pages in detail. If you are interested in our materials, you can contact me on Twitter @longwinsk and my colleague Will @willjiang_eth.

We will also regularly share our investment views and new understandings of value investing on our Twitter and official website. I hope today's sharing can provide some inspiration to everyone. Thank you all.