Exclusive Interview with Shen Yu: The Main Incremental Funds Come from ETFs, This Bull Market May Not Have a Shanzhai Season
This article will discuss Shen Yu's understanding of industry cycles. In addition, with the Bitcoin halving approaching, Shen Yu shares how the changing landscape of mining will affect the market. Interestingly, he also shares his current mental state regarding investments.Original Source: BlockTempo
During the Hong Kong Web3 Carnival, BlockTempo had the privilege of inviting Shen Yu, co-founder and CEO of Cobo, a digital asset custody solution provider, as well as co-founder of the world’s largest mining pool, F2Pool, for an exclusive interview. We discussed Shen Yu's understanding of industry cycles, the impending Bitcoin halving, and how the changing landscape of mining will impact the market. Interestingly, he also shared his current mental state regarding personal investments.
How Bitcoin Halving Impacts Mining Companies
First, BlockTempo raised questions about the competition and elimination mechanisms among Bitcoin mining companies, asking Shen Yu what preparations major mining companies have made before and after the Bitcoin halving, and which types of mining companies are more likely to survive this process. Shen Yu stated that there are actually three main types of companies in the Bitcoin mining industry, each with different characteristics and strategies to cope with market challenges.
Firstly, North American mining companies primarily rely on publicly listed companies, depending on cheap oil and gas resources and some redundant electricity resources in North America. During the last bear market, many of these mining companies went bankrupt and restructured due to high leverage and other reasons, clearing a significant amount of debt through discounted sales.
In the past six months, with the significant rise in cryptocurrency-related stocks in the U.S. stock market, these mining companies seized the opportunity to raise substantial funds, strengthening their cash flow and beginning to expand into new business areas such as Bitcoin's Layer 2 solutions and NFTs.
The second type of companies is mainly supported by Chinese capital, distributed in South America and Africa. These unlisted companies do not have strong financing capabilities and pursue low-cost operations, relying on traditional mining return cycles. In the past six months, many low-cost, high-speed expansion mining farms have emerged in Africa, with costs about half of those in North America. Especially after the Bitcoin halving, these mining companies are expected to expand rapidly due to their ability to operate high-power machines.
The third type consists of emerging mining companies supported by national investment institutions. These companies aim not only for profit but also to participate in market competition and secure early Bitcoin production. Some small countries have begun to utilize national funds and local surplus electricity to invest in building mining farms.
Overall, the main players in the market can be categorized into these three types. Currently, the Bitcoin halving has a significant impact on the second type of mining companies, as they are more sensitive to cost changes and are undergoing large-scale relocations of mining machines to optimize mining costs.
The Altcoin Season May Not Arrive
Currently, the daily issuance of Bitcoin is about $60 million to $70 million, and after the halving, the block reward will be directly reduced by half. In this regard, BlockTempo asked Shen Yu for his views on the impact of this Bitcoin halving on altcoin markets, including potential price increases and expectations.
This time, it is highly unlikely that there will be an "altcoin season," because the players in the market now are different from those before. From the miners' perspective, after the Bitcoin spot ETF was approved on January 10, they had already hedged risks months in advance to cope with the risks of the Bitcoin halving. Additionally, we have seen many publicly listed companies raise substantial fiat funds by leveraging the good news from the ETF approval.
Some mining companies have relocated their mining farms to lower-cost regions in South America and Africa, reducing their sensitivity to costs, allowing them to maintain a gross profit margin of about 10% to 20% even when using older mining machines. Therefore, even in the case of Bitcoin halving, the economic impact on these miners is relatively small, especially considering that the price of Bitcoin has already risen before the halving.
For investors, especially those investing in altcoins, the characteristic of this cycle is that funds are primarily flowing into Bitcoin through channels like ETFs. As for when these funds will flow into other cryptocurrencies, we are still observing.
In May of last year, Shen Yu assessed that the market was in the "early stage of a bull market," and the absolute bottom of the bear market had passed. The cryptocurrency industry was in a state of searching for new narrative logic and development. What does he think about the current stage of this cycle?
I think we are likely in the mid-stage of a bull market. The market has begun to warm up and has found new narrative logic, but it is not yet in a state of high leverage and FOMO.
Shen Yu also reminded readers that because the market is a dynamic and complex system of multi-party games, relying solely on a single indicator or historical data to predict market tops is often unsuitable for the current situation. He suggests that the best practice is to continuously observe market developments and rebalance and redistribute assets when reaching a certain stage. This approach can help maintain a stable mindset during rapid market declines or bear markets and may enhance their absolute returns.
The Impact of AI Chip Shortages on the Mining Landscape
As global demand for chips and advanced processes continues to grow, the demand for new Bitmain S21 mining machines (using 3 and 4 nanometer technology) is directly competing with the demand for AI chips. Shen Yu explained the chip demand dynamics between AI companies and mining machines and expressed how he views these factors affecting the future of Bitcoin mining.
From my perspective, the two may not be in a competitive relationship. Due to the relatively simple structure of Bitcoin chips and the pursuit of extreme power efficiency, this has driven rapid iterations in chip technology, significantly shortening the traditional 18-month development cycle. As early as 2018 and 2019, some mining chip manufacturers began developing AI-oriented chips because both share similarities in computation and power control.
Bitcoin has given rise to a new chip design philosophy called the fully customized methodology, which essentially means using some manual wiring to apply the same technology to chip processes, further squeezing its performance to achieve better power efficiency. These methodologies have also begun to be applied in the design of some AI chips, and we have seen some companies like Bitmain and Canaan producing such AI-oriented chips, which have already achieved millions of units in shipments in the market.
Looking ahead, I believe that mining and AI chip companies will gradually merge, and the boundaries between products will become blurred. Although the mining market is currently a cash cow, generating hundreds of billions of dollars annually, the growth focus of the chip industry may shift towards AI in the future. The experience and technology accumulated in crypto mining will contribute to the development of the AI field.
Moreover, for readers unfamiliar with the mining industry, it is essential to understand that there is a time lag between price fluctuations in the crypto market and changes in hash power, typically ranging from 6 to 12 months. Therefore, changes in hash power over the next six months will depend on chip prices, unless prices reach extreme highs, which would then affect demand changes on the production side.
The Necessity of Expanding the Bitcoin Ecosystem
In a review at the end of 2023, Shen Yu expressed some surprise at the development of the Bitcoin ecosystem. For many Bitcoin "valueists," this may seem "unnecessary." As it stands, not only Layer 2, but also side chains, rollups, NFTs, etc., the BTC ecosystem can be said to be flourishing, with significant user investment participation. Shen Yu shared his views on the current state of the Bitcoin ecosystem.
Currently, the Bitcoin system can be divided into two parts. Firstly, the Bitcoin main chain primarily serves as a store of value, making it difficult to implement significant updates or iterations. Its core function is to ensure decentralization and relative stability. Based on this, many innovative attempts have gradually emerged from the bottom up. Over the past year, we have seen many interesting attempts emerging from the grassroots. Ultimately, everyone found that innovating on Bitcoin's first layer is quite challenging, and they had to choose to develop on a second layer or a side chain.
Additionally, while technologies like the Lightning Network lack grassroots application scenarios, recent economic incentives have somewhat addressed this issue, attracting a large number of real users to experiment within the BTC ecosystem, which is a gratifying development. At the same time, we are closely observing the development trends of these second-layer and side-chain technologies, which are still in their early stages.
The current state is such that, with a large amount of assets accumulated on Bitcoin, there is an urgent demand for these assets to seek returns and interest on Ethereum, which has not been met for a long time. The sudden emergence of these scenarios has prompted everyone to test and try them out.
What will the Bitcoin ecosystem ultimately look like? It is not yet very clear, but these attempts are positive, and we need to experiment to eventually find a path.
When discussing the Bitcoin ecosystem, Shen Yu also shared the challenges currently faced. He believes that although it is in the early stages, the ecosystem is progressing in an optimistic direction.
Some large companies and Bitcoin Core's early views on the Bitcoin ecosystem show a positive trend. Even if some members of the Core team may not favor emerging changes, they cannot stop these developments, which is the charm of decentralized networks. This network naturally gives rise to many market demands and innovative play styles, even if these innovations may seem clumsy in the early stages.
Just like many things that emerged in early Ethereum, which were chaotic and filled with various problems, successful cases eventually did appear. The same goes for Bitcoin; we should observe more and give it enough time and patience to develop, and some revolutionary new developments should emerge. Currently, we are still in the early stages of this process.
In December last year, Bitcoin core developer Luke Dashjr posted on X, criticizing inscriptions as a form of sending spam messages to the Bitcoin network, hoping to fix it before the latest version in 2024. This became one of the main factors for the significant drop of $ORDI at that time. BlockTempo also took this opportunity to ask Shen Yu for his insights.
The Bitcoin ecosystem is a process composed of a three-party game: core developers develop code and submit proposals; miners use hash power to vote on whether to support and implement these proposals; and finally, users vote.
This structure ensures the decentralized nature of the system, meaning that even the Core Team cannot unilaterally reject a feature or new perspective. This decentralization is a significant advantage of Bitcoin compared to other tokens or chains. In the current state, any new developments on-chain are difficult to be determined by a single entity.
Competition in Custody Business and the Current State of DeFi Integration
With the maturation of the cryptocurrency market, including the launch of Wall Street ETFs and the gradual compliance of exchanges, traditional banks and custodians are entering the cryptocurrency field. What does this mean for Cobo, which has been dedicated to wallet custody since 2017?
First, this is a good thing. For a long time in history, new users in the crypto industry, especially novice users, have been troubled by the question: "I know cryptocurrencies may have value and a future, but after purchasing them, how should I store them safely?"
With the development of modular blockchain narratives, the performance of blockchains will gradually be resolved in the next two to three years. The possible final state is that many applications we use will be built on blockchain technology, but users will not be aware of it, such as developments in MPC non-custodial wallets, smart wallets (Smart Contract Wallet/Account, SCW), and passkey-based AA wallets.
Users will have keys in a relatively decentralized manner without realizing it. The development of a large number of good on-chain experiences and non-custodial wallet technologies will ultimately allow many users to genuinely use blockchain technology in various application scenarios.
For Cobo, we have always focused on how to securely store and use private keys, as well as a series of risk control measures during the usage process. We provide different underlying private key management methods for different stages of industry development, from the earliest centralized HSM (Hardware Security Module) solutions for institutions to meet their internal risk control and audit requirements while managing multiple users' permissions.
As the industry develops, we have also provided MPC-based multi-signature solutions to avoid single-point risks for institutions, allowing multiple institutions and insurance companies to share private keys and implement multi-signature-like solutions. At the same time, we are also developing on-chain solutions based on smart wallets, including user control wallet solutions.
Cobo focuses on making attempts and wallet innovations for the entire crypto market in anticipation of a large influx of users in the future. From my perspective, the entry of traditional institutions will widen the path. Ultimately, the two core issues are performance and user experience, especially after solving the non-custodial experience, we will usher in a better, truly grounded state of crypto development.
Reflecting on the industry's development, at this point in time, does Shen Yu believe that the "decentralization" ideology of the gold standard is contradictory?
The development of the cryptocurrency industry has tried many technical routes within blockchain, from the earliest impossible triangle to discovering performance issues, and then to the problem of expensive block space.
After nearly five or six years of attempts and development, everyone ultimately chose a modular blockchain approach, making some compromises and balances at different levels to reduce the overall blockchain costs to a level that end users can adopt. To some extent, this sacrifices a certain degree of decentralization, but for high-value applications at the top level that have a great demand for decentralization, they can still choose Layer 1, where the costs are higher, and it is acceptable to pay that price for freedom and decentralization.
However, the vast majority of the messages formed by the value network we transmit will not all be of high value; there will certainly be a large number of low-value application-side messages that can ensure security and transparency through a lower degree of decentralization. It can be said that there are now various choices and combinations that make blockchain scenarios richer.
The Investment Philosophy of Whales: Maintaining Mental Balance
During this Lunar New Year, Shen Yu provided encouragement to investors in the crypto circle on the X platform and reviewed his previous "plan to accumulate crypto assets from $1,000 to $100 million." He suggested that when personal assets reach $10 million to $100 million, one can invest 10-15% of assets in promising sectors. This not only keeps investors busy but also prevents unplanned investment behaviors, and he can be seen actively tracking trends on the X platform.
Therefore, BlockTempo also asked Shen Yu if there are any particular sectors he is focusing on recently. What trends must be emphasized this year?
My style is to try some fresh and interesting things, experiment, and observe the development of these technical routes. As of 2024, I am particularly focused on the development of "modular blockchains."
From the scaling issues in the Bitcoin ecosystem in 2017 and 2018 to the scaling issues in the Ethereum ecosystem, it took seven or eight years for the market to deliver an answer, which is modular blockchain, and it has already demonstrated practical application cases. We do not yet know the extent of its state and upper-layer applications, but this trend is already very certain. This market could be the next market worth over a hundred billion dollars, so I am personally focusing a lot of energy and emphasis on this large segment of modular blockchain.
Interestingly, BlockTempo also asked Shen Yu about his current mental state regarding investing in cryptocurrencies. Does he still experience FOMO?
FOMO is something everyone will experience because groups have emotions, and the underlying biological principle is that people will FOMO. The best thing I did in 2023 was spend more time reading and reflecting on the pitfalls I encountered and the things I did poorly after the market turned bearish. The biggest gain in 2023 was reducing the FOMO mentality.
Often, you just need to conduct a thought experiment. For example, when you see something new and exciting, if you think about it for a day or two, that excitement will pass, and you may not actually execute or try it.
You just need to understand what its core value is and what value it can capture. Then you might not pursue it because you realize it may just be a short-term thing.
Expanding your perspective from a local view to a higher level to look at the entire market will reveal that many actions are actually meaningless. You will avoid engaging in those experiences that may seem good in the short term, and sometimes even provide a lot of incentives that feel good, but in the long run, they are harmful. When you get used to thinking from a broader and more distant perspective, you can escape that FOMO mentality.
In the interview, Shen Yu also shared that investors from different eras have different perceptions and reactions to the market. Notably, with the rise of the new generation of investors, he observed that especially post-2000 investors, who have grown up in a digital and internet environment, are more sensitive and adaptable to market changes.
The new generation of post-2000s is more adapted to the entire internet development process because they have been internet natives since birth.
They are more sensitive to market emotions. For us old-timers in the crypto space, our sensitivity on this side is certainly not as good as everyone thinks. We have also realized this trait, so we pay less attention to short-term market emotional fluctuations.
You need to clarify what kind of money you are making: are you making money from market emotions or from cycles?
Different types of money have different return targets.
For the newcomers, especially the younger generation, their initial capital accumulation may be less; however, they have a lot of time and a good sense of the internet. Under these advantageous structures, their path to observing market emotions is more suitable for them. This is a significant difference between the old crypto circle and the new crypto circle; many post-2000s have already moved on without us… (laughs)
I think the new generation of post-2000s is great. They are more adapted to the entire internet development process because they have been internet natives since birth.
The Future of Crypto People in the AI and Metaverse Era
As the interview neared its end, as a wallet custody provider and crypto OG, Shen Yu candidly spoke about the transformation process of the industry, responding openly to the impact of AI on the cryptocurrency industry and wallet custody. What should crypto people understand about AI? What will the future look like when crypto people start using AI?
I think we are at a very good intersection of time because we are basically in a period of rapid development of multiple technologies. Blockchain technology has solved performance issues over the past decade, AI technology is beginning to be widely applied, and future autonomous driving and robotics technologies are gradually taking shape.
What is exciting is the integration of these technologies, such as the native interaction between blockchain and AI, and the direct interaction between a large number of IoT devices and AI agents. In this direction, each terminal and AI agent may have its own smart wallet and keys, allowing them to autonomously purchase data, trade, and invest within the scope authorized by humans.
In the future, this cross-industry integration will require more foundational modules to be perfected, including improving the accuracy of cryptographic technologies and AI models to achieve large-scale implementation of blockchain technologies and applications.
In the past two years, with tech giants launching more advanced VR hardware, market expectations for the metaverse have gradually increased. These innovative hardware devices not only enhance the quality of immersive experiences but also lay the groundwork for future metaverse application scenarios. How does Shen Yu view the future so-called "metaverse"? Will it still be dominated by Web3?
The ultimately realized metaverse may differ significantly from the FOMO imaginations we had during the bull market over the past two to three years. Its core lies in the data and ownership in virtual spaces being stored and presented through blockchain technology, with user experiences becoming more seamless. In the past, we first issued on-chain assets, speculated on assets, and then sought their application scenarios. However, in the future, as chain performance improves and data storage costs decrease, a large number of games and metaverse applications will allow high-value data assets to be stored on the blockchain seamlessly.
Additionally, combining the native characteristics of blockchain, such as DeFi and AMM, will promote spontaneous value discovery and enhance financial attributes. Instead of relying on NFTs to find applications as in the past, it would be better to reverse this approach and put mature application assets on-chain. This process will be driven by the development of hardware technologies like AI and VR.
During the previous metaverse craze, many investors and users rushed to purchase virtual land, which was considered valuable digital assets across multiple platforms. However, after the initial investment frenzy, many began to question the actual value and purpose of these investments, especially when they realized that aside from ownership, they were unclear on how to effectively utilize these assets to create value. At the end of the interview, Shen Yu stated:
Looking back, Crypto has done two things in the past 10 years: first, we issued a large number of on-chain assets, like in 2017 and 2018, when a lot of ICOs were issued purely based on concepts and speculation, similar to the internet bubble of 2000, where simply buying a domain name could lead to speculation. In the early days, this indeed promoted industry development; this was the bubble period.
NFTs are similar; we first issued a large number of assets, then experimented, and after the bubble burst, we ultimately still need to rely on applications. The internet ultimately developed through a large number of applications that genuinely solved real-world problems, benefiting individuals collectively. The future of Crypto may follow the same trajectory. There are many opportunities hidden within the time machine principle, and we can roughly compare that the final state may be similar.
Therefore, a technology will inevitably go through a bubble period, followed by a phase of mass enthusiasm, and finally reach true maturity. This is a typical cycle of technological development, and Crypto cannot escape this process.
