Leaving the Cai Chongxin Family Office, an all-in Web3 year

Author: Chen Zhiyan, Undercurrent

When you believe that opportunities in a place are nearly exhausted, leaving the table may not mean "being a coward."

In mid-April, I met Huang Yu, who had just returned to Shanghai from the Hong Kong Web3 conference. He painted a long-lost, vibrant scene for us—an agenda packed from 9 AM to 11 PM every day; while walking, he would occasionally run into acquaintances and sit down to chat for an hour; there was no need to worry about idle time, as "the previous person would naturally arrange the next appointment for you."

"The atmosphere was very lively," Huang Yu said, reminiscent of the golden age of Chinese VC, "or rather, this is what any thriving industry looks like."

A year ago, Huang Yu was the head of China investments at Blue Pool Capital—a family office co-founded by Cai Chongxin, Jack Ma, and others. Now, at 36, he has become a founding partner of an investment firm called NextGen Digital Venture (NDV), focusing on providing investors with a compliant way to invest in cryptocurrencies (Crypto).

In April 2023, NDV launched its first fund. This fund was established in collaboration with cryptocurrency wealth management company Metalpha Technology Holding Ltd (NASDAQ: MATH).

"Undercurrent Waves" learned that so far, the fund has raised $100 million from global investors, including institutional investors and top family offices. Since its establishment a little over a year ago, the fund has achieved a performance of +170%, outperforming Bitcoin by over 50% and Ethereum by 100%.

With experience from the perspective of investors, Huang Yu has made some special arrangements for NDV: for instance, to address the concerns of wealthy individuals regarding the compliance and security of Crypto, NDV chose a "Type 9" structure based on Hong Kong's "asset management," placing assets under regulation. Using DBS as the custodian bank, daily transaction records are sent to the Hong Kong Securities and Futures Commission for filing, and professional third-party fund administration provides investors with corresponding net asset value updates. These designs allow investors to gain Crypto-related returns without actually holding virtual currencies.

"This is the most investor-friendly structure in the market, allowing investors to earn returns in a compliant and mature custodial system," Huang Yu said.

Despite achieving impressive results within a year, Huang Yu believes that Crypto has not yet formed a new world. He hopes this brand-new market can grow, but as an asset manager, he also looks forward to more rational and long-term investors. "Crypto is an alternative asset with potential and significant risks. We operate in the highest-risk industry in the most compliant way."

The following is the dialogue------

Part.1 In the Middle Ground of Crypto

"Undercurrent": NDV's performance in its first year has outperformed the soaring Bitcoin. What does this mean to you?

Huang Yu: I studied history at Peking University, and in my view, individual power is insignificant in the face of the larger trend. What we do is merely align with the tide of the times and make choices. Since the reform and opening up, China has experienced several waves in various industries—from the global expansion of manufacturing to the booming real estate sector during urbanization, and then to the e-commerce boom brought about by the internet revolution. Each wave represents a significant opportunity lasting over ten years.

Today, in the context of so-called "de-globalization," cryptocurrencies (Crypto) represent a brand-new asset allocation method, and they will be an indispensable part of future mainstream allocations. It is not just a technological innovation; in my view, it is the optimal solution for global allocation. Any phase of success that NDV has achieved is not something to be complacent about because the real hero behind it is the change of the times, which has provided unprecedented new opportunities.

"Undercurrent": Crypto has indeed just surged, but can this be sustained?

Huang Yu: Crypto itself is a new opportunity that has been over ten years in the making. I have been continuously communicating with the largest institutional investors globally (sovereign funds, pension funds, endowment funds), and the current consensus is that the global geopolitical situation will remain unstable for some time. The U.S., as the issuer of the reserve currency, has abused its power, leading to excessive liquidity and rising inflation, which will further exacerbate the uncertainty of the dollar. The current high interest rates of the dollar are difficult to sustain in the long term, so to maintain the dollar's dominant position, war will be a very natural choice for the U.S. All these factors drive investors to seek diversified asset allocations in terms of regions and categories. This is a long-term positive for Crypto. In fact, the invention of Bitcoin was also a response to the excessive printing of money in the U.S. in 2008.

The remaining question is: how much are you willing to allocate to asset safety?

"Undercurrent": If investing in what you call a "great era" is the right big decision, what are the small decisions that NDV has made correctly in gaining returns?

Huang Yu: We actually use many quantitative indicators for decision-making; much of the data in the Crypto world is publicly transparent. For example, on June 15 last year, we monitored that the top 10 Bitcoin addresses in the world increased their holdings by 7,500 Bitcoins in one day (valued at $500 million today). Thirteen days later, the world's largest asset management company, BlackRock, applied for a Bitcoin spot ETF. Although Crypto is anonymous, the movements of large holders can be monitored, and from a gaming perspective, we rely heavily on data. Although NDV is a fund that invests in cryptocurrency stocks, we use blockchain tools combined with traditional financial market methods for investment.

"Undercurrent": Compared to those who "do not believe" in Crypto or are "all in," you have chosen a middle ground.

Huang Yu: In the public's perception, Crypto is seen as gambling. Objectively speaking, the unregulated parts of this field indeed breed many problems and scams.

For the digital currency natives, Crypto is the "gold rush" of the new era. Initially, during market booms, many Crypto practitioners can earn a lot of money in this industry, but that does not mean everyone can retain those earnings.

Due to my previous work experience, I have a richer toolbox than others. Simply put, my family office experience makes me better understand LP's needs and the impact of macro trends on a single asset class, while my VC background allows me to more easily understand the changes brought about by technology with a long-term mindset. The prospects for Crypto are good, but because of the very high leverage, there will be a round of over 70% corrections every few years. Being able to make money in phases is not the most important thing; what matters is a safe exit.

"Undercurrent": Why did you choose to leave the family office in 2023 to establish a Crypto fund?

Huang Yu: From the outside, the transition from a family office to Crypto seems significant, but for me, the difference is not that great because investing itself is about pursuing major structural changes: after the pandemic, the instability of the global economic situation has increased, providing opportunities for innovation in Crypto assets. In long-term diversified asset allocation, for investors, compliance is more important than returns. After spending half a year researching various types of Asian institutions in Crypto, including primary, secondary, quantitative, and arbitrage, I found that there is currently a lack of compliant channels to allocate Crypto asset classes in the market, which led me to decide to shift to the Crypto investment field.

There is also a more emotional reason. I have been an NBA fan for nearly 30 years. In 2022, I went through a rather desperate period in Shanghai, during which my favorite NBA star, Curry, led his team to win the NBA championship all by himself at the age of 34, just like me. I witnessed his transformation from a pure outside shooter to a player who could compete fiercely on the court. In a year when everyone least expected it, he led his team to victory. This gave me tremendous entrepreneurial courage. Even in the later stages of his career, Curry never gave up on change. This made me realize that it is never too late to change.

"Undercurrent": Before establishing NDV, did you anticipate the surge of Bitcoin in 2023?

Huang Yu: 2022 was a year of significant decline for Bitcoin, and many people had already left Crypto by then. To dare to do this at that time meant having a clear understanding of the future direction of this specific asset.

In fact, Bitcoin exhibits clear cyclicality, with most corrections occurring 1-2 years after reaching a historical high. For example, from $1,163 in 2013 to $152 in 2015, then to $19,666 in 2017, and back down to $3,100 at the end of 2018, before rising again to $69,000 in 2021. Each time it reaches a peak, Bitcoin's price tends to retract by 80%-85%. This volatility mainly stems from Bitcoin's issuance and mining mechanisms, dollar tides, and the high leverage effect caused by its lack of regulation.

Therefore, I started my entrepreneurial journey when Bitcoin was at the bottom of this cycle. If investors can also view Bitcoin from a long-term perspective and understand and accept its cyclicality, then its long-term returns are quite attractive.

"Undercurrent": In 2023, we can hardly find a newly raised fund in the primary market that has been successfully raised. From your experience, will Crypto be the only solution for new funds in the future?

Huang Yu: I don't like to make any choices through exclusion. Moreover, the market is rich and dynamic, and there will definitely be stage-specific optimal solutions at each phase.
Currently, NDV's positioning is the most suitable for me. Due to my previous professional experience, I can directly feel that Bitcoin has become an asset class overseas, which has a positive impact on the entire Crypto market. I believe the market is currently in a phase where traditional finance is gradually accepting Crypto.

"Undercurrent": Indeed, this year the U.S. SEC and Hong Kong have successively approved spot Bitcoin ETFs. What does this mean for the Crypto investment field?

Huang Yu: After the approval of the Bitcoin ETF in the U.S. at the beginning of the year, the price rose from $40,000 to $70,000, with net inflows through the ETF exceeding $15 billion. This means that these ten ETFs manage a total of $22 trillion, indicating that their clients allocated less than one-thousandth of their funds into this market, which nearly doubled Bitcoin's price. If the future allocation ratio reaches 1%—and this is not difficult—what does that mean for this asset class? It is very hard to estimate what scale Crypto will reach in the future. But one thing is certain: we are far from the peak.

Those who previously participated in Crypto investments are actually quite similar to Chinese VC practitioners before 2006. They were the early movers, many of whom came from different industries to invest. They are perceptive but not closely related to professional finance. However, in the future, as a large asset class, Crypto will certainly attract more funds and will need corresponding, more professional management.

Part.2 More Conservative vs. More Adventurous

"Undercurrent": In the midst of change, investors tend to adopt a more conservative and stable attitude towards assets, which seems contradictory to the risk-prone nature of Crypto.

Huang Yu: I don't see it that way. We have always advised investors to allocate 1%-5% of their assets to Bitcoin as a hedge strategy against global uncertainties. The high volatility of assets should be managed through position control, rather than completely avoiding participation.

Today, in the short term, Bitcoin is a risk asset, but in the long term, it is more of a safe-haven asset. In the short term, as a new asset, the volatility is normal due to the lack of understanding from new entrants, which is related to market capitalization/stage. Early tech stocks were similar. However, in the long term, Bitcoin has its long-term value as a tool against dollar printing.

In fact, colonialism has never disappeared from the world. The first generation of colonial empires was the British Empire, whose method of ruling the world was to open direct stores and send governors to collect taxes globally. The second generation of colonial empires was the U.S., whose approach was more advanced, akin to a "POS machine + franchise" model to collect coinage taxes, specifically by printing money.

As the U.S. continues to print money, more countries will begin to resist being harvested and will decouple from the dollar, gradually forming a consensus network around Bitcoin. Countries and regions like El Salvador have already adopted Bitcoin as a reserve currency, which is a great start.

"Undercurrent": How do you view regulatory risks?

Huang Yu: In general, it is clear that domestic regulations prohibit the use of RMB to buy Crypto, but there are also some cases where courts recognize Bitcoin as an asset that is protected. From NDV's perspective, we still focus on Hong Kong, serving offshore asset allocations. Currently, Hong Kong has legislated to confirm the legality of digital assets, so specific operations are also based in Hong Kong.

Regarding Crypto itself, the more important factor is the attitude of the U.S. After the approval of the Bitcoin ETF, the U.S. has already regarded it as a new asset. From a policy perspective, both Biden and Trump, the candidates from both parties, support Crypto, so the regulatory landscape of major powers has basically been determined. In the long run, whether it is U.S. listed companies or central banks of small countries, there will be incentives to purchase Bitcoin, and the future inflow of money into this asset class will not be less than a trillion dollars.

"Undercurrent": Although NDV's performance seems good at the moment, how many times has it experienced drawdowns in the past year?

Huang Yu: A 20% drawdown in Crypto is very normal. In the past 13 months, there have been two significant drawdowns—one of 8% and another of 15%. However, even accounting for these two drawdowns, the overall floating profit is around 170%, and the risk-reward ratio is relatively appropriate.

From an overall risk control perspective, the fund has set a lock-up period, mainly because this asset class is different from others, with clear volatility and cyclicality. The lock-up period is actually intended to encourage LPs to maintain a relatively long-term attitude towards this asset. Over the past 11 years, Bitcoin has consistently shown a pattern of long bull markets and short bear markets, but even in bull markets, a monthly drawdown of 10-20% is quite normal. However, any participant seeing a 20% drop in a new category will panic. But from our perspective, if a major trend is occurring, one should not exit. We advocate that LPs allocate 1-5% of their assets into Crypto-related products.

"Undercurrent": We have previously studied some family offices in the Chinese market, and a common difficulty for practitioners is gaining trust. How does setting a lock-up period address the trust issue?

Huang Yu: The core of all asset management industries is to earn money from trends; the key is how to use a reasonable incentive mechanism to align your interests with those of the investors.

On one hand, NDV's partners put in $6 million on the first day, which strongly aligns their interests with all investors. On the other hand, apart from a subscription fee for daily operational expenses, NDV currently does not charge a management fee. This means that as managers, we only take a share of the profits upon exit. We do not want to give ourselves too much risk-free return during the startup phase.

"Undercurrent": What value does your experience working in a top wealthy family office bring to you?

Huang Yu: Besides having a larger financial toolbox than ordinary investors, I look at global capital flows and the movement of large capital. I enjoy viewing problems from the perspective of historical trends. Compared to the past, today's world is more inclined towards confrontation, so capital flows will be very unstable. In uncertain times, relatively neutral third-party assets like Bitcoin are easily favored.

"Undercurrent": What do you hope people's understanding of Crypto will be?

Huang Yu: It is still a new alternative asset. In the future, in global asset allocation, Crypto will be a stateless asset in terms of nationality and can partially replace dollar VC in terms of returns. Because a qualified asset portfolio always needs to include high-risk, high-return allocations.

"Undercurrent": Is Crypto the only choice for high risk and high return in the future?

Huang Yu: AI certainly is as well. But the opportunities to directly participate in AI with assets in the primary and secondary markets are still too few. In the long run, I believe AI will eventually combine with Crypto at some point in the future. AI itself is advanced productivity, but if any country or individual can control AI, it will be a very dangerous thing and will hinder the promotion of AI. Crypto is a production relationship that no one can control, which can organically combine with AI.