Original article: The Rollup
Compiled/edited by Yuliya, PANews
After the cryptocurrency market has experienced multiple rounds of bull-bear conversions, VanEck's portfolio manager Pranav Kanade is undoubtedly one of the best perspectives for observing the flow of institutional funds. In the latest in-depth conversation with The Rollup, he revealed the strategic shifts that institutional investors are experiencing, the structural opportunities in the liquidity token market, and forward-looking thinking about the upcoming wave of tokenized stocks, especially how institutions can re-examine their capital allocation in the crypto field after the market crash in 2022. PANews compiled and sorted out this conversation.
What does “the agency is coming” really mean?
Moderator: Many people often mention that "institutions are about to enter the market", but the actual progress does not seem to be in line with expectations. From VanEck's perspective, how can institutional capital really enter the crypto field?
Pranav: Institutional funds are gradually entering the crypto space, mainly in two forms: one is direct capital purchase of related assets, and the other is to establish on-chain products for others to use through asset tokenization.
These two types of institutional groups are different. The former includes investors who purchase assets, while the latter are institutions that focus on product development. At present, the flow of global capital is mainly controlled by family offices, high net worth individuals, endowment funds, foundations, pension funds and sovereign wealth funds. These capital holders usually make investment decisions through passive strategies (such as ETFs) or active strategies (such as professional managers).
These pools of capital have been involved in crypto in various ways, but they haven't really "arrived". Family offices may have been early in because they saw the potential for returns in liquidity. Last year, many institutions started buying Bitcoin ETFs, which is an easy way to get exposure. Another way is through venture capital, where they find large blue chip managers to allocate. However, there are still many institutions that have not yet entered the liquid asset or its proxy space, and I think this is where the advantage is now.
Moderator: You mentioned that there are advantages in the liquidity token market. What do you mean specifically? Why are institutions relatively lagging behind in entering the liquidity token market?
Pranav: Since 2022, about $60 billion of capital has flowed into venture capital projects at the pre-seed and seed stages, and many founders prefer to exit through tokens rather than the traditional IPO path. It usually takes 6 to 8 years from seed round to IPO, while it only takes about 18 months through token issuance. For some business models, token exits are more attractive.
However, this trend also exposes the liquidity problem of the market. Many projects that have exited through tokens have generally seen token prices fall in the past 12 to 24 months due to the lack of sufficient market demand to support the value of these tokens. In the traditional financial market, venture capital-backed companies have a deep public equity market as support at the time of IPO, but the liquidity token market has not yet formed a similar ecosystem. This has made some capital pools begin to realize their over-allocation problems in the venture capital field.
Primary early stage VS secondary liquidity - are funds being moved?
Moderator: My partner Robbie and I run a fund that has done about 40-50 deals in the past 2 years. But this year we have only done one or two. Now I look at the charts of Bitcoin, Hyperliquid or ETH and wonder why I would lock up money for 4 years waiting for a big explosion when there are obvious liquidity benefits right now? Are you also seeing this shift among early capital allocators?
Pranav: In the crypto market, there is a significant imbalance between supply and demand, especially in terms of liquidity. Due to the insufficient supply of capital and the huge market demand for tokens and projects, investors need to screen out potential projects from a large number of tokens. The reality is that 99.9% of the tokens on CoinMarketCap are junk, and their value is far below the market value. Only a very small number of projects with clear product-market fit, which can generate revenue and give back to token holders, are worth paying attention to.
If the market value of all cryptocurrencies other than Bitcoin, Ethereum, and stablecoins (currently about $750 billion) grows several times in the future, certain projects will directly benefit from this trend, and their tokens may attract most of the value inflow. Such investments are considered to have higher return potential after risk adjustment while retaining liquidity advantages. Investors can adjust their strategies at any time, enjoying similar returns to venture capital while maintaining the flexibility of exit.
On the other hand, since 2022, the quality of talent entering blockchain application development has declined due to the hostility of the US government to the crypto field at the time, and many outstanding founders have chosen to turn to AI application development to more easily obtain financial support. However, since the election, talented founders have begun to return to the crypto field to promote the construction of blockchain applications. Compared with investors who deploy capital between 2022 and 2024, investors who start now and will deploy capital in the next two years may get better returns because they can attract better talent.
At the application level, although there are some talented founders involved, the pricing of related projects is still lower than that of L1 imitation projects. Many venture investors still focus on past successful models rather than looking forward to possible opportunities in the future, which may limit their investment potential.
The Income/Cash Flow Narrative
Moderator: How long will the "income model" last? Is it a temporary trend or the end? Is cash flow the only thing that matters?
Pranav: The crypto industry is currently facing a binary choice: either become an appendage of the Internet or focus on creating real value (such as income). Most of the world's large capital pools either want to allocate "store of value" assets - only a few assets in the world can play this role, such as gold, Bitcoin, real estate, etc. It is a miracle that Bitcoin can be among them. Not all assets can become a store of value.
All other assets other than value stores will eventually be considered "return of capital" assets. For example, if I invest $1, how much money will it bring me in 25 years? No one asks when SpaceX will start returning capital to shareholders, but people think that SpaceX is worth X today because of how much money they can make and how much money will come back to us when we colonize Mars in 20 years. Although many areas can support disruptive innovation, they still need to return to the framework of capital return in the end.
The crypto industry has long seemed to be avoiding a key question: how to prove the true value of its assets. This avoidance is partly due to regulatory pressure, with many projects trying to avoid being classified as securities, and therefore turning to narratives such as "community currency" or "store of value." However, if the crypto industry hopes to attract mainstream capital, it must focus on product-market fit and clearly explain why these assets are valuable. The most common question investors ask when considering investing in crypto funds is: "Why is this asset valuable?" because they are accustomed to the thinking framework of stocks and bonds. Only when the answer to this question becomes obvious will there be large-scale capital inflows and the size of the crypto asset class will expand, otherwise it may be limited to assets such as Meme coins traded in a small circle.
The value of future cash flow forecasts
Moderator: Therefore, the prediction of future cash flow is also very important. If we only look at crypto projects that can generate large-scale revenue at present, there will be very few investment targets. But if we take into account the expected future cash flow like traditional asset valuation, then the possibilities will be expanded.
Pranav: Our strategy allows us to invest in both tokens and publicly listed stocks so that we can allocate where there is the most potential, rather than being limited to holding Altcoin. At present, there are indeed fewer Altcoin worth investing in.
However, we are still happy to find projects with great products, even if their tokens do not currently have a clear value capture mechanism. Because tokens are programmable, value capture mechanisms can be designed in the future, as long as the team is good and responsible, ensuring that value does not flow only to equity and make the token meaningless.
If a team develops a great product, even if the token value capture mechanism is not yet clear, it is possible to foresee how these mechanisms will be realized in the future through imagination, which is an investment opportunity in itself. Once the product is successful and value flows to the token, the token may go from obscurity to a top 30 asset by market capitalization, thereby driving the return of the entire fund. The key is to identify projects that can achieve value capture in the future and invest at the right time.
When should the project start charging?
Moderator: How do you view the relationship between the user growth curve and starting charging (realizing revenue)?
Pranav: In cryptocurrency investment, whether a project has a moat is an important consideration. The existence of a moat means that the product or service is difficult to be replaced and can maintain its advantage in the competition. However, many cryptocurrency projects currently lack a moat, especially when the project may lose customers once it starts charging, which indicates that its business model is not sustainable. Such projects are generally not considered good investment targets.
Although some cryptocurrency products may have excellent technology or innovative features, this does not mean that they have good investment value. The feasibility of the charging model and the customer's acceptance of the fees are one of the important indicators for evaluating projects. In addition, charging fees and returning these fees to token holders are two independent decisions and cannot be confused. Therefore, investors need to consider these factors comprehensively when choosing a project to avoid potential risks.
There are problems with the structure of many crypto projects at present, where funds are driven by foundations, while the actual product teams operate in other entities. Ideally, products with moats should be built to support the team's further research and development by capturing fees, thereby driving the birth of better products or new products.
This model is similar to traditional business operations, such as Amazon building AWS through the cash flow of its e-commerce platform and then using AWS profits to expand advertising services. This method of capital allocation is considered more efficient than directly returning capital to shareholders, especially when the return on investment in R&D is higher than simple return. For crypto projects, if the founders can build excellent products and generate revenue, it is better to encourage them to continue to develop new products to achieve long-term value growth instead of returning the profits to token holders.
Moderator: People misunderstand this when they talk about buybacks, they think it's a very efficient use of capital, but it's actually quite inefficient.
Pranav: In the current market, the token world is in a stage of scarcity. Although the supply of tokens continues to grow, the overall market size is basically fixed. Compared with traditional capital markets, large capital pools such as pensions and endowment funds have not yet entered the token market on a large scale, and their main investments are still concentrated in Bitcoin and public equity of some crypto businesses. At the same time, "capital return" has become the focus of the industry. Buybacks are not new, but their importance is particularly prominent in the current environment. Each project should clarify the tokenization path of its products, but whether it is achieved through tokens depends on the characteristics of the current market.
The current market value of alternative coins other than Bitcoin, Ethereum and stablecoins is about $700 billion, and it reached $900 billion after the election, but the overall market has not seen significant growth. While demand is limited, market supply is increasing significantly. In this scarce environment, capital returns have become a focus, such as buybacks. However, in the next 24-36 months, regulators may approve multi-token ETFs, which are similar to S&P 500 index funds and will allow capital to have broad exposure to the crypto market through passive investment. This change may bring new channels for capital inflows to the market, thereby changing the current scarcity situation.
Tokenized stocks - the next trillion-dollar valve
Host: Will the legendary Altcoin bull run that people talk about come? What will trigger a bigger Altcoin rally? Is Bitcoin dominance only going to go up?
Pranav: In traditional stock and bond investing, the question we always ask is: who will buy this asset from me in the future at a higher price and how are they thinking about it? Basically, always asking who is the next marginal buyer and how are they approaching it.
However, in the cryptocurrency market, marginal buyers are more likely to be speculators or gamblers, which is different from the logic of traditional value investing. Even if analytical indicators show that certain token projects are undervalued, these analyses may not apply due to the different focus of marginal buyers. However, this situation may change over time.
There are two main directions in which the market may evolve in the future. One is to drive market value growth through the popularity of tokenized equity, such as traditional companies choosing to exit the market in the form of tokens rather than equity. Tokenized equity not only has the attributes of traditional equity, but can also be used for more purposes through programmable functions, such as rewarding users or creators. For example, if OnlyFans' equity is tokenized and used to reward creators, it may bring greater market appeal. This model may further expand the current $700 billion alternative coin market, and more companies may choose on-chain IPOs instead of traditional IPOs.
Another scenario is that the prices of existing assets rise, similar to the previous "alt season". If there are stimulus policies similar to those during the epidemic, such as issuing cash checks or injecting liquidity, investors may put funds into assets that have not risen significantly, thereby driving up the prices of Altcoin. Looking back at previous cycles, after the increase in market liquidity, funds initially flowed into credit debt and large technology stocks, and then expanded to high-risk assets such as SPACs and Bitcoin, eventually forming a rising tide of Altcoin. However, this situation may only occur against the backdrop of falling interest rates and loose economic policies.
Moderator: So how does this support your current liquidity position and thesis? And what upside or opportunities do you see in Q3 and Q4 from a sector perspective?
Pranav: I will not make any macro predictions because I have no advantage in macro. By observing the L1 chains in the market and the fee data they generate, only three to four chains generate significant fees, while other chains with larger market capitalizations have almost no fee income. The high market capitalization of these chains is mainly based on the expectation that they may seize the market share of the top three or top four chains in the future, but the actual probability is low.
Our strategy is to maintain discipline, not get involved in these assets, and wait for better assets to be listed on the chain. During this period, how to use funds effectively becomes a key issue.
Stablecoin legislative window
Pranav: I think the imminent passage of stablecoin legislation is expected to drive a range of companies to adopt stablecoins to optimize their business cost structure. It is reported that some investors have begun to focus on companies in the public market that may benefit from stablecoins, from Internet companies to e-commerce platforms, gig economy and sports betting, analyzing the proportion of fees paid to the banking system as a cost basis, and evaluating whether the use of stablecoins can effectively reduce costs. Through screening, the list of these potential beneficiaries has been greatly reduced, but it still contains some investment opportunities worthy of attention.
If some companies can increase their gross profit margin from 40% to 60%-70% by using stablecoins, their profitability and market valuation multiples may increase significantly. This area has not yet received widespread attention from crypto investors and public equity investors, and is an asymmetric investment opportunity. At the same time, if more valuable token assets emerge in the future, we may quickly adjust our strategy to capture higher return opportunities.
L1 valuation - should we look at past fee income or monthly active users three years from now?
Moderator: In your opinion, are top assets like Ethereum, Solana, Chainlink or BNB also completely overvalued? Can they have a little bit of the monetary premium power of Bitcoin?
Pranav: I don’t think most L1 tokens will enjoy a “monetary premium” similar to Bitcoin. While some of the top 10 assets by market cap may not have a clear use case, they are viewed as a store of value because they have strong community support. However, the market will ultimately view these tokens as assets valued based on cash flow multiples, and from this perspective, some L1 tokens are undervalued, some are overvalued, and some are reasonably valued.
I believe that the value of these assets should not be judged based solely on last month or last week’s data, but rather on the next 2 to 5 years. Each blockchain has its consumers of block space, such as ETH’s L2 and Solana’s consumer-facing applications.
The key question is how much demand will the developers currently building applications on these chains generate for the chain's block space if their applications are wildly successful in the future. At the same time, these chains are also constantly expanding their block space supply. Assuming that both supply and demand expand simultaneously, how will the revenue scale of these chains change in the future? Based on the future revenue level, is the current asset valuation reasonable? These questions will become an important basis for judging the long-term value of L1 assets.
Moderator: This is indeed a bit worrying because if you try to value them using traditional methods like discounted cash flow (DCF), a lot of L1s look overvalued.
Pranav: Traditional cash flow models may not be applicable to valuing the cryptocurrency market. Currently, there are about 50 million cryptocurrency holders in the United States and perhaps 400 million worldwide. However, there are only between 10 million and 30 million active on-chain users. If these users only grow by 5% per year, then the valuation of the entire industry is indeed high. But I think the on-chain user base may experience explosive growth similar to ChatGPT in the future. In this case, the number of users using on-chain applications directly or indirectly may reach 500 million in the next three years. This will make the current valuation of some first-level blockchain (L1) projects appear underestimated.
The future of infrastructure and applications
Moderator: The current market is shifting from infrastructure to applications, and even the "fat application theory" has emerged. How important do you think it is for infrastructure teams to have user relationships? Is this the key to industry growth?
Pranav: There are no examples of killer applications migrating from their own chains and building a complete technology stack independently. If an application chooses to build a technology stack independently, it may lead to two results: one is user loss, and the other is enhanced user experience and higher profits. However, the answer to this question is still unclear.
In other industries, having users means having experience, and everything else may become commoditized, but the cloud computing field has formed a three-way competition among Amazon, Google, and Microsoft. L1 infrastructure may also experience a similar situation. Applications may switch between a few giants instead of building their own chains. At this stage, the value of holding liquid assets lies in the ability to flexibly adjust investment strategies. Once killer applications can completely replace the underlying infrastructure and operate independently, the strategy of holding L1 assets may need to be re-evaluated.
Moderator: In the crypto space, the underlying infrastructure gets all the brand recognition. For example, Ethereum is a brand, but you don’t “use” Ethereum directly, you use applications based on Ethereum.
Pranav: I think there might be a different question here: do you think crypto will go mainstream through existing Web2 giants deciding to build on top of or leverage these technologies? Or will it go mainstream through VC-backed startups creating killer apps?
If it is the latter, then the decision logic of these startups in choosing a blockchain is usually based on whether they can quickly demonstrate user traction in order to obtain the next round of financing. In the past two years, Ethereum and its L2 solutions have been considered the best choice because they can show results faster. However, this trend seems to have changed at this stage, and more and more projects choose to build on Solana because it is more efficient in demonstrating traction.
Currently, apart from Bitcoin and stablecoins, there is no real killer application in the blockchain field. In addition, regarding the potential of mainstream applications, functions similar to WhatsApp integrating stablecoins may become the next breakthrough point, but the specific implementation method has not yet been clarified, including whether it will rely on existing blockchains or develop independent solutions.
Host: How to find the core value of your existence and develop applications that truly attract users?
Pranav: Everyone gets into crypto for different reasons. When I left traditional finance to do this, I believed that well-designed tokens could be an incremental capital structure tool for businesses, even superior to stocks and bonds in some ways.
If Amazon stock was just a tokenized Amazon stock, Amazon could grow Prime much faster than the 14 years it took to build Prime because they could use it as a reward to grow this thing. So I'm here because I think tokenized stock is one thing, and then the question is, what do you need to make it tangible? Do you need the most decentralized blockchain? I don't know. I think solutions that can create a superior user experience are probably more critical.
