Crypto Outflows In December 2021; Will VCs Co-opt Web3?

As 2021 comes to a close, digital assets see their first outflows in the past four months. Are institutional investors just taking gains? Also: Jack Dorsey started another firestorm on Twitter by claiming venture capitalists have already co-opted Web3.

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Show Highlights

Digital Asset Investment Products See First Outflows in 17 Weeks: “Digital asset investment products saw outflows totaling US$142m for the week ending on December 17th, the first outflow following a 17 week run of inflows, according to CoinShares latest fund flows report. The largest previous outflow took place in June of 2021 where weekly outflows totaled $97 million.” (Blockworks)

Jack Dorsey Stirs Uproar by Dismissing Web3 as a Venture Capitalists’ Plaything: ““You don’t own ‘web3’,” tweeted Dorsey. “The VCs and their LPs do. It will never escape their incentives.”” (Bloomberg)

[June 2021] Crypto Startup Solana Raises $314 Million to Develop Faster Blockchain: “Blockchain startup Solana Labs Inc. says it has raised $314 million of new funding to develop technology used in the fast-growing area of the cryptocurrency markets known as decentralized finance, or DeFi. The funding round was led by Andreessen Horowitz, one of Silicon Valley’s most prominent venture-capital firms, and Polychain Capital, a crypto hedge fund that also does VC-style investments.” (WSJ)

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Cryptogic is THE show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethererum, and other cryptocurrencies.

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Transcript

– [Scott] Hey, how’s it going? Welcome to another episode of “Cryptogic.” Scott Hawksworth here with you on December 21st, 2021. A lot to cover today, and joining me once again is Andy Hagans, the co-founder of The Alternative Investment Database, also the co-founder of Cryptogic. Andy, welcome once again. 

– [Andy] How you doing, Scott? Merry Christmas. 

– Yeah. Merry Christmas. Just a few days here, I’ve got my first plane flight with my daughter who’s just below 2. So it’s going to be interesting. 

– All I want for Christmas is a nice little bear market, like a 50% drawdown. 

– Just a 50% drawdown so you can just buy? 

– Well, so I can load up. I want to load up on some Ethereum and Bitcoin before the new year. Yeah. 

– Santa buys the dip, right? 

– Exactly. 

– So we’ve got a lot to cover today. And I want to kick it off that really kind of just connects to what you were just talking about, and it was on Blockworks here. Digital assets investment products have seen the first outflows in 17 weeks. Andy, what are your thoughts on this? 

– Well, first of all, as a percent of assets under management, you know, the headline number here was really not even that large. And frankly, I think, you know, we had the fed already signaling that they’re going to hike rates next year, we had this big inflation print, and then the Build Back Better bill collapsed. 

And so I think the markets are kind of taking a breath, and frankly, I think a lot of institutional investors, hedge funds, and others are saying, “Okay, risk-off. Let’s lock in gains right before the end of the year, you know, so we lock those in for the year total, and we’re risk off this week.” 

Honestly, I think that’s really all that is. 

– So you don’t think that it’s people saying, oh, I don’t know about all this cryptocurrency stuff. I’m out. I’m panicked. I’m scared. You know, maybe it’s, oh, I’m worried about incoming regulation or something crazy happening. You don’t think it’s any of that, you think it’s just pure risk management? 

– I think less and less of these movements are crypto-specific. I mean, certainly crypto’s still more volatile than the S&P, but more and more you’re seeing these risk assets move together. You’re seeing crypto and S&P futures are directionally in the same direction. You know, crypto’s a little bit more volatile. 

And again, I think this is just traders, institutionals just saying risk off this week just a little bit. I think everyone is kind of in a holding pattern to see what comes next. I think there’s rumors that the next CPI print is going to be even higher, you know, that it might crack 7%, and that’s obviously making people nervous. But, on the other hand, as Build Back Better, as that imploded, looks like that’s not going to happen. 

The fed might feel like they’re going to have an easier time controlling inflation if Congress doesn’t pass any more of these spending bills, but it’s still probably going to be an interesting six months looking at Q1 and Q2, right? Like, even if we do see kind of near-term peak inflation in Q1, it’s going to take a little while to work through those numbers and for the supply chain to get unstuck. 

And, you know, hopefully, that’s starting to move in the right direction, but as I’ve said along, you know, even if we start having better policy and making smarter decisions in reference to the supply chain, it’s going to take 12, 18, 24 months for all of that to unwind. So, you know, honestly, I’m fairly optimistic in the medium to long term about our economy. 

I’m not going to bet against the American economy. But I think we might be in for a rough 6 to 12 months. And I think a lot of investors have just had this awesome bull market, both with crypto, with real estate, with equities. I mean, heck even with bonds. I mean, long term had a bull market in the bond market. And so I think people are just locking in gains, maybe taking some chips off the table. 

That’s all this is. 

– I mean, to be honest with you, you know, I dabble in collectibles as well, and I’ve seen some of that, you know, come back down to earth a little bit as people kind of locked in some of their gains there. And so I think you’re really spot on with what you’re saying here. It’s hey, we had this great bull market, a lot of people, you know, had a lot of success, and now they’re saying, “All right, let’s balance it out. Let’s balance that risk.” 

And take some of those winnings, so to speak, right? 

– Yeah. And, you know, it doesn’t signal a bear necessarily, it can just be that consolidation phase. And, you know, crypto could just move sideways for a year. Volatile day to day, but I think everyone’s expecting either a bull or a bear, but you could have a consolidation phase and be sort of range-bound. 

And the same could be true for equities. I mean, all of that is quite normal after a bull market to have this consolidation phase. But I don’t know. It is hard to say, I mean, obviously, it’s hard to say how the markets are going to move, but I remain convinced that inflation is going to sustain itself for 2022. And again, I’m not going to get into that larger secular trend deflation versus inflation. 

I think it’s okay to be agnostic there, but I think, you know, it kind of makes sense to start hedging your bets a little bit and being a little bit more defensive as we enter the new year. 

– Right. And someone like yourself, it almost, doesn’t really impact you so much because you’re long, you’re long on Bitcoin, you’re long on Ethereum, right? 

– Yeah, exactly. But on the other hand, Scott, I think some of these institutionals, they want to have a little bit of dry powder. So even if you are in the long run, long Bitcoin, long Ethereum, a lot of these guys will sell and lock in gains, you know, if it rises above 50 or 55, and then they’re waiting for it to dip 45 or 40 to buy back in. 

So even if you’re long, you know, you might be waiting to buy the dip. And again, I think all that is healthy for the crypto market. It helps these various coins stabilize a little bit more, become a little bit less volatile when you have more disciplined investors enter the picture versus, you know, retail investors who tend to FOMO in, not that there’s anything wrong with that. 

– Hey, you know what, there’s no wrong with FOMO-ing from time to time. 

– We’ve all done it. We’ve all done it. Right, Scott? 

– Absolutely have. So, okay, I think that really covers that aspect. There was another story that you actually sent over to me that I thought was really interesting. And when you’re just kind of talking about blockchain technology and all of these interesting developments, Web3 is one of the big deals. And a guy you may have heard of, Jack Dorsey, had some interesting thoughts on Web3. 

And basically, he said that VCs really own Web3, and some people were pretty mad about it. Spicy tweets according to “The Verge.” Andy, what’s your take on this Web3 and Jack Dorsey, his sort of thoughts here? 

– Well, I got to say, Scott, you know, talking about what someone tweets really makes me feel like I got to question my life choices and where I’ve gone in life. But the reason…I think that, though, okay, in all seriousness because these little Twitter storms, you know, it’s kind of like, guys get a real job, but I actually think it’s an important conversation. 

And the larger conversation of DeFi versus TradFi, and as crypto is being adopted by these more institutional players, both institutional investors like hedge funds, but also as banks and more traditional financial companies are dipping their toes in the water, it’s like, is crypto going to become a victim of its own success where it just gets co-opted by these traditional institutions? 

But wasn’t that always just sort of baked in the cake, Scott, that, you know, the idea that the sort of altruistic idea that crypto is going to change the world? I mean, that’s true. And that it’s going to revolutionize our financial system. I think that’s true in some ways, but, like, did anybody really think that all of the banks were just going to go out of business in a decade and just not exist anymore, and that this was truly going to totally replace the financial system and that, you know, venture capital firms would just say, well, crypto exists now and people… 

– We’re going to fold up shop. 

– Yeah. People can raise money with an ICO. So we’re going to close up shop. And, you know, we had a good run. Like, obviously not. And, you know, the macro story, people love the macro stories. Either crypto’s going to win and TradFi is going to lose, DeFi is going to win, TradFi is going to lose, or the big banks and the traditional financial systems are going to totally co-opt this. 

I think the truth is actually a little bit of both and somewhere in between. Obviously, you know, banks and traditional financial companies are going to want to participate in this new technology, in Web3. But at the same time, I don’t think that they can totally co-opt it in the sense that crypto and blockchain technology do fundamentally shift power I think to individuals. 

I mean, they’re just sort of inherently libertarian when you think of the nature of it. 

– [crosstalk] That’s one of their main thesis of their existence is that kind of thing. 

– Exactly. That doesn’t mean that they can’t be regulated and they won’t eventually be regulated. And, you know, governments have a way of, you know, being able to regulate things, and get their hooks in, and tax them, and all that sort of thing. But if you look at the underlying technology, I do think it, you know, it shifted a little bit of leverage to individuals to be able to transact, especially globally. 

So, you know, you can look at countries where they are making Bitcoin, crypto illegal. It doesn’t necessarily mean that citizens, residents of those countries, don’t own any Bitcoin, don’t own any crypto. So personally, I think it’s a little bit of both where absolutely crypto is going to democratize, and decentralize our financial systems a little bit, but at the same time, you’re not going to wake up in 10 years and banks don’t exist anymore. 

You know, our banks aren’t a key part of our global financial system. That expectation I think was just unrealistic to begin with. 

– Well, you know, Andy, just to jump in, this is a discussion I’ve had a number of times with a lot of folks starting businesses around DeFi, crypto, and what have you. And you almost want, not almost, I think you absolutely do want banks to be involved, traditional financial institutions. 

You want big players to be in this space because that also, I think creates an environment where mass adoption can continue to march where the average person can say, okay, I actually am comfortable now transacting with this cryptocurrency, or buying some of it and owning it, or using this new Web3. 

Whatever it might be, there’s kind of that push and pull. And I think kind of to add to that, you know, Jack Dorsey, he’s a Bitcoin maximalist, and you and I have discussed this before. And a lot of the Bitcoin maximalist sort of have that philosophy of like, it was first, and it’s this whole ethos, and we want to just reject all the traditional financial, you know, organizations and ways of doing things. 

We’re going to blow it all up. And so I think some of that come…you get that pushback. 

– Which is kind of funny to me, Scott. It’s kind of funny how these things work that, like, people who own Bitcoin would be traditionalists. Like, I’m a real conservative when it comes to crypto, you know, Bitcoin came first, nothing but Bitcoin. I’m a stodgy traditionalist. I mean, it’s just kind of funny in the context of crypto, you know, like, it’s such a new thing, and right now it’s still very early adopters. 

I think when you are in this space, we think of it like, look how far it has come. And it absolutely, you know, looking at the market cap, looking at ecosystems now versus five years ago, it’s come a long way, but still go grab your mom and try and, you know, set her up with a wallet and buying some Bitcoin. 

– Right. And she’ll be like, what is this? And we’re in the very, very, very early days of this. And, you know, so I agree, when you see bigger players buy-in, in the long run, they’re going to help create that ecosystem that leads to mass adoption. 

– Well, to that point as well, when we’re talking about Web3, there is so much potential with it. And so many people are excited about this idea of what if we rethought the web and what if for content, you just had something built into your browser where you don’t even know and you just paid 10 cents to view this rather than having to go and have a subscription to be at Wall Street Journal, or Bloomberg, or whatever. 

And this is just undercuring the entire web experience and enabled by these technologies. And so a lot of people are like, this could make things better not only for consumers, but also for businesses when they’re dealing with advertising dollars and trying to monetize content, and ad blockers, and all of these kinds of things. 

So there’s all these technologies that can enable these exciting things. And I think you need VC investment and interest to make that a reality, at least that’s my take on it. 

– Yeah. I don’t know if you do or don’t. And, I mean, I think the other big angle of Web3 that’s really taken hold this year, especially, is just the idea of users owning their own content. So, you know, compared to a Facebook or all these Web2 jumpers… 

– Right. I will give you my identity or you can have some information about what demographic I fit into in exchange. Yeah. 

– Yeah. And the idea with Web3 that I think has really taken hold this past year, the narrative around users owning their own data compared to a Facebook or these “traditional” Web2 companies, Facebook and all these social sites that own your data, that own the ecosystem, they can do whatever they want. 

So I think that narrative has kind of taken hold. It’s very exciting, you know, to think of as a consumer, the idea of, you know, owning your own data, owning your own content, taking it with you. But then I think, you know, people see VCs investing in Web3 and they go, oh, here we go again. You know, you’re not going to really own your own data, but I guess my point is it might be a little bit of both, right? 

Like, depending on how this all shakes out over the long run, I do think blockchain technology has shifted some of that power, in the long run, back to the individual, sort of an inherently libertarian, individualists’ type technology. But at the same time, of course, VCs are going to invest heavily in this. 

You know, of course, traditional banking and traditional financial companies are going to invest in this. And I think they’re only going to succeed where and when they add value. And so, like, let me just bring up Facebook, you know, they rebranded as Meta. And, Scott, I want to get your thoughts on this. 

When I heard that, I chuckled, and honestly my response was to, like, almost feel sorry for Mark Zuckerberg and Facebook just because it’s like it’s the baby boomer social network. And obviously, you know, its best days are behind it. It’s become everybody’s political whipping boy, whether you’re right-leaning or left-leaning. 

– Yeah. No matter what side of the spectrum you fall on. Yeah. 

– Right. And just the idea that they’re going to be, like, leading in the charge into the metaverse just sounds so hilarious to me. 

– For me, it was kind of like a try-hard move. It was like, “Oh, you’re trying real hard. Okay.” 

– Yeah. I mean, I can see the appeal. I can see the appeal, but it’s probably not going to be on Facebook where that shift happens, right? 

– Yeah. And, kind of, there was the other big rebrand kind of speaking of Jack Dorsey with Square, you know, now becoming Block, and there’s just this, oh, we’re going to rebrand because we’re going to send this message that we’re all about this, and we are leading the charge, and we are going to set the standard and what have you. And, I mean, whether or not that goes that way or it was just a bunch of marketing eggheads, punching some numbers, who knows? 

– Well, realistically, I can see Square pulling it off a little more easily than Facebook. 

– I think so, too, just because they have been doing that in the sense of they have invested so much into crypto and Bitcoin specifically. So they’ve kind of made that such a part of them, and whereas Facebook was like, oh. 

– Yeah. And, you know, Facebook reminds me of Yahoo!, where they kind of became this also-ran, you know, Web2 company, and they kept trying to do acquisitions and rebrands. It was like one after another, like, what is Yahoo!? And it just never quite clicked for them, right? 

And I think what’s hard if you are an entrepreneur, like a Mark Zuckerberg, is knowing you started this thing. It’s a freaking ATM that just generates huge profits, right? 

– Incredible profits, right? 

– But in a way, you kind of know its best days are behind it in terms of, you know, adding value, changing the world, you know, etc. And you kind of see where the ball is moving with crypto and Web3, and you’re like, “I want in on that.” But the thing is you’re not going to be able to walk away from your ATM, from your cash machine. You know, it’s too profitable really to walk away, I think. 

So, you know, you kind of become a victim of your own success, but I don’t think I see Facebook really leading the way, but you know what, I could be wrong. 

– Kind of connected to that, so we’re talking about sort of the old guard of these technology companies. You have so much new companies that are raising funds and trying to change the game. And, Andy, you had sent another article my way that I did want to talk about, and that is that Solana raised $314 million to develop a faster blockchain and… 

– Yeah. This was earlier this year. This was six months ago, but, you know, Solana has gotten so much hate, you know, because of their investors and the VC investment in it. 

And I find that just a little bit silly, I guess, in the sense that for me, these cryptocurrencies have to be usable. They need an ecosystem, they need, you know, a development ecosystem, they need apps. They frankly just need investment and like an Andreessen Horowitz, they have the connections, they have the talent, they have the brains to help build that ecosystem. 

So the idea that, you know, their lead investment is a bad thing, I don’t really follow that logic. I mean, I guess if you’re an anarchist and you just think VCs shouldn’t exist or something, but I think the whole thing is a little silly. And Solana still gets a lot of hate over, you know, all of the VCs that are invested. 

I don’t know what to say about that, Scott. What do you think? 

– I mean, I think, in general, and it really ties back to some of that ethos. You know, we were talking about a lot of the libertarian, you know, ideals and things like that. There’s just this massive distrust of big players’ traditional finance. And so the larger crypto community, when you see things like that with Solana raising those funds, you get this pushback because they’re saying, well, you’re not one of us. 

You aren’t part of this, hey, decentralized everything, empower the little guy. We’re all going to do this, you know, as a community, as opposed to having these big players. 

– Well, that’s just it, Scott. That’s just it. If these are democratized and anybody can go out and buy Solana, or Bitcoin, or Ethereum, why not large institutions, why not large investors, right? It’s almost ironic we’re going to decentralize this and democratize it, but then it’s going to be like this little club on Reddit where… 

– But you’re not allowed. It’s too much money and you’re too traditional. 

– Yeah. I find it quite silly, to be honest with you. 

– And again, to tie it back to what I’ve said, I think that you want those players because they can find more use cases. They do have the backing to push things forward. And that can be really good for someone who’s invested in Solana or invested in Bitcoin, you know… 

– Yeah. I mean, because that funding is going to lead to more entrepreneurial talent and more the developer talent entering those ecosystems. And personally, you know, that’s a bullish case as far as I’m concerned is look where the talent is going, whether within crypto or even just in the larger financial system. 

Look where the smartest people are heading to, that is a really important leading indicator, in my opinion. So if VCs and Andreessen Horowitz, or some of these big names in the VC world, I mean, their names are freaking gold, right? And so when they make an investment and you see that talent flock to a platform, to me that’s a bullish indicator. 

I don’t care if the people in Reddit like it or not, that’s a bullish indicator as far as I’m concerned. 

– Right. Right. That’s validation. 

– Exactly. 

– Isn’t that validation for whatever it is, be it Solana or another cryptocurrency? I think that’s a really, really good point, Andy. 

– Well, thank you. 

– So I think we covered a lot of ground here. To sum it all up, you know, as I said in the last episode, crypto isn’t going anywhere. And if you don’t like VC involvement, you know, I’d say rethink that because there are a lot of great things that can come out of that. 

And if we are excited about these technologies, which we are, you should be excited about that. 

– Absolutely. 

– Awesome. Andy, thank you again. And if you want to get the show notes on this or find any of the great articles that we have, you can, of course, always go to cryptogic.com. We’ll have all the links right there. And stay tuned for another episode coming at you soon. 

– Merry Christmas, everyone. 

– Merry Christmas.