Top Chinese VCs discuss controversial topics: Are AI+Crypto and BTC L2 pure speculation?

This podcast episode is a discussion organized by Wormhole & Pyth during Hong Kong Event Week. The host is Colin Wu, Founder of Wu Blockchain. Guests include BMAN, Co-Founder of ABCDE; Michael, Investment Lead, Inception Capital; Mia, Head of Ecosystem and Post-Investment at Hashkey Capital; Julia, COO of Caladan. This issue mainly discusses some of the challenges currently faced by Chinese cryptocurrency VCs.

What track are you most concerned about right now? Why

Michael:

In the last year, I have mainly invested in multiple projects in the AI ​​field, such as MyShell and Flock. Recently, I have turned my attention to the Bitcoin track, especially projects like Merlin and Unisat. Currently, I am particularly interested in the UTX Stack or RGB project as I think it brings some innovative technical solutions to the Bitcoin space.

BMAN:

Given our ten years of experience in this industry and the background of traveling through multiple cycles, Bitcoin is currently in a state of renaissance. Therefore, we have invested more than 30% of our funds in the Bitcoin ecosystem, involving about ten projects including Babylon, Merlin, Bitlayer and Unisat. In addition, about a third of the funds are invested in next AI-related projects. We will also host a larger Asian AI Hackathon next. The rest of the funds are mainly invested in infrastructure areas, such as ZK, modularity and Parelle EVM. Our entire ABCDE team has technical backgrounds, so we will focus on technology areas.

Mia:

My main concern is our investment follow-up and ecological development. Recently, we have been paying close attention to various compliance matters and related financial products, including infrastructure and corporate services. In general, our investment strategy is to seek progress amid stability. Just like the AI ​​and Bitcoin ecosystem mentioned earlier, we are also making related layouts, including the Restaking field. Additionally, we have several new investments to be announced soon.

Julia:

Since we are a trading company, we usually focus on those projects related to trading. Recently we invested in a new exchange project called Backpack. As mentioned before, we are also interested in layer 1 and layer 2 solutions. There are many new layer 1 and layer 2 technologies launching this year, and we are investing in several of them. Recently, we have shown strong interest in Monad, Berachain, and Bitcoin projects. Another area that interests us is stablecoins, and we have seen a lot of projects around stablecoins recently.

Is the bull market not a good investment time because the project valuation is too high? What is the difference between bull and bear VC investments?

Michael:

I think from a VC perspective, there is a consensus among our peers that there may only be two or three window periods left in the primary market. months. In a bull market, VC investment in projects will have a clear exit cycle and higher requirements. Looking back at the past portfolio, especially during the bear market period from March to June last year, the projects that came out had some parallel opportunities in Hong Kong. Now our investment expectations may not have such high expectations for yields, but the requirements for exit are more stringent.

BMAN:

The entire valuation is now much higher than a year ago, sometimes even two or three times higher. Therefore, for many projects, we have two options internally: first, if the project can be successfully launched within a year, we think it is worth investing; second, we are ready to cross the market and prepare to hold it for 4 to 5 years. next cycle. Projects that are in an intermediate state are more embarrassing, so our suggestion for the portfolio is to either prepare for the long term or seize the opportunities in the current cycle.

Mia:

Even during a bear market like last year, we were very active and had made arrangements to adapt to the cycle. As Mr. BMAN said, we are also considering possible tracks for the next cycle in advance and making some long-term preparations. For our asset management, there will definitely be a portion of the shift from the primary market to other potentially more diversified investment opportunities, which is also one of our current strategies.

Julia:

I agree with BMAN that one significant difference between a bull market and a bear market is valuation and of course velocity. In a bear market, deals progress more slowly, it may take weeks or even months for you to decide whether to invest, and project parties have more time to develop their products and bring them to market. In a bull market, everything needs to happen very quickly and you may only have a few days or at most a week or two to make an investment decision. If projects want to go live during this market cycle, they have to do it very quickly.

Many VCs shift from the primary market to the secondary market. What is the core competitiveness of VCs in the primary market?

Michael:

Currently, the shift from the primary market to the secondary market is mainly about pursuing liquidity. This time last year, we saw some funds starting to form secondary funds. This was because there was a valuation inversion in the primary and secondary markets at that time, and some good secondary investment opportunities emerged. As a major investor in the primary market, although we are currently focusing on the primary market, we will empower the project parties as much as possible, whether it is organizational situation, resource docking, or marketing and technical support.

BMAN:

Indeed, we have seen that many funds that originally focused on the primary market are beginning to turn to the secondary market. But our ABCDE fund still focuses on the primary market because we believe that the primary and secondary markets are essentially different. The primary market is more about empowerment and value addition, while the secondary market is more of a zero-sum game. We like the primary market because it's more of a positive-sum game. Our strategy is to go deep into the developer community, build our own development team, write open source projects, and communicate with developers in the community. We often make connections when projects are still young and help them grow from the outset.

Mia:

In addition to investing in the primary market, we also invest part of our funds in the 1.5 and secondary markets. For us, it's just a matter of risk control and appetite. Our support for projects and the resources we provide will not differ based on the level of investment. Our ecosystem is relatively large, including HashKey Exchange, and we have recently launched some major projects, such as the Compliance Fund. It's a comprehensive strategy for our portfolios and the support we provide them.

Julia:

As a VC, your investors are choosing you, not just you choosing your investors. The strongest founders always have options. If you want to be a VC in the primary market, the bottom line is that you need founders who can help you. Each VC has their own unique way and specialty of helping. For example, from our perspective, we are an exchange and market maker, which is something we can definitely help our project with. Other VCs may be geographically advantaged, help projects move from one region to another, or have strong connections in a particular industry. But no matter what, as a VC in the primary market, you must have a competitive advantage that can really help the project.

AI is a popular narrative that VCs are pursuing now. Is it just a false proposition that is gaining popularity and has no life?

Michael:

In the past year, we have invested A lot of AI projects, I don't think it's wrong to pursue AI because it's really a huge narrative. We hope to break through the limitations of the open source model through the incentive mechanism of blockchain. I see some AI-related blockchain projects pushing the field forward with innovative solutions. Across the AI ​​landscape, solutions currently remain centralized, which leads to greater efficiency. Cryptocurrency itself is an alternative (Plan B), so why can’t AI have Plan B?

BMAN:

We have noticed that many funds in the market that originally focused on the primary market have begun to turn to AI. One of our portfolio companies, 0xScope, is doing AI, and they found that the price of crypto projects is mainly affected by narrative and market makers. In the long term, I am very optimistic about the combination of AI and blockchain. Blockchain does not just serve humans, it is more suitable to serve AI or machines. Blockchain provides four key attributes for AI: instant confirmation of ownership, governance capabilities, assetization and liquidity. These attributes are not available in current AI technology. When combined with AI, we see a promising future. We will invest one-third of our capital in AI.

Mia:

AI is an area that we pay great attention to, but we are not the most professional team. We encourage existing portfolio companies to incorporate AI elements such as AI governance. We support this transformation and are on the fence about new AI investments, but are willing to make some small investments. We remain optimistic about the combination of AI and cryptocurrencies, although this is still to be decided.

Julia:

Although there is a lot of hype in the AI ​​field, there are also real application cases. At our company, engineering teams use AI tools to write code, which significantly increases their efficiency. Another example is one of our portfolio companies, Kaito, where they use AI and language learning models to understand text-based data and sentiment data. We also use these tools. So I think focusing on AI will lead to more opportunities for practical applications.

What do you think of the Bitcoin ecosystem? Regarding the controversy over L2, how can we resolve the issue of whether only the Chinese are currently playing?

Michael:

From what I know about the West, the Bitcoin Layer2 they are working on is also pursuing TVL. Basically, there is not much difference between the East and the West. I hope the market will pay less attention to TVL, because currently the market mainly focuses on which platform has the highest TVL, such as launching a launch pad or DEX on Merlin because it is easier to gain market attention. I hope that in the next month or two, the market will shift to focus on technical breakthroughs on Bitcoin rather than just TVL.

BMAN:

The Bitcoin ecosystem began to emerge last year, starting with Ordinals and BRC20, and it has only been one year. It first started in Asia, but recently the West has also started to get involved. I explain the importance of the Bitcoin ecosystem to European and American VCs every week, such as Merlin and Inscription, and there are indeed European and American investment projects. Each halving of Bitcoin will reduce the rewards to miners, which requires new "military expenses", namely transaction fees, to maintain network security. The Bitcoin ecosystem can increase transaction fees, thereby incentivizing miners to continue maintaining the network. In addition, many Bitcoins are in a dormant state. The development of the Bitcoin ecosystem can increase the liquidity of Bitcoin and drive the prosperity of the entire encryption ecosystem.

Mia:

For many cryptocurrency VCs, including us, more discussions are about how to build ecosystems and practical applications, and how to make them generate value. When we communicate with players in the traditional financial world, they have already allocated a certain proportion of BTC, and what they are now concerned about is how to make these BTC generate compound interest. We support cooperation with any asset that can earn interest and its related applications, and we also remain open-minded and believe that there will definitely be new things emerging around Bitcoin.

Julia:

I strongly support BMAN and Mia’s point of view. When communicating with traditional investors, I found that their attitude towards Bitcoin is completely different from other cryptocurrencies, especially after the launch of the Bitcoin ETF. They are more accepting of Bitcoin as an asset, but are still skeptical about other cryptocurrencies. Skepticism. I think this provides a great opportunity for Bitcoin to grow.

What is the quality of Binance’s VC investment projects? Does whether a project can be listed on Binance determines its success? Does it account for too much?

Michael:

At present, this is indeed a dilemma, that is, in a decentralized world, centralized exchanges such as Binance occupy a monopoly. I hope Binance can become more transparent in some aspects, which will be more beneficial to the entire ecosystem. At the project level, you don’t need to rely too much on Binance’s investment decisions; if your project does well, Binance and OKX will naturally invest. Relying too much on exchange strategies, such as reserving a large proportion of tokens for Binance and OKX, is actually unhelpful. We should return to the essence of the project and focus on the innovation and value of the project itself.

BMAN:

The Crypto industry is all about liquidity. As the largest liquidity platform, Binance is naturally the first choice for project listing. However, I have observed two trends: First, the currency listing process is gradually standardized, becoming more and more like the listing of traditional financial institutions such as Nasdaq; second, the liquidity of decentralized exchanges has increased significantly, and the wealth effect of many projects The increase in currency prices mainly comes from DEX. In the future, more projects may choose to obtain liquidity on DEX instead of centralized exchanges. This is a positive industry trend.

Mia:

From a VC perspective, we should not overly pursue Binance or predict its movements. We are always open to our portfolio and if the requirements for listing on Binance are not met at the right point in time, then look for other opportunities. Our goal is to support them in seizing market opportunities rather than pushing them to make inappropriate listing decisions.

Julia:

From an exchange perspective, Binance only launched 30 to 40 tokens last year, which obviously does not mean that only these tokens are successful in the market. On the one hand, the number of coins listed on Binance is very low. On the other hand, Binance’s market share is also declining, from more than 50% in January last year to less than 30% in December. In the past year we have seen the rise of many new exchanges and DEXs, such as EDX and Backpack. Therefore, Binance should not be the only platform that projects need to focus on.

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