The New Internet of Value
Setting the stage for Re7 Capital's joint venture with Republic Crypto — commencing with the RxR Opportunities Fund.
Are there any real blockchain use cases, or is it all just speculation? Crypto is down 80%. Game over, or will it rally again? Is crypto investable in the world of rising rates, shrinking liquidity, and extra regulation?
“I never buy at the bottom and I sell too soon.”
Nathan Rothschild
Controversy.
This is probably the best word to describe how investors feel about this space. It feels like there is something real that this technology brings to the table but it’s buried so deeply underneath the noise of scandals and shiny crypto kids that it’s hard to discern if there is real value.
It certainly helps to zoom out and observe how the sector has evolved over the years (see some of our earlier thoughts here), but the best way to achieve clarity is to answer the questions above with tangible numbers.
Does anyone actually use the blockchain and its apps? Data speaks for itself.
The Ethereum ecosystem processes ~3 million daily transactions:
Source: Artemis
There are ~24,000 software developers working to create to new apps and products:
Source: Electric Capital
The traction is in the numbers:
With many new use cases and enterprise projects on the horizon….
This data shows us there is real traction and demand for this technology. The question is: how does it translate into economic value—if any?
Which brings us to a structural question:
Is there any intrinsic value in crypto businesses and their tokens?
Every blockchain ‘app’ is a business which monetizes the above mentioned activity:
A decentralized spot exchange with monthly volume of $7.5B and dividend yield of 3-5%
A decentralized futures exchange which trades at 13x P/E with Q1:23 revenue up 4.5x YoY
A blockchain network with revenue growing 75% MoM and profit margin on track to hit 80%+
A blockchain bridge taking a cut on $2.4B of monthly cross chain transfer volume
And finally, the Ethereum blockchain, with a net profit of $362M in Q2:23 vs. -$1.9B in Q2:22
These apps are able to monetize their users at margins which are vastly superior to traditional companies. A famous example is Uniswap—a decentralized exchange. It processes more volume than Coinbase with 50x less employees. The reason is simple —all these businesses need to do is publish their code (i.e. apps) on the blockchain and the network effect takes care of the rest.
Several million active blockchain users is a drop in the ocean compared to billions of people using Nasdaq-listed products. One can only imagine how profitable these networks may become at scale.
And the investment case is simple—we have a small sector with explosive growth metrics which got sold off amidst high profile bankruptcies (of trading firms, not product firms) and complete deleveraging. All of this was exacerbated by the toughest liquidity environments in decades. Was crypto’s success only driven by lax liquidity and low rates? We believe the data above demonstrates a resounding no!
Thus we see a once in a cycle opportunity to pick up these assets at 80%+ discounts to their ATH prices with a thesis that the pace of adoption of this technology will not hit a wall just because the Fed decided to raise rates. We view risk-return (hence RxR ;) as highly asymmetrical with a meaningful return if the crypto market normalizes—let alone continues to grow.
What’s the most interesting way to get exposure?
Historically there haven’t been too many options to get directional exposure to the space. One might buy some benchmark exposure such as BTC or invest in venture funds (there are high quality trading and yield funds, but they don’t run high market exposure).
The industry has been maturing in phases and so have instruments allowing one to get exposure to it:
In the beginning there was Bitcoin. As the sector started to expand, entrepreneurs began raising patient venture capital to build out exchanges, custodians and eventually next generation blockchains. VC funds were the only way to get exposure as there were simply no projects that had matured to a level where they could be investable on the back of fundamental analysis. Over time the venture-funded seeds have blossomed and as of the last crypto cycle, we have a plethora of investable blockchain businesses trading in secondary markets.
A new investable asset class has emerged—liquid tokens—and we intend to take full advantage of it given our teams’ expertise as operators across DeFi, using these apps on a daily basis and running staking infrastructure.
Liquid vs. venture? Well, VCs raised $33B in Q2:23 alone and are obliged to deploy this capital into private deals. As a result, early-stage startups (pre-product and pre-revenue) are raising at higher valuations than their more mature cashflow-generating publicly traded counterparts.
Interestingly, our approach allows us to achieve a similar upside but in a de-risked fashion. We are targeting that circle in the middle:
These are growth equity stage businesses with lots of upside potential which we are buying at seed valuations!
The mismatch of private vs. public liquidity creates an opportunity to pick up this interesting spread and capitalize on it.
Where does this leave us?
Witnessing the crypto industry evolve from a Bitcoin whitepaper into a trillion dollar sector has been quite a journey. As active onchain operators, we’ve seen small teams of software developers publish a piece of code and scale to thousands of users in a matter of days. We remember the days of 2017 when the Ethereum blockchain would get congested when people were playing with CryptoKittens. Now, Ethereum processes billions of dollars in volume on a daily basis. Having witnessed such growth from within the industry, we take a view that this technology’s scaling and adoption is just getting started.
Source: Internet World Stats, Consensys, Glassnode, Coinbase, CH & Co
Every cycle the world sees stories that ‘this time crypto is dead’. What we see is that every cycle adoption grows 10x and so do the valuations.
Crypto has a long way to go and our portfolio is patiently positioned to fully participate in this new internet of value.
About RxR
The RxR Opportunities Fund is a partnership between Republic Crypto and Re7 Capital that combines Republic Crypto's leading web3 advisory, venture capital, enterprise-grade infrastructure, and treasury management capabilities with Re7 Capital's DeFi expertise and technology. The Fund has a broad mandate to invest in liquid crypto tokens, seeking to capitalize on unique investment opportunities that exist in today's market across all web3 sectors.
Contact details
Evgeny Gokhberg
eg@re7.capital
Jon Knipper
jon.knipper@republiccrypto.com
Sarahjon Reilly
sarahjon.reilly@republiccrypto.com
Data Source: Artemis, Dune Analytics, TokenTerminal, The Block, DeFi Llama
The Material is for distribution to Professional clients only and should not be relied on by any other persons.
The Fund Manager, FCM (Cayman) Ltd, 3-212 Governors Square, 23 Lime Tree Bay Ave, PO Box 30746, Grand Cayman KY1-1203, Cayman Islands (“FCM”) is authorized and regulated by the Cayman Islands Monetary Authority (CIMA) [CIMA Reference Number: 2020992]. All financial investments involve an element of risk, therefore, the value of your investment and the income from it will vary and your investment amount cannot be guaranteed. The information contained herein does not constitute an offer to sell or the solicitation of any offer to purchase interests in any of FCM Fund’s or strategies. This letter is for informational purposes only. Certain information contained in this letter constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities of the Fund. Due to various risks and uncertainties, the actual performance of the Fund portfolio may differ materially from those contemplated in such forward looking statements. The proposed investment program for the Fund involves risk, and no assurance can be given that the investment objectives stated herein will be achieved. You must read the Fund offering and governing documents prior to investing in the Fund in order to completely understand the Fund’s investment program and risk profile. Past performance is not indicative of future results. An investment in the Fund is speculative and involves a high degree of risk and an investor could lose all or a substantial amount of the investment. The Fund may be leveraged and performance may be volatile. Performance information shown in this fact sheet has not been audited and is subject to change.
RxR Opportunities Fund is an Alternative Investment Fund of FCM (Cayman) Ltd., authorized and regulated by the Cayman Islands Monetary Authority (CIMA) [CIMA Reference Number: 2020992]
Investor capital is at risk. This letter is distributed via e-mail.
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