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Markets Outlook
Crypto Update | The Long-Term Focus: Crypto From a Venture Investor's Perspective
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- [00:00]
Ryan Reynolds
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- [01:19]
David Pakman
In crypto, one of the problems is people pay too much attention to short term things and not enough attention to long term things. I'm a venture investor, so we invest over long periods of time, like six to 10 years we can sometimes hold positions for so we care less about being right tomorrow and need to be right, you know, five, six, seven years from now.
- [01:44]
Host
We all know I love to talk about the road to boring and sometimes the road to boring can mean stable long term returns for investors. Our next guest looks at crypto through a business lens and says stablecoins, IPOs and gaming will be winners in the long run. Managing partner and head of venture investments at Coin Fund, David Pakman joins us now. David Pakman, welcome to Markets Daily.
- [02:08]
David Pakman
Thank you. It's great to be here.
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Host
Of course. Now anyone who's been watching the markets, it's been a little bit choppy lately with some broader macroeconomic trends affecting crypto markets. Talk to me about a market trend that you're watching that you think maybe people aren't paying enough attention attention to.
- [02:26]
David Pakman
Sure. Well, I think in crypto one of the problems is people pay too much attention to short term things and not enough attention to long term things. I'm a venture investor so we invest over long periods of time, like six to 10 years we can sometimes hold positions for. So we care less about being right tomorrow and need to be right, you know, five, six, seven years from now. So if you pull back and look at that timescale, we are on the cusp of major, major adoption and use cases being widely used for crypto, for blockchains, for crypto rails. And so a lot of this is maybe keying off some of the legislative and regulatory changes in the United States which will lead to more institutional adoption. But I think we're about to witness and if you look closely enough, you're starting to see significant usage across a lot of different categories of crypto.
- [03:16]
Host
Well, the people who watch this show, the people who listen to this show are retail investors, some of them are institutional investors and some folks are just trying to make sense of what's going on in the headlines. I'd love to hear more about your 6 to 10 year thesis. Who are the winners going to be in the long run? If I'm huddling something or I'm looking at what projects I should, I should be paying attention to now because they're really going to boom in the next decade. What are those?
- [03:43]
David Pakman
So I think in terms of catalysts, what will lead to more widespread usage of crypto infrastructure? Really what most has, what most of has been built in crypto thus far are major software infrastructure layers that are built decentralized, so different from web2. And what are they useful for? Well, they're largely today useful for payment and financial services type products. So that is where we are expecting to see continued mainstream adoption. The most obvious is stablecoins. We'll talk I think a little bit about some of the pending legislation that if it passes will really allow for even more broad stablecoin adoption. But in this category we have 225, $230 billion of stablecoins on chain across multiple different chains. And these are the sort of size of each transaction has been decreasing. So while we have about 22 times growth in the last three years of stablecoins, we have a decrease in transaction size which starts to show that they're probably being used more and more for payment type applications rather than moving very large blocks of money across chain. So I think we're going to see this continue. I think we'll have stablecoin usage by many, many users for cross border payments for business to business payments for P2P payments. And that will just bring more and more wealth on chain and more users with wallets. And we can talk if you want about what that means.
- [05:09]
Host
I would love to talk about what that means in just a second, but I want to hear your perspective on stablecoins. It feels like we're hearing about a new stablecoin Every week people are issuing stablecoins or new stablecoins on different chains that are interoperable stable coins. Do you expect to see a consolidation of stable coins within the next decade? I imagine you're going to say yes. But what might that consolidation look like?
- [05:32]
David Pakman
Well, first we're going to go through a phase of rapid expansion, I think. I don't know how many we're going to see, but we're going to see tens, 20, 30, 40, 50 stable coins, at least in US dollar denominated ones. We'll see multiple European euro denominated ones. So we're going to see a lot of stable coins, but there really isn't a reason to have this many. You know, we don't need 50 different stablecoins. So I think we'll then go through a consolidation phase where some will not last or some will merge together. I don't know how many we'll have at the end, but, you know, more than one and fewer than 10 would be my guess. I think it can just be confusing in the adoption phase to force consumers to think a little bit about, like, which StableCoin for the dollar am I using? Are they all the same? Some offer yield to me, some don't. But we are going to go through that phase and it'll be sort of exciting to have as many different financial service and consumer products pushing stablecoins as a mechanism for payments. But it will go through a confusing phase as well.
- [06:36]
Host
Yeah, I think that we can all see that on the horizon. I want to talk a little bit about the stablecoin ecosystem from an investor's perspective. I think you can bring a good perspective to the show here. We talk about stablecoins, we talk about infrastructure, and we talk about wallets. If you're an investor and you're looking at the developments that are happening in the space, what are you looking out for?
- [06:57]
David Pakman
Yeah, so I've been trying to draw a historical analogy here. If you were around in the late 90s, as many people were going online, we'd use that phrase a lot like, have you gone online yet? Are you online? And what that really meant was you got an email address. Because if you didn't have an email address, you couldn't really do anything online. You couldn't like open up a web account at some, you know, some E commerce, retail or Something like that. So when you got like your AOL email account or your Yahoo or your Hotmail account, then you were online. And once you were online, as more and more people went online, that was a reason for more and more vendors to come online, whether it's a digital publisher or an E commerce site or a service provider. So that was the explosion, people going online. And that's what led to more and more online activity. We are going through the same thing with crypto, but we call it going on chain. Are you on chain yet? And what that really means in our parlance, as you know, it means that you have a wallet, custodial or non custodial and you have some tokens in it which might just be USDC or stable coins. You have some wealth or some assets on chain. And why is that such a catalyst? Because once you have a lot of people with assets on chain, then there'll be more services that with one click you can ape into or buy or transact or seek yield on or invest in. And so that's the explosion that I think we're looking to see that I think will be catalyzed by more and more stablecoin activity. And I actually think that's why maybe we're going to go through like a DeFi 3.0 phase between more and more wealth on chain through stablecoin adoption and through the ETFs which will soon, we hear, allow for staking. There will be rewards and yield that is being sent to ETF holders. Hopefully some of that appears on chain rather than in your old fashioned brokerage account. So I think we're expecting to see this migration on chain of wealth and assets and that is the catalyst we need to lead to wider crypto adoption.
- [08:58]
Host
It's okay if you don't want to answer this, but if you had to pick a stablecoin winner, would you pick one?
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David Pakman
Well, I mean today obviously we just have a few in the US And I think Circle does a really good job of trying to be a compliant and institutional friendly chain. But of course Tether has more global market share. Then we hear all sorts of stories about them becoming more and more compliant or transparent or auditable or the things that I think governments and traditional institutions will hope for out of stablecoin providers. Providers. But I don't want to get into that dog fight. I do think though we're in this period where you have so many banks and financial institutions that want to adopt crypto rails, they want to use stables over crypto because unbelievably low cost, really easy to adopt. Technically transparent obviously works 24, seven, no middleman, you know, so lower fees, higher margins on payments. So we're going to have that. But they're also then prone to say, well, like why should we give our yield away to somebody else? So I think that's what leads to your previous question of why we'll have banks and a bunch of people create their own coins, stable coins. But long term, they can still get the benefit of bringing their customers on chain without needing to capture the yield.
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Host
Let's pivot a little bit now. You know, part of this maturing of the industry are crypto firms going public, becoming more mainstream. We recently heard that Etoro filed for an ipo. You just mentioned Circle. I believe that, you know, their expectations that Circle will also IPO in the United States. Is 2025 going to be the year of the crypto IPO?
- [10:32]
David Pakman
I think some of it depends on the macro. Like crypto companies are not in control of the macro equities market environment, which I think is probably the number one reason or the number one requirement that figures into your. The question of should you go public or not, assuming your business is ready to. So I can't predict what the, you know, global macros are going to do. Tariffs, interest rates, all that. But assuming we have receptive markets for IPOs in general, I think there are at least six or seven very high quality crypto companies that can and should be public companies. You mentioned a few. I can also think of companies like Chainalysis Block, Damon Kraken, you know, some of the other exchanges, the centralized exchanges. So, and I think that would be very good. Right now there's really only one, you know, public crypto company. I mean, if you don't count strategy. And I think that. So I think that should change. It would give more equity investors exposure to the space. I think it's good for the long term.
- [11:33]
Host
Talk to me a little bit more about how more public crypto companies in the United States might affect or impact crypto markets. And I'll tell you why I asked the question. We had 10X founder Marcus Thielen on the show previously and he said, you know, with more IPOs, if we see crypto IPOs this year, those companies may be incentivized to prop up the price of bitcoin. Curious of your thoughts there and how you think the crypto markets might react or be impacted.
- [12:03]
David Pakman
I don't look at it through that lens and that may be a valid, you know, sort of conclusion to draw about having more public crypto companies. Maybe public crypto companies are like more transparent about the fact that they're keeping some of their treasury and digital assets. And that makes, you know, the, the idea of keeping assets in, in keeping treasury assets in digital assets a more accepted thing for, you know, Fortune 500 companies. But, but I don't really look at it through that lens. What, what, what I would be more excited about is crypto companies tend at least a bunch of them to be really good companies. They have access to global markets instantly when they're formed because crypto is inherently global. These can be very high margin companies because the transaction costs of operating on blockchains are very low. So they can be like really good companies from an equity investor perspective. And so we want to shine light on that to really help overcome some of the negative sentiment that crypto has attracted for itself with some of the bad actors over the years. So showing that the crypto sector produces really healthy equity return driven companies is good, but it's not the only path to liquidity and excitement. As you know, like we are good also in crypto of building companies that capture economic value through just the use of their token. They don't have an equity component. But if we help bring more legitimate companies to light on the equities markets, I think that leads to more investor interest on the token markets.
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Host
That's really interesting. I mean, let's talk about Institutional investors really came onto the scene with the launch of the ETFs that you mentioned at the top of this interview. Our institutions, institutional investors ready to embrace more publicly traded crypto firms. In your opinion, are we going to see that kind of boom we saw with the ETFs or is this more of a slow burn?
- [13:48]
David Pakman
I don't know the timing of, of sort of institutional adoption of purchasing digital assets. But the setup has never been better. We even now have the United States holding digital assets. So it kind of withdraws the question of like, is it safe to do that? We want to highlight successful large custody enterprises, reporting enterprises, kyc, AML transparency compliant enterprises, the whole financial services stack, let's call it the legacy financial services stack. We want to show that that is productive, that is successful, that's adoptable by all the institutions. Some of the global bank holding companies have been prevented by regulation of being in the space. So once we have the catalysts of the regulatory changes, the legislative changes, that's really what's holding back some of the large banks and traditional financial institutions whose customers have been saying like we'd love to move money across borders for pennies per transaction independent of transaction size. We'd love to buy and hold digital assets. So again, I'm going back to a couple legislative regulatory catalyst this year that lead to more and more customers coming on chain, more and more institutions on chain, more and more ownership of digital assets, adoption of defi, more fees generated into the blockchains themselves. I think of blockchain sometimes through the business lens. Through the lens of business, what I care about is like hey, what's the revenues, what's the growth, what's the margins? Right. Well, actually are really good if you look at fee generation of blockchains. And so all of this is just triggered by this continued expected adoption.
- [15:26]
Host
When you look at the fee generation of blockchains, are there top chains that you're looking at? Like when you say that, what chains are you referring to?
- [15:34]
David Pakman
Well, look at its peak, ethereum generated about $6 billion in fees over a 12 month period. Looking back the last 12 months, it's down to about 1.7 billion. We've seen a lot of movement of fees to basically decrease in base layer fees in the EVM ecosystem because of layer twos. That's a good thing. But sure, we have a company called Etherfi which is a liquid restaking provider and they're on a run rate to generate I think 45 or $50 million of ARR. It's our current run rate and you can see that it's all transparent, it's on chain. So I love protocols that are able to produce fees or the equivalent of revenues that we can start to use as a basis for figuring out what's a fair price for the protocol's value.
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Host
Going to that a little bit deeper for me. What does that mean for the Ethereum ecosystem moving forward?
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David Pakman
Well, again, through a long term lens, I just don't see a massive threat to the Ethereum ecosystem. It's still the largest ecosystem. When we look at all layer 1 Ethereum plus the layer twos combined EVM compatibility is really a requirement for so many other chains to lure developers over. It doesn't have the most developer friendly tool set language and some capabilities. So we have more modern chains that offer sort of more developer friendliness and modern capabilities. But still there's just more liquidity and more users effectively on EVM chains. I think that's going to persist for quite some time. I know that there's a bunch of narrative about Ethereum as an organization moving too slowly, as a community moving too slowly. But, but ultimately I think the community will be responsive to the needs and the pressures put on them by the competitors. This is why it's good to have competitive environment long term. I think it's highly likely that we'll have at least three or four or five major blockchains running, you know, significant amounts of applications. And then I think we'll also have a bunch of specialty chains I'm talking about just at the base layers now, but you know, like another four or five or six or eight chains that are really specialized for very particular activities. And each of those can generate, you know, tens of billions of dollars in fees. So I think that's a bright future we're looking forward to.
- [17:50]
Host
All right, and David, just before I let you go, you know we talked about stablecoins, we talked about infrastructure a little bit. If you look outside of those, if you had to pick a narrative that we may see develop, that we may see kind of rise and steal some of the spotlight from some of this for the remainder of the year. Is there something that stands out to you?
- [18:11]
David Pakman
I think gaming is still something that we, you know, it sort of was a heavy narrative two years ago. It kind of went away. I think we'll see that emerge just because there's, there's always been the case that gaming and entertainment leads usage, consumer usage of the newest technology waves and we're, we're still due for a at least a lightweight mobile casual experience that take on crypto rails that takes advantage of things like really easy payments as we've talked about through stables ownership of digital assets. You know, we're investors in a company called off the Grid. They make Godzilla, which is a top extraction shooter game right now that doesn't advertise the fact that it's built on top of a blockchain and doesn't point out the fact that you know you have a wallet built into the game, but you do and all the in game assets are owned by the players and all sorts of really cool benefit that bring to users. I think we're going to see a catalyst maybe also in the ton ecosystem. Just given you got a billion users on Telegram and messaging. Apps have been good platforms for likely casual games. So I think that's probably an under discussed narrative right now.
- [19:19]
Host
I got to ask you a follow up question here. I know I said I was going to let you go. You know, off the grid was so huge. Everyone was talking about what that meant for web3 gaming and web3 gaming adoption and the narrative just kind of slipped into the back burner a little bit. And what I've been hearing from some gaming projects in this space is they're still kind of struggling to bring, to bring users into their product. And so my question is, my question for you is what do you think it's going to take to get that mainstream user base using Web3Games? And is it maybe going to happen in a region outside of North America that I hate to say on this show we focus so much on North America. Is, is the catalyst going to happen somewhere beyond the shores here in the United States?
- [20:05]
David Pakman
Well, I think a lot of gaming is global and so I would expect to see global gaming activity. I wouldn't characterize off the grid today as struggling. It's not a word I'd use. They had a really successful, widespread, covered launch and are continuing to grow. Sure, there's this, you know, explosion when you come on the scene and then a sort of a reversion to the mean and then steady growth. Their growth is, is, is transparent and online you can see, because it's a blockchain, you can see how many wallets there are and transactions. They're doing great. I also think they're committed for the long term and it takes time to build, you know, sustainable player bases. The fact that crypto moves on from narratives so quickly is more of a shortcoming of the way crypto thinks of the world rather than, I think the way value is built.
- [20:54]
Host
I hope I didn't say that they were struggling. I, I meant to say the narrative has kind of fallen to the, to the background. Right. We don't hear well.
- [21:01]
David Pakman
That's because there's a new narrative every day in crypto. Right. Yesterday's is, yeah, you have to cover it. I'm sorry for you, but, you know, that's just not the way value is built. Like, I'm in the business of trying to work with entrepreneurs to build economic value over long periods of time. Right. Build products that are sustainable, iconic and great, and they create economic return. What's cool about crypto is not just me can participate in that economic value creation, but all, all token holders can. So if we're focused on the long term, building sustainable businesses that are, that get paid for what they do and have users over long periods of time, I think that's the, that's what, it's less, it's less exciting and more boring to talk about that than whatever new bonk or meme coin there is today. But, but that's really the only way we're going to build long term value here, David.
- [21:52]
Host
I call it the road to boring. And it really means that the industry is maturing. I think it's a good place to be. And I appreciate you bringing a refreshing perspective to the show. You know, we don't always have guests on here who are looking at things from a business perspective and in the long term. And so I appreciate you joining.
- [22:11]
David Pakman
Anytime you need someone really boring, just call me back.
- [22:14]
Host
David, you are not really boring. I didn't mean to say that.
- [22:17]
David Pakman
You didn't say that. I said that. Road to boring. I'm using it. I like that.