Where Is The Crypto Alpha Hiding This Cycle?

Jack Farley (0:00)

Nothing said on Forward Guidance is a recommendation to buy or sell any investments or products.

All right, everybody, I'm super excited today to be joined by some of my favorite allocators in the industry here to talk a bit about where the alpha is in this cautiously optimistic, but potentially early bull market that we have going on here. Yeah, why don't we go on a line here? Just feel free to introduce yourself. Yeah, maybe mention your style of fund and what you focus on. We'll start with you, Arthur.

Arthur Cheong (0:33)

Yeah, I'm Arthur. I'm the founder and CEO of Defiance Capital. We are crypto liquid funds that's been investing in the space since 2020

Classic liquid venture style. We buy the crypto of the ad that we think have a lot of promising potential. And yeah, stay in for the ride.

Rajiv Patel-O'Connor (0:52)

Hi, I'm Rajiv. I'm a GP of Framework Ventures for an SF-based investment firm that mostly does early stage venture and some liquid token investing.

Smac (1:02)

Yeah, I'm Smac. I'm a partner compound. We are a thesis-driven, research-centric investment firm, typically early stage venture and more recently spending time on publics and equities and tokens as well. So Generalist Fund based in New York, probably a third of the fund is crypto related.

Jack Farley (1:22)

Awesome. Yeah, why don't we get into where the emerging sectors are and what's interesting.

Obviously, the first one is AI has obviously been a lot of excitement there over the last year and starting to see that shift towards excitement in crypto and obviously the intersection of AI and crypto is there's a lot of interest and excitement there. So just love to hear a bit about that specific niche sector, how the three of you are thinking about it, how are you thinking about the alpha there and the opportunity set. Arthur, why don't you go ahead.

Arthur Cheong (1:54)

Yeah, so I think in the initial phase, I think since 2023, I think that was a bit of a struggle. There was a lot of fitting of crypto and AI theme. But I think over the past one year, we start to see more and more things that make sense. I think this is probably not a very well-known fact, but the developer of the largest open source AI agent framework, Hermes, is actually built by a Nuus Research that was actually building something on a crypto AI side as well. I think now they are being considered a very legitimate AI team as well.

Those are one of the examples. We also saw a Venise AI, which is essentially a crypto version of open router where you can route inference with privacy focus through it. I think that that actually has been really taking off. I think that obviously if you compare them to open router, the token span and inference is still not as big, but the growth chart is still a hockey stick. I think that this is some of the prime example that we are seeing right now.

Rajiv Patel-O'Connor (2:53)

I think there's a few things. One is that AI is obviously transforming the way that companies operate. We're seeing operational leverage that we haven't seen previously for early stage companies, where they're able to make a lot more progress without needing to hire a lot more people or potentially spend on headcount.

On the crypto side, I think in particular, we've been really excited about financing opportunities. We think crypto is really good for capital formation. And with the whole AI CapEx build out, there's lots of different areas that need to be financed. One of our portfolio companies, USDAI is doing mid-market cluster financing. So if you're a promising startup or even a public company, and you want to buy $150 million worth of GPUs, you can go to them and potentially get more attractive rates with less of a down payment relative to what you might see elsewhere.

Smac (3:50)

Yeah. So we've been investing in traditional AI and ML since 2016 And so for us, one of the things that when we look at kind of crypto slash AI or where that overlap is happening, a lot of it comes down to the talent level of the builders there. So I think what's kind of interesting is we've seen some of the overarching ideals of kind of crypto start to permeate more into these AI systems and this AI kind of narrative, which is a lot around permissionlessness.

And so to me, I think we think that if crypto AI is going to compete on efficiency today, that's probably not the place that makes the most sense.

At least today, I mean, maybe that's not true in the future, but I think there's a lot of kind of underlying societal trends that make the things behind crypto more appealing. And that's kind of around coordination. I think some of the economic models could be different. And then again, like permissionlessness compared to the, you know, centralized AI and some of the centralized frontier labs and what they're doing.