The original text of this article is in Chinese. The editing and translation were completed by ChatGPT. There may be errors.
What is the most important track you are currently focusing on? Why?
Michael:
Last year, I mainly invested in several AI projects, such as MyShell and Flock. Recently, I have shifted my focus to the Bitcoin track, especially projects like Merlin and Unisat. Currently, I am particularly interested in a project called UTX Stack or RGB++. I think it brings some innovative technical solutions to the Bitcoin domain.
BMAN:
Given our decade of experience in the industry and our background spanning multiple cycles, Bitcoin is currently in a sort of Renaissance. Thus, we allocate more than 30% of our funds to the Bitcoin ecosystem, involving projects like Babylon, Merlin, Bitlayer, and Unisat, about ten projects in total. Another third of our funds are invested in upcoming AI-related projects. We will also host a large-scale Asian AI Hackathon. The rest of our funds are mainly invested in infrastructure areas such as ZK, modularity, and Parelle EVM, etc., as our entire ABCDE team has a technical background, so we focus on technology areas.
Mia:
I mainly focus on our post-investment and ecosystem development. Recently, we have been closely monitoring various compliance issues and related financial products, including infrastructure and corporate services. Overall, our investment strategy is to seek progress in stability. As mentioned earlier, we are also making layouts related to AI and the Bitcoin ecosystem, including the Restaking area. In addition, we have several new investments about to be announced.
Julia:
Since we are a trading company, we usually focus on projects related to trading. Recently, we invested in a new exchange project called Backpack. As previously mentioned, we are also concerned about layer one and layer two solutions. There have been many new layer one and layer two technologies launched this year, and we have invested in several of them. Recently, we have shown a strong interest in Monad, Berachain, and other Bitcoin projects. Another area we are interested in is stablecoins, as we have seen many projects related to stablecoins recently.
Does high valuation make a bull market bad for investment? What differs between bull and bear VC investments?
Michael:
From a VC’s perspective, there is a consensus among us that the window for the primary market might only last another two to three months. In a bull market, VCs have clear exit cycles and higher requirements for investments. Looking back at our portfolio, especially during the bearish period from March to June last year, there were some parallel opportunities in Hong Kong. Now our investment expectations might not be so high on returns, but the requirements for exits are stricter.
BMAN:
Now, valuations are much higher than a year ago, sometimes even two to three times higher. Therefore, for many projects, we internally have two options: first, if the project can successfully launch within a year, we consider it worth investing; second, we are prepared to hold for 4 to 5 years to the next cycle. Projects in a middle state are rather awkward, so our advice for the portfolio is to either be prepared for the long term or seize the current cycle’s opportunities.
Mia:
Even during last year’s bear market, we were very active, having made adjustments for the cycle. As Teacher BMAN said, we are also considering possible tracks for the next cycle and making some long-term preparations. For our asset management, there will definitely be a portion of the funds moved from the primary market to more diversified investment opportunities, which is also one of our current strategies.
Julia:
I agree with BMAN’s view, a significant difference between bull and bear markets is valuation, of course, and speed. In a bear market, transactions proceed slower, and you may need weeks or even months to decide whether to invest, giving project teams more time to develop their products and bring them to market. In a bull market, everything needs to be very fast, and you might only have a few days or at most a couple of weeks to make an investment decision. If a project wants to launch in this market cycle, their speed must also be very fast.
What’s the core strength of VCs in the primary market? Why shift to the secondary market?
Michael:
Currently, the shift from the primary to the secondary market is mainly in pursuit of liquidity. Last year at this time, we saw some funds starting to set up secondary funds, because there was an inversion of valuations between the primary and secondary markets, presenting some good secondary investment opportunities. We ourselves, as major investors in the primary market, although currently focused on the primary market, will empower project teams as much as possible, whether in organizing the scene, resource docking, or marketing and technical support.
BMAN:
Indeed, we see many funds that were originally focused on the primary market now turning to the secondary market. But our ABCDE fund remains focused on the primary market because we believe the essence of the primary and secondary markets is 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 deeply develop developer communities, establish our own development teams, write open-source projects, and interact with community developers. We usually establish contact with projects before they mature and help them develop from the beginning.
Mia:
In addition to investing in the primary market, we also allocate some funds to 1.5-level and secondary markets. For us, this is just a difference in risk control and preferences. The support and resources we provide for projects do not vary depending on the level of investment. Our ecosystem is relatively large, including HashKey Exchange, etc., and we recently launched some major projects, such as compliance funds. For our investment portfolio and the support we provide for them, this is a comprehensive strategy.
Julia:
As a VC, your investors are also choosing you, not just you choosing your investors. The most capable founders always have many options. If you want to be a primary market VC, the most fundamental thing is that you need to be able to help your founders. Each VC has its unique way and features to provide help. For example, from our perspective, we are an exchange and market maker, which is a clear way we can help our projects. Other VCs may have geographical advantages, helping projects from one region to another, or have strong contacts in a specific industry. But anyway, as a primary market VC, you must have a competitive advantage that can truly help projects.
Is AI just a trend-driven venture for VCs, or does it offer substantial value?
Michael:
Over the past year, we’ve invested in quite a few AI projects, and I don’t think it’s wrong to pursue AI because it is indeed a massive narrative. We hope to break through the limitations of the open-source model with the incentive mechanisms of blockchain. I’ve seen some AI-related blockchain projects pushing the field forward with innovative solutions. In the entire AI field, solutions are still centralized, which brings greater efficiency. Cryptocurrency itself is a Plan B, so why can’t AI have a Plan B?
BMAN:
We’ve noticed that many funds originally focused on the primary market are now turning to AI. One of our portfolio companies, 0xScope, is working on AI, finding that the prices of crypto projects are mainly influenced by narratives and market makers. In the long run, I am very bullish on the combination of AI and blockchain. Blockchain is not only for human service; it is more suitable for serving AI or machines. Blockchain provides four key attributes to AI: instant entitlement, governance capability, assetization, and liquidity. These attributes are not present in current AI technologies, and combined with AI, we see a promising future. We will invest one-third of our capital in AI.
Mia:
AI is an area we are very focused on, but we are not the most professional team. We encourage our existing portfolio companies to integrate AI elements, such as AI governance. We support this transformation, are cautious about new AI investments, but are willing to make some small investments. Regarding the combination of AI and cryptocurrency, we remain optimistic, although it is still in a pending stage.
Julia:
Although there is a lot of hype in the AI field, there are also genuine application cases. In our company, the engineering team uses AI tools to write code, which significantly improves their efficiency. Another example is one of our portfolio companies, Kaito, which uses AI and language learning models to understand text-based and sentiment data. We are also using these tools. So I think focusing on AI will bring more practical application opportunities.
What are the perspectives on the Bitcoin ecosystem and L2 controversy, and how can Chinese dominance be addressed?
Michael:
From my understanding of the West, they are also pursuing TVL in Bitcoin Layer2, basically no big difference between East and West. I hope the market can focus less on TVL because currently the main focus is on which platform has the highest TVL, such as launching a launch pad or DEX on Merlin because it is more likely to gain market attention. I hope that in the next month or two, the market can shift to focus on technological breakthroughs in Bitcoin rather than just TVL.
BMAN:
The Bitcoin ecosystem has been rising since last year, starting with Ordinals and BRC20, only a year so far. It initially rose in Asia, but recently the West has also started participating. I explain the importance of the Bitcoin ecosystem to VCs in Europe and the US every week, such as Merlin and Inscription, and there are indeed European and American investment projects. Each Bitcoin halving reduces the rewards for miners, which requires new “military funds,” i.e., transaction fees, to maintain network security. The Bitcoin ecosystem can increase transaction fees, thereby incentivizing miners to continue maintaining the network. Additionally, many Bitcoins are in a dormant state, the development of the Bitcoin ecosystem can increase the circulation of Bitcoin, driving the prosperity of the entire crypto ecosystem.
Mia:
For many cryptocurrency VCs including us, more discussion is about how to build the ecosystem and practical applications and how to make them generate value. When we communicate with players in the traditional financial sector, they have already allocated a certain percentage of BTC, and they are now concerned about how to make these BTC generate compound interest. We support cooperation with any interest-bearing assets and their related applications, and we remain open-minded, believing that something new will definitely emerge around Bitcoin.
Julia:
I strongly support BMAN and Mia’s views. In communication with traditional investors, I find that their attitude towards Bitcoin is completely different from other cryptocurrencies, especially after the launch of Bitcoin ETFs, they are more accepting of Bitcoin as an asset, but still skeptical about other cryptocurrencies. I think this provides a good development opportunity for Bitcoin.
How does Binance’s quality in VC projects and its listing influence affect a project’s success? Is this impact too significant?
Michael:
Currently, this indeed poses a dilemma, that in a decentralized world, centralized exchanges like Binance occupy a monopolistic position. I hope Binance can become more transparent in some aspects, which would be more beneficial to the entire ecosystem. At the project level, there is no need to overly rely on Binance’s investment decisions; if your project is well done, Binance and OKX will naturally invest. Relying too much on the strategy of exchanges, such as reserving a large proportion of tokens for Binance and OKX, is actually futile. We should return to the essence of the project, focusing on the project’s own innovation and value.
BMAN:
The crypto industry is all about liquidity. Binance, as the largest liquidity platform, is naturally the first choice for projects to be listed. However, I’ve observed two trends: one is that the listing process is becoming more standardized, increasingly resembling traditional financial institutions like Nasdaq; the other is that the liquidity of decentralized exchanges has increased significantly, and many projects’ wealth effects and price increases mainly come from DEXs. In the future, more projects may choose to obtain liquidity on DEXs rather than centralized exchanges. This is a positive industry development trend.
Mia:
From a VC’s perspective, we should not overly pursue Binance or predict its moves. We maintain an open attitude towards our investment portfolio; if they can’t meet the requirements to be listed on Binance at the right time, then we look for other opportunities. Our goal is to support them in seizing market opportunities, not to push them to make inappropriate listing decisions.
Julia:
From the perspective of exchanges, Binance only listed 30 to 40 tokens last year, which obviously does not mean that only these tokens are successful in the market. On one hand, the number of tokens listed on Binance is very low, on the other hand, Binance’s market share has also declined, from over 50% in January last year to less than 30% in December. In the past year, we have seen many new exchanges and DEXs rise, such as EDX and Backpack. Therefore, Binance should not be the only platform that projects need to focus on.
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