Chainfeeds Summary:
After engaging with some family offices, endowments, and allocators interested in cryptocurrencies, Regan Bozman of Lattice Fund writes about his thoughts on the slow opening of the private markets.
Source:
https://x.com/reganbozman/status/1860008356234362922
Author:
Regan Bozman
Perspective:
Regan Bozman: The current trend is clearly capital inflows, but it will take time. Assuming most institutional capital sources read the "New York Times" rather than following Polymarket, they priced in around a 50% chance of a Trump victory and adjusted their portfolios accordingly. If we assume investors will prioritize their largest positions, they need to rebalance fixed income, energy stocks, and any ESG-related assets. Opportunistic assets like cryptocurrencies or investments with only a 1-3% crypto exposure are not a Q1 priority. So I'm very bullish long-term, but I think the path up will be bumpy, with a potential pullback by year-end or Q1 next year, maybe even some tax-loss selling. The fundraising market for most crypto funds was quite difficult in the run-up to the election. The main challenges include: a headwind in the venture market (primarily a lack of distribution income), a headwind in crypto markets (lack of exciting narratives, waning general interest, concerns about market structure), and emerging hot sectors (AI) - most LPs categorize crypto as venture, and to invest in new venture deals, they need distributions from existing venture investments. This was not an issue in 2021/2022 when many IPOs returned capital to LPs. Now venture liquidity is absolutely an issue as the IPO and M&A markets have performed poorly, and venture overall has underperformed. As a result, many LPs are cutting back on new venture commitments. Most LPs started investing in crypto funds in 2021, but these funds have not yet distributed cash. I don't think this is a structural issue, but rather a function of the current lock-up structure leading to early returns. But nonetheless, many LPs have not yet seen any returns from their crypto venture investments. Of course, this is not universal. Some LPs don't put crypto in their venture buckets, and some LPs are choosing more liquid funds (which is healthy for the whole industry). But these are real structural headwinds for most allocators. Even if BTC hits $100,000, these issues won't be fully resolved. There are also some crypto-specific headwinds: 1) lack of an overarching narrative; 2) waning general interest (almost no new LPs have started looking at crypto in the past two years); 3) concerns about token market structure. Most of these crypto-specific issues are subjective rather than structural. $100,000 BTC will certainly dull people's concerns about the space. But my experience is that most LPs are not focused on crypto at all. While FOMO is real, many allocators need to go through a committee process, which means FOMO translates into an investment decision at least 1-2 quarters out. On the point of LPs not focusing on crypto, one issue is that AI has captured a lot of allocators' attention. Many are skeptical of crypto use cases, but once you've used ChatGPT, you naturally feel that AI will change everything. I think the questions about crypto use cases are outdated. AI is clearly in a bubble that will destroy many venture funds. But I understand that ChatGPT is very intuitive, while crypto's appeal is less so, and the potential market size of AI is limitless. But these are current issues, and things change quickly. Within weeks, we'll see the most crypto-friendly political shift in history, along with $100,000 BTC. This will change everything. Regulatory uncertainty has been the easiest excuse to fob off the crypto industry for the past decade. But this excuse will be hard to maintain going forward. Downstream effects include better token design, more institutional adoption, and more founders joining. Like all technologies, AI will enter a disillusionment phase. After the AI venture market adjusts, the engineers working at $2 billion pre-revenue AI companies will re-evaluate their situation. They'll find the crypto industry's waters are warm, and we have better memes.
Source
