What Liquid Funds Are Buying
Moderator: Jason Yanowitz, Empire
Guests: Seth Ginns, Cosmo Jiang
Compiled and edited by Janna and ChainCatcher
This article is adapted from a video interview on Empire, Blockworks' channel, on August 18th. The interviewees were Seth Ginns, Managing Partner and Head of Liquidity Investments at CoinFund, and Cosmo Jiang, Head of Liquidity Token Strategy at Pantera Capital. They engaged in an in-depth discussion on topics such as the current coin selection logic of liquidity funds and the impact of digital asset treasuries (DATs) on the crypto industry. Seth, a firm believer in the fundamental value and policy dividends of the crypto market, explores token opportunities with a stock-like investment approach and firmly believes that DATs are a critical bridge connecting traditional finance and crypto. Cosmo, on the other hand, prioritizes risk management, carefully selecting tokens in the current fragmented market, always focusing on core fundamentals such as cash flow. He also expressed optimism about the intersection of AI and crypto. From their different perspectives, the two outlined the current state and future prospects of the crypto liquidity fund industry.
TL & DR
- The core of the liquidity fund is to select tokens based on fundamentals, similar to stock analysis, and trade mainly through spot trading and supplemented by derivatives, focusing on institutional-level infrastructure and risk management.
- Both Seth and Cosmo are optimistic about Solana and Ethereum. The former believes that Solana is expected to become the leading L1 blockchain, and the latter is investing in Ethereum through options because ETH is the entrance to traditional finance and has the potential to catalyze commercial transformation.
- Stablecoins are a key area. Athena has performed outstandingly in the field of decentralized stablecoins. Plasma, as a project focusing on stablecoins, has significantly oversubscribed its ICO and will benefit from the promotion of relevant bills.
- DATs are a bridge for traditional capital to enter the crypto field. They can reduce investment friction and educate investors. Cases such as Bitmine show that their information disclosure is key to attracting funds.
- The integration of crypto and traditional finance is accelerating, and tokenized stocks will be traded 24/7. Exchanges such as Nasdaq have already made arrangements, and traditional institutions need to adapt to the all-weather market model.
- The DeFi ecosystem and the intersection of AI and encryption will benefit from DATs. The DeFi ecosystem provides income opportunities, and the latter is a hot topic in the traditional market with great potential.
- Regulatory policies are driving industry standardization. DATs are in their early stages, and traditional large capital is beginning to enter the market, which will drive further integration of the crypto market and traditional finance in the long run.
(I) Definition and institutional positioning of liquidity funds
Jason: I'd like to start with the concept of liquidity funds. This industry has historically been dominated by venture capital firms, with roughly 98% of institutional capital flowing into the sector going to VCs. However, this is changing. What is a liquidity fund? What is the strategy of a liquidity fund? How many tokens do you hold? Do you actively trade them, or do you hold them for the long term?
Seth: One interesting dynamic in crypto is that private companies have a liquid investment vehicle that anyone can invest in relatively early in their lifecycles: a token. Having grown up in the public equity markets, if I started to see the institutional infrastructure building up, I could build a truly institutional-caliber, liquid crypto fund for this expanding token universe. I saw this beginning to happen at the end of the last decade. In early 2020, I joined Jake and Alex at CoinFund, which mimics what I do in equities: it evaluates investments based on fundamentals. Previously, there were far fewer tokens that could capture value through tokens. Blockworks recently did a great job outlining the checklist of what constitutes a good, transparent, investable, liquid token. But now they're starting to behave more like stocks—you can simulate revenue, derive target prices, and construct a fundamentals-focused portfolio. Furthermore, there are governments now implementing pro-crypto policies, and these will become equities in the future. So, this convergence and expansion of market cap tables and capital structure components is happening in the crypto world.
Seth: As an investment firm, our role is to identify the best fundamentals-based opportunities in both venture capital and liquidity. On the liquidity side, we pursue an absolute return strategy. This means investing in long-term growth opportunities that we believe have very large target markets, exceptional teams, and the potential for significant returns over multiple years based on fundamental assessments. We apply a fundamentals-based hedge fund approach to liquid cryptocurrency investments, and because these tokens are liquid, we are able to manage risk.
Jason: Cosmo, how much overlap is there in managing a public equity fund and managing a liquidity token fund?
Cosmo: From my perspective, they're the same. Perhaps we'll start by discussing the categorization of liquidity funds. People don't fully appreciate that different types of funds have very different mandates. At the highest level, there are market-neutral funds, whose goal is to generate returns without any directional market risk. Then there are more absolute return funds, whose mandate may be to take on some directional risk. And then there are pure, fundamentals-based long-only funds, whose mandate is to take on a significant amount of directional risk and hope to generate meaningful excess returns on that basis. It's a bit like classic stock picking: picking good stocks, or in this case, good tokens, that should outperform the market over the long term. The confusion now lies primarily in the fact that in a volatile market like crypto, the performance of directional funds will obviously be very volatile. Market-neutral investing in crypto is very attractive because market volatility increases the returns and spreads available to market-neutral funds, so when market-neutral funds can generate outsized returns regardless, the distinction becomes less clear. Furthermore, over the past three years, everyone has been dealing with a huge wave: the rise of Bitcoin's dominance. In a world where Bitcoin is among the top 5% performing assets in crypto, it has become a benchmark.
(2) The contradiction between Bitcoin dominance and fund management
Jason：Talk about responsibility and how you manage the relationship between fund investors and Bitcoin dominance. I ask this because Bitcoin is one of the best performing assets in the market, but fund investors don't pay fund managers to just buy Bitcoin on the open market.
Cosmo: At some point, if you know Bitcoin will be the best-performing asset, you should long on it. But as a risk manager trying to build a repeatable process over multiple years, it's unlikely that process would allow you to hold 100% Bitcoin. You likely have a risk management threshold that you adhere to over the long term, and in a so-called conventional environment, that might mean your maximum concentration in any given token is 25%, 30%, or maybe 40%. In that case, if you only hold 25% in Bitcoin, and Bitcoin is the best-performing asset, you're certainly going to underperform. So that becomes a problem, especially as Bitcoin becomes more accessible and, once again, the most recognized asset. The success of a liquid fund depends on fund investors choosing the right fund for them. As a manager, you choose fund investors who understand what you're trying to achieve, otherwise you'll be caught in these difficult conflicts.
Seth: Another really interesting dynamic is that Bitcoin is a bit like a CNBC cover story. When they talk about crypto, it's on the cover of the Wall Street Journal or the Financial Times. For the mainstream media, it's something that attracts them. Interestingly, there's a lot of positive fundamental momentum in the decentralized finance and stablecoin space, with very innovative base-layer and innovative companies emerging, but every time there's a buy order in the market, the Biden administration cracks down on the space again, and then money flows from Altcoin to Bitcoin. So the attention on Bitcoin is a dynamic; people are focused on Bitcoin first. We're entering a period where the government is bringing more positive momentum to crypto, and it's happening faster than anyone in this room expected. Obviously, at the end of the first quarter, there were widespread concerns about tariffs, but as those concerns have begun to subside, we're starting to see excitement about stablecoins. When a government moves from executive orders to actually pushing a legislative agenda and investing political capital in the development of crypto, that's a truly breakout, long-term growth moment for crypto.
Cosmo: Digital assets are divided into Bitcoin and blockchain technology. Bitcoin can survive, grow, and succeed independently of the success of blockchain technology. Bitcoin has essentially nothing to do with blockchain technology anymore, other than the fact that it runs on a blockchain. They are two very independent risk factors and fundamental factors. So if you want Bitcoin, you should buy a Bitcoin ETF. If you want exposure to blockchain technology, you have to bet that it will eventually have a wide range of fruitful use cases.
(III) Market differentiation and portfolio construction
Jason: Seth, when you joined Coin Fund, if you bought 10 tokens, 9 out of them would go up. The market is very different now. Now if you blindly pick 100 tokens, maybe only 2 will go up, and 98 won't. Let's talk about the market or portfolio construction.
Seth: This is a great market for liquidity funds. In this environment, if you put in the effort, have good connections, attend developer conferences, and see where the technology is headed, you can earn very good returns. The biggest setback over the past few years has been not seeing these positive fundamentals reflected in token valuations. My core premise for investing in Altcoin is that these are long-term growth opportunities with large and expanding addressable markets, and there are very savvy developers and entrepreneurs leading these businesses. If you invest in a seed or Series A startup and pick the right one, these investments should significantly outperform high-quality assets like Bitcoin, even though Bitcoin still has a lot of room to run.
Cosmo: The level of dispersion in the market this year is really crazy. I've been a portfolio manager in the equity space for a long time and I'm used to a lot of dispersion, but the reason why comparing Bitcoin to all the other coins is so problematic this year is because Bitcoin is up 24% this year, while the average top 100 coin was down around 30% by the end of July. So in a world where the average coin is down 30% and Bitcoin is up 24%, the comparison becomes really crazy, and only about 5% of the top 100 coins are up this year. So in a way, this is a coin-picking market, but unless your coin is Bitcoin, good luck picking it.
(IV) Token Selection and Trading Strategy
Jason：How do you choose your tokens? How many tokens do you typically hold at any given time?
Cosmo: The core of what we do is fundamental assessment. We look for management teams that we can trust and evaluate, as well as business models with unique economic models, or projects whose future economic conditions can be evaluated. And the cash flow of all assets is the most important. Interestingly, the initial discussion about value capture revolved around the need to use all revenue generated to repurchase tokens or return revenue to token holders through staking or other methods. I hold about 10 to 15 tokens. The first half of the portfolio, or 50%, is in 5 tokens. So the concentration is quite high. Regardless of the sector, I usually have a portfolio of 20 tokens. As a single analyst, I can't analyze more than 10 tokens, but I have the resources and a strong team, so I can expand to 20.
Jason: You keep talking about fundamentals. Can you elaborate on what fundamentals mean?
Seth: Growth is key, and any on-chain metric is priced in almost immediately. If an on-chain metric changes, like revenue multiples, if you look at Ave and its revenue multiple, you'll see that as revenue rises, the multiple remains constant, meaning revenue growth is being reflected in the token in real time. You don't gain any advantage just because revenue grew 25% last month because that's already priced in. What matters is understanding the opportunity that's coming up and whether revenue is likely to continue growing at that rate, whether it's likely to accelerate or decelerate. And the multiple reflects that acceleration or deceleration. If you're in the early stages of a really big acceleration, you'll typically see multiples higher than where you're trading.
(V) Market Narratives and the Existence of Non-Fundamental Tokens
Jason: How do you deal with the idea that the market is still largely driven by narrative?
Cosmo: The word narrative is a shortcut for humans, and it's actually a much more complex system. And I do think there are a lot of factors involved, but there's also the question of time horizon and the fact that there's likely truth behind the "narrative" that's driving action. In the short term, markets tend to be driven by narrative, or it's easy to use narrative to explain why something happened after the fact. But over the long term, coins with stronger fundamentals clearly outperform coins with weaker fundamentals. We have a fundamentally sound portfolio, and out of the top 400 coins, there are probably 75 to 80 that fit that category, and those coins have outperformed the fundamentally weaker coins by an average of about 20% or 30% this year. That might not sound like a huge number in traditional markets, but in crypto, it is.
Seth: First, in traditional markets, meme stocks are the best-performing stocks. Second, the ability to directly drive value capture and shift token fundamentals toward greater alignment with actual value capture is likely more dynamic than in traditional stock markets. Even in traditional stock markets, Tesla was the most shorted stock in 2013 and 2014 because people saw it as a meme stock that far exceeded its potential from a fundamental perspective. So, in crypto, we have a much greater ability to get a project started from a true fundamental value capture perspective. Bonk is a great example on this list of a high-performing token with strong momentum in terms of fundamental penetration.
(VI) Token Trading Execution and Selling Timing
Jason: Part of your job is picking the right tokens. Two other aspects I'm interested in are when to sell your tokens and how to execute trades. And what tokens do you hold currently?
Cosmo: Excess returns are driven by token selection. Other managers, such as market-neutral managers and market makers, may excel in token acquisition or strategy execution. The vast majority of our performance comes from token selection, not actual execution. That is, we primarily trade spot and some derivatives to access liquidity from elsewhere, as US-domiciled funds cannot trade on international exchanges. This year, one of our unique and successful investments has been Ethereum. We established an ETH position in May, primarily through the options market. The argument at the time was that everyone was disappointed with ETH, yet ETH remained the second-largest token by market capitalization, the gateway for traditional finance to the cryptocurrency market, and the home of most stablecoins. Over the past six or seven months, people have been deeply disappointed and frustrated by ETH's price performance relative to Bitcoin. From the Ethereum Foundation to the project leaders, everyone is working hard to get ETH back on track and foster a more commercial mindset.
Cosmo: I can talk about this at a high level. Our company's largest holding remains Solana. We remain very bullish on Solana becoming the leading L1 blockchain. We are now expressing a lot of our views on other tokens through DATs. So we are the largest investor in Caner Equity Partners besides SoftBank and Tether, and this is a large position we hold as an alternative to Bitcoin. We are also one of the largest anchor investors in Bitfinex, so we hold it as an alternative to ETH. One token that has performed very well recently is Athena. With the explosive growth of stablecoins after the passage of the stablecoin bill, this is one of the very exciting things in the stablecoin space in the United States after the passage of the stablecoin bill. Paul Atkins' speech on decentralized finance last week, they are really pushing decentralized finance lending in a big way. Athena is very pro-cyclical in a pro-cyclical environment.
Jason: Before we leave this topic, there are a few other things I want to talk about regarding DATs, but before we leave the discussion about tokens and portfolio construction, when did you sell?
Seth: When there's a token with strong fundamentals, rapid growth, and good performance, and it experiences a significant drop, we risk manage that position, adjusting for the volatility of the token. We also have weekly portfolio reviews and risk management meetings, which cover macro, the top-down picture of crypto, the top 100 performing and underperforming tokens, the working and ineffective parts of the portfolio, governance proposals, key news, charts for the week, and then we make selections for each token in the portfolio, as well as tokens that are being considered for inclusion or have recently been removed from the portfolio.
Cosmo: When I think about risk management, starting with portfolio construction, there's always a top-down view of where we are in the market and how much we want to invest in any particular sector or factor, such as large-cap stocks, small-cap stocks, decentralized finance, non-decentralized finance, L1s, etc. This plays a significant role in our portfolio construction and relative sizing, which can drive some non-specific or non-bottom-up decisions. But from a bottom-up perspective, when we look at any position in isolation, we're very process-focused, and we review the KPIs of our tokens at least weekly. When investing in high-growth stories, we want to keep them running. But when something is trading at an extremely high valuation, the fundamentals must continue to improve, otherwise things can get tough once the market senses signs of weakness. So we pay close attention to weekly tracking. If revenue declines month-over-month for several consecutive weeks, I won't sell, but it will increase pressure, and we'll ask ourselves why and reconsider our position sizing.
(VII) Discussion of DATs
Jason: One thing that exists in the stock market but doesn't exist in crypto is investor relations. There might be an investor relations portal, an investor relations team, quarterly earnings calls. None of that exists in crypto, and I'm just starting to see some of it. If there's a founder who's launched a token listening to this, what advice would you give them about managing investor relations with liquidity funds?
Cosmo: People have to realize that when you have a liquidity token, it's a huge responsibility to interact with your ultimate stakeholders, your token holders, because it's now in the public market. And as the market starts to focus more on fundamentals rather than pure hype or narrative, management teams are starting to realize that they have to focus on cultivating a healthy shareholder investor base, so this is critical to the long-term health of the token.
Seth: I totally agree. What’s interesting is that under the previous administration, a lot of teams were afraid to take on an investor relations role because it would make them look less decentralized. Now that there’s an administration that’s moving in the right direction from a policy perspective and encouraging team participation, this has encouraged more teams to consider the investor relations function, and DATs have played a big role in this.
Jason: Should every reputable, fundamentally sound founder with a token consider DATs now?
Seth: DATs are doing several things. First, they promote education and play a crucial role in educating traditional investors about what protocols are doing, what Bitcoin, ETH, and Hyperliquid are doing, while also reducing some friction. Many traditional equity funds can't directly hold tokens, many tokens don't have ETFs, and existing ETFs generally can't be staked or generate returns. So DATs overcome a lot of friction. Compared to the capital flows from crypto-native funds, the capital flows from traditional finance are enormous. But over time, we'll see more of these bridges, and then after the market structure bill passes, traditional foundations will directly invest in tokens.
Jason: Looking at DATs from a more macro perspective, the industry has two views on them. One side says it’s a fad, and the other side says it’s the new reality and you have to prepare for it.
Seth: This is exactly what's leading us toward the convergence of the cryptocurrency market and traditional finance. The regulatory and policy landscape is opening up, and it's perhaps the second-largest growth opportunity after AI. Furthermore, it's more directly investable, more accessible, and clearer about where capital should be deployed. The capital flows we saw in DATs preceded the ability of traditional funds to enter the crypto-native space. So, with the passage of the Market Structure Act and the decline in MNAV (net asset value multiples), we may see a concentration of large winners within each ecosystem. Furthermore, it will still take two to three years for traditional funds to fully enter the market and be able to directly participate in token trading. So, until sufficient regulatory clarity is achieved to allow direct participation, these bridges will be used.
Cosmo: One of the least understood and least reported things about DATs is that Coinbase's inclusion in the S&P 500 was a very groundbreaking event, because now every asset manager in the world that benchmarked to the S&P 500 suddenly had to decide whether they were overweight, underweight, or neutral on Bitcoin. Before that, before April, you could have chosen to ignore it. But now, if you manage any money in the world, you have to care about crypto. This is now reflected in the market, and you can see it in the performance of Coinbase, Robin Hood, Circle's IPO performance, and the emergence of DATs and the strong market reaction they received. So this is all part of a larger trend where equity investors now have to allocate or decide to allocate to digital assets, and they are clearly choosing to be overweight rather than neutral or underweight.
(8) Integration of Crypto and Traditional Finance and Future Trends
Jason: Finally, let's talk about the idea of convergence. We've already seen DATs and, for example, Atkins's speech on blockchain-based financial markets and stocks, as evidenced by Kraken's acquisition of Ninja Trader. What will the world look like in a few years?
Seth: Let's assume Coinbase tokenizes its shares later this year or early next year, and these tokenized shares trade 24/7 with ample liquidity. If you're a fund currently holding Coinbase shares, and they only trade Monday through Friday, 9:30 AM to 4:00 PM Eastern Time, are you fulfilling your fiduciary duty to your investors by holding traditional stocks instead of Coinbase's 24/7 liquidity? If there's ample liquidity, the answer is clearly no. This will eventually lead to people entering the crypto space and being able to hold tokenized shares. Then brokers like Robin Hood, Circle, and traditional banks will follow suit. This will lead to a surge in traditional stocks trading 24/7, and once it starts, it will happen very quickly. The Market Structure Act could be a key component in making this happen. Nasdaq and the New York Stock Exchange understand this, but there are some practical operational issues at play. Crypto-native players have inherent advantages, and others will face a steep learning curve to catch up. This is the future, and it's coming soon.
Jason: One last question before we wrap up. Which groups in crypto will benefit the most from these DATs?
Seth: I think it's all participants, all large decentralized finance ecosystems. When you think about what DATs are, they're funds that deploy capital as much as possible to maximize returns. There are a lot of interesting yield opportunities in decentralized finance today. So anyone who can generate excess returns at a reasonable level of risk will be a huge beneficiary, whether it's Athena with a stable 10% yield, or a staking provider or a revolving loan provider.
Cosmo: Anything that people can fundamentally assess, decentralized finance will be one of the key areas, the base layer. One area that's going to be hot soon is the intersection of AI and cryptocurrency. This is a big MAG 7 theme, and it's a big theme in traditional markets as well. There are some very interesting opportunities at the intersection of AI and cryptocurrency, and it's an area ripe for DATs.
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