This episode’s guest: Stewart, Director of Investment Research at First Class Warehouse, Twitter: @Jindouyunz
As an old fan of Toudest Warehouse, I invited its investment research director, who is also my old friend Jindouyun, to talk about how they invested 1,000 times in aave in the last cycle and the changes in the concept of value investment in this cycle. I also discussed the methodology of finding Alpha in this cycle and summarized some points that impressed me.
*The following text is for sharing only and does not constitute any investment advice.
TL;DR
1. Investment Strategy
Fund size and allocation ratio: The total size of the first-class warehouse fund is about tens of millions of dollars, and it is strictly stipulated that each investment manager cannot manage more than 10 positions. It mainly invests in altcoins.
Expected return: Outperform BTC gains.
Tolerable drawdown: You can tolerate any drawdown. There is no mandatory drawdown line for either your own or the companys. You will only sell when you find that the development trend of the project is deteriorating during the holding process.
Transaction logic: good project + good price, relatively long-term holding.
2. The content of this issue is summarized as follows
What is the investment methodology to successfully capture 1000x AAVE?
The overall judgment framework is to buy and hold based on the fundamentals of a project and the appropriate price.
What are fundamentals?
Each project has its established goal, which can be profitable or non-profit but with many people using it. As long as it is developing better and better in the direction of the established goal, it is considered that the project has fundamentals.
Taking AAVE as an example, the entire investment process is:
1) I started to screen projects after secondary investment in June 2019, and found AAVE (which was called ETH Lend at that time) in the so-called Open Finance track at that time.
2) When you see a project, ask yourself three questions: Is there a demand for this thing? How big is the demand? Can it meet this demand well?
3) AAVE answers the first two questions in the affirmative. Is there a demand? Yes, the demand for lending comes from people leveraging themselves to amplify their profits when participating in the cryptocurrency market; how big is the demand? The demand is huge, as can be seen from the contract trading volume. But the answer to the third question is no, because AAVE was a peer-to-peer model at the time, with low capital efficiency and poor liquidity, so there was no purchase.
4) However, we were quite sure that the Open Finance track would have explosive growth, and in the absence of good benchmarks, we regarded AAVE as a seed player for continuous observation and follow-up. The reason for being optimistic about Open Finance/DeFi is based on the logic that most of the demand in the cryptocurrency circle is still for cryptocurrency speculation.
5) After two or three months, when I looked at AAVE for the second time, I found that it had changed to a peer-to-pool model, so I decided to open a position. (I immediately made a layout shortly after the transformation and bought at a low point)
6) Sold it in February or March 2021 when AAVE was around 500 or 600 dollars.
What is the right price?
Valuation can actually be divided into two categories: one is conceptual and the other is business.
The representative of the conceptual type is MEME, whose characteristic is that the ceiling can be very high as long as the funds are willing to push it to that height.
The business type relies on data, which is divided into old track and new track.
1) The benchmarking method is commonly used in the old track, benchmarking against the current leaders. It is somewhat similar to the concept of price-earnings ratio. We use the ratio of the core business data of the leading project to the market value as a large reference. The core data of the lending track is the lending volume TVL. If the TVL/FDV ratio of a lending leader is 3, then if the ratio of other lending projects is 2 or 4, it is considered acceptable, but if it is 15 or 20, it is obviously underestimated, and if it is 0.5, it feels overestimated, unless the project has great growth potential. Of course, this comparison method is only one of the factors for reference, and the factors that truly form the market value are very complex.
2) There is no very accurate method for new tracks. For example, LIDO is the leader in the Ethereum Staking track. Its TVL is very high, but it is not certain what the ratio is to the market value. To this day, the ratio reflected by LIDOs valuation is far from the expected value. Generally speaking, a lending project with a TVL of 5 billion US dollars can reach a market value of 1 billion US dollars, and a DEX with a TVL of 3 billion US dollars can reach a market value of 1.5 billion US dollars. Therefore, it is usually said that TVL is a single-digit multiple of the market value, but now LIDOs TVL is 30 billion US dollars, and the market value is only 1.7 billion US dollars, the multiple is 17 times, which is higher than the previous estimate (because it is believed that if the TVL reaches 10 billion, then the market value will at least reach 1 billion). In the case that mainstream finance cannot find a comparison, the valuation of this type of new track must be determined by the leader.
What features will this round of Alpha have?
Let’s first talk about the characteristics of the previous round of Alpha:
1) The pioneer or leader of a new track. There are two advantages of a new track: first, new things are not easy to be seen through in a short period of time, and it is easy to be overwhelmed by the rise and then FOMO, so this type of target is easier to create retail buying during the rise; second, the new track is still in its early stages, and it has a safe margin of time before it is confirmed or falsified, which gives it a ceiling for valuation and narrative space.
2) Have very good business data to speak for itself, regardless of whether the data comes from token incentives. For example, Axie is the Alpha of GameFi, BNB and Solana are public chains, and PUNK and BAYC are NFTs. This industry likes to tell grand narratives, and people will become numb after seeing too much. At this time, if a coin wants to rise to billions or even tens of billions of dollars, in addition to narratives, there really needs to be some relatively large data to convince others.
It is actually very difficult to find Alpha in this round, because the characteristics of this cycle are little money, many tickets, and a large plate, so there can only be local market conditions. And observing the sectors with relatively good local market conditions so far, MEME, Mingwen, and SOLANA, also made Jindouyun have a change in investment methodology:
No longer look at what the market will use, but think about what the market will hype.
Looking back at the inscriptions and MEME, both have very good hype logic.
1) Inscriptions: In every bull market, several important groups in the cryptocurrency circle must have a sense of participation and need to get some rewards. Inscriptions are a good way to provide additional income for Bitcoin miners, so from the perspective of commercial interests, the inscription market is a natural thing.
2) MEME: There are two points. First, the ceiling is high, and there is no need to deliver impressive data or fundamentals in the process of promoting market value; second, the chip structure is more suitable for the main force to promote, no matter how high the promotion is, everyone can accept it, and there is Dogecoin as a successful case in the past, which can give everyone room for imagination. Even in 2024, it can still make everyone have the hope of getting rich overnight, so MEME is also a target that caters to the market.
How can I ensure that I don’t miss out on new things?
Mentally, I am no longer obsessed with value investing. If I insist on value investing, I will not touch the inscription even if I go back 100 times.
Logically/thinking, we no longer look at what the market will use, but think about what the market will hype. Specifically, when we see a new track or something that sounds surprising, our first reaction is not to deny it (because last year, both Inscription and SOL were recommended by researchers, but we didn’t pay attention to them because of our limited knowledge). Instead, we think about which main players and groups will hype it? How will they hype it? If it is hyped, how will the price rise?
In terms of action, you can either participate or observe and accumulate samples if you don’t participate.
What is the Stop Doing List?
There are two points:
1) Stop being biased and stop obsessing over some of the core points in the investment structure, such as it must be implemented, it must have real business, etc.
2) Stop trading on impulse. Crimes committed on impulse are not premeditated, but are committed on impulse. Trading on impulse means that you didn’t have your sights on this coin, but it has been rising for a while. After research, you are impressed. Your friends agree, so you buy it. In the last cycle, you could win two out of three on a trading on impulse, because it was a time of heavy trading. The overall return rate of doing so this time is not ideal.
Which traders are recommended to follow?
There are two:
The first one is Boss Coffee in Jindouyun for several reasons:
1) The ability is very complex. Some people are very good at speculating on MEME, but they may not be good at value investment. Some people can hold on to it for a long time and get multiple times, but they may not be able to grasp the short-term opportunities. Coffee is very versatile.
2) Thinking is based on first principles. The first principle can be simply understood as everything is thought about to achieve the ultimate goal, and the process is not affected by others or previous practices. The first principle of investment is to pursue the ultimate asset return, so as to make corresponding changes according to the current market. For example, when discussing the impact of ETF on the price of Bitcoin internally, Jindouyun and another colleague used the phenomenon that gold ushered in a bull market for several years after the ETF was passed in the United States to predict the price of Bitcoin this time, while the boss inferred that the inflow of funds into the ETF was not necessarily the reason for the rise of Bitcoin, but only the result of the rise, so if the price falls, the ETF will naturally start to have a net outflow. This view based on the first principle is not popular in the market, but it is correct in Jindouyuns opinion.
3) Be able to go against human nature and not be FOMO. Everyone understands the truth, but being able to hold back when you should, being able to act when you should, and being able to leave when you should is indeed easier said than done.
The second one is Kevin Zhou of Galois Capital (Twitter@Galois_Capital) (famous for shorting LUNA), the reason is: trading decisions come from very quantitative and precise thinking and judgment, which is something most people cannot do when trading. I recommend Kevin Zhous podcast with Jason Choi and Laura Shin, which explains in detail why he shorted LUNA. The podcast link is as follows:
https://www.youtube.com/watch?v=euejD1b59pc
https://www.youtube.com/watch?v=4Zkk1Y7VaaY
In addition to the recommended traders, Jindouyun also gave his Must Read list. They rarely make calls, but are full of useful information:
If I want to learn about important industry events, I can only choose one website, and that would be ChainFeeds. Finally, I would keep communicating with people around me. Over time, I would filter out a group of friends with a high information yield rate and keep in frequent contact with them.
3. Final Thoughts
I am actually very similar to Jindouyun. We have been investing on the front line and are also oriented to so-called value investing. However, the changes in the market environment during this cycle and the missed opportunities for some new trends and new things have made me start to reflect that it is time to find a new way of value investing and change the dimensions of thinking and decision-making. Although we dont know what will happen in the second half of the bull market, through continuous dialogue, continuous participation, continuous trial and error, and continuous observation, we may be very close to that thing.
Conversation Record
FC:
How about you give us a brief introduction of yourself?
Stewart:
Hello everyone, I am Jindouyun, currently working in investment research at TouDengCang. Before entering this industry, I was working in management consulting. In 2017, I entered this industry by chance and have been doing it ever since. At TouDengCang, I am responsible for two things: one is managing our research report business, and the other is responsible for some secondary market investments.
FC:
There are actually several reasons why we invited Jindouyun to come: First, I am actually an old fan of TouDieCang, and I have renewed my membership for three years. I have read most of the research reports; second, I think you are the ones who have achieved results in value investment among our Asian funds, such as AAVE and MATIC, which you discovered relatively early, including in this cycle. When 404 came out, Coffee started calling Pandora in the group very early. So I think you have been on the front line and have been doing this kind of serious analysis. I think we are quite similar. But I think there are still many things that I am curious about, so I invited you to talk about many things that I am curious about. What you just said is probably your professional background. Can you introduce your trading background to everyone? For example, when did you start to get involved in trading? And what is your current trading style?
Stewart:
The transaction can be divided into two parts: the first stage is some casual participation by individuals. One is the A-shares in 2015. At that time, the bull market was actually the first time to participate in something related to trading, and it was also very leeks; the second is after 94 in 2017. A classmate told me about this. I didnt dare to buy Bitcoin directly because I am a conservative and cautious person. I read the book for about two months. After reading it, I found that this thing is possible. At that time, Bitcoin rose a lot, so I became a high-level buyer. I have taken root in this industry since January 2018. I have been involved in the market for several years, and it has been a few years since I took this as a profession, or a formal management organization. In recent years, it is not only personal assets, but also the financial management needs of some friends and relatives, and the management of some first-class warehouse funds, so the whole process is like this.
FC:
You still take money from your relatives.
Stewart:
Yes, because there may be more people doing business in our area, and the industry has not been particularly prosperous in recent years. I heard that this area is better, so I will help them manage their finances.
FC:
I had a particularly deep impression before. It was the money of a relative of mine. He gave me 500,000 RMB when Bitcoin was 6,000 in the last cycle. I always suggested that you should not give it to me and buy it yourself. He said no, I must give it to you. I was very happy when it reached 10,000. When it dropped to 5,000 on March 12, he said no, I have to take it back. It is useful. I said okay, I will make up the money for you and you can take it away. But I said you have to promise me one thing, you don’t take the initiative to ask me for investment and financial management, because I think relatives are sometimes more difficult to manage than LPs, so I want to ask you along this question, what is your investment strategy? This may include your capital size and your expected return cycle. These background information may let everyone know what kind of stage your strategy is more suitable for.
Stewart:
The size of the entire first-class warehouse fund is about tens of millions of dollars, so we have a hard rule that each investment manager cannot manage more than 10 positions. In this case, if an investment manager manages 5 million US dollars, he cannot manage more than 10 positions, which means that he has to invest about 500,000 US dollars in each project on average. In this market, 500,000 US dollars can be bought and sold relatively freely, which will actually screen out a large number of projects. The characteristic of this batch of projects is that its liquidity is not enough to support. Simply put, if you open an exchange today and find that the daily trading volume of this coin in the entire network does not exceed 1 million US dollars, it is actually quite difficult to configure 500,000 US dollars. It may take a long time to buy. If you sell without reaching the target, that is, sell at a loss, or want to exit midway, it is very difficult and may have to bear very large slippage. This also leads to our trading strategy being more long-term. Generally speaking, the long term is about several months to a year. For example, in the last round, we may hold a coin for up to two years.
FC:
Do you have expected returns?
Stewart:
There is no expected return. After a round of bull and bear markets ends, everyone will definitely have some psychological goals for the next round. However, it is actually not encouraged to set a goal in advance, because if the goal is not achieved in the middle, and the market and rational judgment are about to end, it will cause yourself a lot of pressure.
FC:
But there is a problem. When you choose a target, you must think about how to exit, your expected exit return, or your LP has at least one (requirement), that you want to outperform Bitcoin or something, is there an expected return logically?
Stewart:
Yes, because we mainly invest in altcoins. We invest in altcoins not only ourselves, but also the market. We think that investing in altcoins as a whole will definitely outperform Bitcoin. So this is also a rule for us. Although it is not a clear rule, everyone has a scale in their mind. If it does not outperform Bitcoin, it is not a good thing. There is no rigid rule such as how many Xs it must be. When we invest in a project before, we will have a softer one, that is, we will ask whether its expected return is 10X. For example, a coin may increase many times, but it also needs to be multiplied by a probability. Some coins may have a strong certainty, and may only increase two or three times. This will not enter our field of vision during the first screening.
FC:
I understand. Then will you stop loss?
Stewart:
It depends on personal style, there is no forced stop loss.
FC:
I am actually quite curious about this. What is your promotion system for investment managers? You can let different people manage different positions. Basically, you guide them on timing, when to buy and when to liquidate. You are not involved in the process. So there is no IC?
Stewart:
Let me briefly talk about it. First of all, investment managers are all from our internal researchers, that is, some researchers who usually write research reports. Because they are brought up by themselves, at least they will have a more consistent approach to looking at projects. This is the first point. Secondly, if he has a certain interest and talent in trading, he can start to be trained as an investment manager. When he first becomes an investment manager, he will not be responsible for most of the funds at once. He will be given a sum of money first, for example, a certain amount must be achieved in half a year. If he reaches this requirement, he can be given an additional sum of money. This is the overall situation.
FC:
Does the half-year requirement refer to the return requirement? Or does it refer to the verification of its investment logic?
Stewart:
There are profit requirements, but we will also look at how the process is achieved. If it is an irrational impulse to buy a lottery ticket with a small probability, it will not be recognized.
FC:
Got it. Lets talk about your specific fundamentals. In fact, the reason why you became famous overnight is that I heard that Coffee may have made a lot of money by value investing in 2017 and 2018. Later, it was equivalent to that he passed on his methodology to the entire team. Last cycle, you discovered AAVE very early and should have made 1,000 times. I still have a deep impression because I saw you wrote a review at that time. So I would like you to take this as an example, or MATIC, or other high-yield projects. Can you combine this project to talk about your overall judgment framework?
Stewart:
Our entire judgment framework, in fact, we call it value investment, which is to buy and hold according to the fundamentals of a project and the appropriate price. Its just that this fundamental is somewhat different from the fundamentals in everyones usual context. When we often talk about fundamentals, we are talking about the fundamentals of a company behind the stock. The company can make a profit, and there is a high probability that its profit will grow in the future, so we will buy its stock. There are actually two points implied in this. One is that a company must make money, and the second is that after it makes money, its income can be captured by stocks. Of course, this is constrained by the law. In fact, these two points are not very valid in the currency circle, because there are many good projects that do not actually generate income, and there are some that generate income like ENS. The second point is that buying coins is actually not like buying stocks. There is no legal constraint to say how good the project is and how high it must rise. There is no such strong binding. It is more that the market thinks that the project is good and it will rise, so everyone buys it. So the logic of our value investment is that each project has its established goal, which can be how much money a company wants to make, or it can be like a communication protocol at the beginning of the Internet, which may not make any money itself, but many people use it, so it has value. As long as it is getting better and better in the direction of its established goal, we call this the fundamentals of a project. So our overall framework is to look at a project, see what it wants to do, see how its fundamentals are developing, and then buy it at the right price.
Let me talk about AAVE. AAVE is not just about its high multiple, but it can really reflect such a process and is a good example. We established the first secondary fund in June 2019. Although it was not a fund in the strict sense, we found AAVE when we started screening projects. At that time, it was called ETH Lend. The background at that time was that the word DEFI was not popular yet. What was popular was called Open Finance, which advocated that everyone could participate. There were not many financial projects at that time. ETH Lend is a lending company, but its way of doing it is a bit wrong. It is a peer-to-peer lending company, unlike todays peer-to-pool lending. When we looked at its logic at that time, we probably asked ourselves three questions. The first one was whether there was a demand for it to do this, the second one was how big the demand was, and the last question was whether it could meet this demand well?
There is a demand for lending, and the demand is to add leverage to yourself when participating in the currency market, similar to contracts, or short selling. This demand is very large, because if you look at the trading volume of contracts, you will know that there are still many people in this market who want to use leverage to magnify their profits. Therefore, the ETH Lend project met the first and second points at the time, but unfortunately it did not meet the third point, because it was a peer-to-peer approach. In fact, there was a project called Compound at the time. Compound was already doing it in a peer-to-pool approach, which was the correct way to open it, but Compound did not issue coins at the time. So when we first screened AAVE, we actually did not plan to invest in it. Later, the reason why we invested in it was that the entire project was led by our boss. I think the best thing he did in this process was that he would not ignore it just because he saw the project in the first round and thought that the method was wrong or the way he did it was not suitable. Because at that time, it was relatively certain that the DeFi or Open Finance track would have an explosive growth, as would lending, but there were no good targets. In this case, the best way was to treat them all as seed players. The test was not that todays leader would be the leader in the future. As long as the project was still working on this track and as long as it had subsequent iterations, it might have a chance. So we kept following up and would look at it again after two or three months. When I looked at it for the second time, I found that AAVE had really changed its ways, learning from Compound and making itself a peer-to-pool model. It was at that time that we made up our minds to build a position. In fact, there is another detail here, because our position building strategy does not mean that all positions are bought at once. Sometimes we also observed it over and over again, and verified it over and over again. At that time, its liquidity was very poor, and there was only a BTC trading pair, so it started to rise a lot before our position was actually entered. Now looking back, the reason why AAVE was able to increase 1,000 times later, in addition to its continuous iteration and even surpassing Compounds business, there is actually a lot of luck in it. When we first saw it, it was a peer-to-peer lending method. If it had done business in a more correct way when we saw it, the price at that time would not have been so cheap. The second point is to thank the boss for continuing to follow up on this project. He laid out this project shortly after his transformation, so he happened to buy it at a relatively low point, and then it was sold at the same time in February or March 2021, about five or six hundred dollars, so the income of the whole process will be higher, and this is the overall situation.
FC:
I understand. Actually, I just heard a few key words. I want to confirm them and ask more in depth. Just now you talked about whether there is demand, how big the demand is, and whether it can be met. You also talked about the fact that you think the DeFi track has growth. When we look back, we are all rearview mirrors. So at that time, did you think that this growth was emotional, or did you benchmark it against external data, or what? Because I want to extend it. Today, assuming that I think AI is great, do I think it is great emotionally, or do I need to use some data to prove it? This actually bothers me.
Stewart:
I will answer your question with my own experience. In fact, there were quite a lot of tracks in 2019, just like we are facing many tracks today. At that time, we were more confident in some tracks, such as DeFi, because logically speaking, many demands in the currency circle are actually speculation. Why can Uniswap become the most important infrastructure? Because without it, there are many tokens that are not listed on the exchange and can only be bought through agents. So this logic is relatively easy to grasp. I remember that in 2019 or 2018, the head of Chainlinks China region, or one of their outsourced publicity teams, had contacted us. In fact, we missed Chainlink at that time because it was a layer behind DeFi. I gave this example to say that when we judged some things at that time, many were optimistic and many were pessimistic. Some of the ones we were optimistic about did explode, and some of the ones we were not optimistic about did slap us in the face. So today, AI or DePIN will also face these problems. Some logics are easier to grasp, some may sometimes require some imagination, and sometimes the imagination may be excessive. It is difficult for me to give a standard answer on how to judge whether a track will definitely explode in the future.
FC:
So what I heard was actually more logical. For example, we think AI is a good track, but in fact, most AI is not that useful. The core of everyones belief is that AI is a global trend and it may be a very imaginative thing, so everyone thinks that AI should be used. I think this is the truth.
Stewart:
Yes.
FC:
Next question, you just mentioned that AAVE was doing peer-to-peer in the early days, but you thought the pool was the right way. Why did you think peer-to-peer was wrong and the pool was right? Where did that perception come from?
Stewart:
There are two. One is Comound’s example. In fact, Comound’s business volume was much better than AAVE’s at the beginning. The second one was in the very early days, in 2017, when there were two schools of thought in DEX. One school was what we call peer-to-peer or order book-style, similar to the trading experience and trading method on Binance, and the other school was the AMM route. I remember that the first one to formally do AMM was Bancor, and Uniswap was the second or third project to do this. In fact, from the perspective of DEX, it can be felt that when there are not many people participating in the market and the liquidity is not high, the efficiency of peer-to-pool is relatively high. This is based on empiricism and past cases. (Conclusion). Logically speaking, what is the core difference between peer-to-peer and peer-to-pool? Let me give you an inappropriate analogy. Its a bit like the difference between our previous quarterly delivery contracts and the current perpetual contracts. The difference between quarterly delivery contracts and perpetual contracts is that they eliminate one of the variables, the expiration date variable. Perpetual contracts are contracts that can last forever and have no expiration date. In the case that the entire market is not large enough, for example, there are only 10,000 transactions in total. If a year can be divided into four quarters due to the expiration date, and there are 2,500 transactions in each pool, if you erase the expiration, the pool will have 10,000 transactions, and the liquidity will naturally be good. So its the same now. Point-to-point pools actually let the market accept a unified interest rate. I cant say I want this interest rate and he wants that interest rate. I cant say I only want to borrow for 2 months and he wants to borrow for 5 months. We have abandoned these problems and standardized all these things. A unified interest rate is put in a pool, and its liquidity is abundant. This is the logic.
FC:
Do you think this (judgment) has anything to do with your past financial background?
Stewart:
There will be some relationship, but I think it is more useful to observe the projects in the cryptocurrency circle and see which projects can take off and which projects cannot in the same track.
FC:
So what should we observe? You just said that Compound used pools at first, and AAVE followed later. Why didnt Compound succeed? I want to know, first of all, do you think there is a difference in strategy? Secondly, if you observe, how do you review the market? If you look at the data, what data do you look at? What is the logic?
Stewart:
If it is DeFi, it is easier to say. The public chain is also easier to say, because the logic is very clear. Then DeFi is a way to build financial products. If it is a bilateral matchmaking, it depends on the way it matches transactions. If it is a derivative, it depends on whether the derivative is simple enough, because I think the derivative must be simple enough, and when the buyer and the seller trade the same derivative, he must be more friendly to both parties and more stable, so that there can be better counterparty liquidity. There seems to be no rule for these, which track is like this, just explore. DeFi is easier to explore because it has the experience of mainstream finance to learn from, while it is difficult to find some (reference) in mainstream business for MEME or NFT. NFT may be better, and you can learn from some trendy brands, luxury goods or some things of large companies with IP. MEME cant find this kind of (reference) at all. The common sense of the past is useless to it, so it can only observe what this industry is like, and observation is the most basic way. For example, if we want to know what the next powerful MEME will be, we will look at what the most powerful MEMEs in the past have in common and try to find those variables. But in fact, this process is quite difficult. The logic is simple, but the process of finding variables is quite difficult.
FC:
Its too difficult, and too anxious, because the essence of this is to constantly make choices, and you are taking money, and the amount of money is one aspect. If 90% of this position is gone, you will feel stupid, which is the most uncomfortable. In fact, you just said that you bought it when the price was low. I also saw your research report. You probably divide it into six dimensions, such as basic situation, project details, development, economic model, and competitive risk. Generally speaking, I have the impression that you should have a valuation. So what you think is cheap, one is AAVE. Why did you think it was cheap at the time? The other is that you look at it today. When it comes to the valuation of this industry, is it only possible to use the benchmark valuation method at present? I looked at Pima two days ago. He believes that the public chain should look at revenue or future cash flow. I don’t know how you look at valuation now. What is cheap and what is expensive?
Stewart:
The first step is to distinguish between conceptual and business projects. Conceptual projects are projects without actual business, while business projects are very concrete and will produce products. One feature of conceptual projects is that their ceiling will be very high, just like Dogecoin, which may be as high as tens of billions of dollars. To push a business project to more than 10 billion US dollars in the market today, it must deliver very good results in terms of business data. For example, it must be the leader in the lending track, it must be the leader in the DEX track, or it must capture most of the traffic and assets of RWA and Restaking, but it is very difficult to do this. So we will make a distinction at the beginning. If I invest in a business project today, and I think I have to wait until it reaches 30 billion US dollars before selling it, we will all say that you should be more stable. Can you really have such a strong business foundation? So this is the first point.
The second point is that each track is very different, divided into old tracks and new tracks. The best old tracks are easier to value. As you said, use the benchmarking method. This benchmark is to benchmark its current leader. There may be a rough ratio between the leader and its business data. I am not saying that this ratio is as standardized as the PE of traditional mainstream finance, but it cannot be too outrageous. For example, we found today that the core data of the lending track is the TVL of lending volume. If we compare it with its market value, if our leader is a multiple of three, I think it is acceptable to compare, and the allowable range is 1 ~ 10. If there is a new lending project today, its FDV ratio is about 30 at the beginning, which is obviously a bit too much. Unless it is very growth-oriented, it is really too expensive. This is the benchmarking method. If it is a new track, we generally don’t refer to its past similar projects. For example, Lido is a leader in the staking track and was also the best in the first batch. In fact, it was difficult to value LIDO. On the one hand, we knew that its TVL in Ethereum Staking would be very high, but we didn’t know what the ratio was. Until today, its valuation reflects that this ratio is actually much lower than we expected. There is no way, because we can’t find a comparison like Staking in mainstream finance, so we can only accept it. For example, we had high expectations before, but now we can only admit it. But for example, if you are working in a niche field in DeFi, the leader of your track will definitely not exceed UNI, because DEX is the largest DeFi, followed by lending, and then others, so this can also be referenced between tracks, and that’s the overall situation. As for MEME, I think there is more room for imagination, it can be as much as it wants, as long as the funds are willing to push it to that height, it can be.
FC:
I understand, the first part is mute, let me add. Jindouyun said that valuation can actually be divided into two categories, one is conceptual and the other is business. The next question, for example, in this cycle, we basically call each other every two months or one month. I don’t know if you think the fundamentals of your value investment have changed, and which dimensions in the past are no longer applicable?
Stewart:
Actually, there is. I remember that Mr. Lanhu also posted a message a while ago. I really felt the same way. He said that his previous logic of value investment is not so effective now. In fact, it is the same for us. In the last round, just like AAVE just mentioned, we would ask those three questions. We thought about what kind of products people in this circle would use, so thinking about DEX and Lending Market was a relatively smooth result. Then in the bear market of the past two years, in 2022 and 2023, we still looked for projects according to this logic. But what is the embarrassing point? I personally have probably looked at hundreds of projects, and I feel that there is no project that everyone will use. So there will be some embarrassment at this time. In terms of investment, if I want to stick to these questions, I must get a good answer before I can invest. I may not be able to do it, and I cant invest in a few projects, but if I dont invest in this project, I will miss the entire bull market. So after a long period of ideological struggle, I finally settled for the next best thing. I changed my original thinking about what people would use and what was useful to thinking about what the market likes to hype.
AI (GPU network) is actually a good example. I dont know how you view AI. I dont see much AI myself. AI answered the first and second questions, that is, whether there is demand and how big the demand is. I think the logic is very clear. With the breakthrough of large model technology, generative intelligence has been well implemented. All companies are training their own models. Training and reasoning require a lot of computing power, and giants such as NVIDIA cannot supply computing power for the time being. Therefore, according to the idea of sharing economy, idle resources, that is, computers in everyones hands, can become a good way to generate income, so we build a platform to match the two parties. This logic is very smooth. But once I think about the third question, will there really be companies using these? I remember a very powerful investor who came from a mainstream financial background and made achievements there. He tweeted last time, saying that he has also invested in many Web2 AI companies, and asked them to take a look at these (AI projects) in Web3. Of course, he didn’t say all of them, because they are either too expensive or unstable. I have the same idea as him, but if I want to stick to the third question, I can’t invest in any AI project. But I also think that AI is likely to be hyped, so I can only give up the third question.
FC:
But the question is how do you sell it? Let’s take IO for example. Although we have invested in it at the first level, will you buy it at the bottom? Or do you think it will rise again in the next step?
Stewart:
As for the IO project, I dont know much about it, so I dont know if it will rise, but I feel that in the past round, there should be a round of AI projects led by Worldcoin. For example, some of them have been listed on Binance, and when Worldcoin rose to its peak, its overall trading volume was also very good, and its market value was also several hundred million US dollars. For this kind of project, I will at least sell a batch first. Because of such a large trading volume, when their valuations are relatively high in the entire market, I will choose to sell a batch first. In order to prevent a lot of (profits) from being missed if there is no second wave. If you say whether there will be more after gambling, I feel that with so many AI projects, you may still have a wave of market in one or two years, but it is hard to say when and who will lead the rise. After all, Worldcoin has also entered a stage of its big release, and I am also wondering who is the leader.
FC:
So I think this is quite paradoxical. Worldcoin is also a VC coin, but it was hyped up to 100 billion like a MEME. So I never look at whether it is a VC coin or a MEME. I think it doesn’t matter. Either way can be right. As long as the market money goes, it is right. If you look at it from the perspective of secondary transactions, you don’t need to judge the value, because your money cannot affect whether that thing has value. I think this is essentially the case.
Next question, since you have seen a lot of Alpha projects, can you give me some characteristics? For example, if I start scanning projects now, which (characteristics) should I look at to see if it has the potential to become Alpha? I should put it in my watch list. I used to think that non-consensus is very important. People think it is bad but it is actually very good. But I found that it is too biased. There are very few concentrated non-consensus. So I dont know what characteristics do you think Alpha has?
Stewart:
Let me first summarize the characteristics of the last round of Alpha. I think there are two. One is that they are the pioneers or leaders of the new track. The second is that they have very beautiful business data to speak for themselves. For example, Axie is the Alpha of GameFi, BNB and Solana are public chains, and PUNK and BAYC are NFTs. Why are these two characteristics important? The first is that the track must be new. There are several advantages of a new track. The first is that new things are generally hard to figure out and see through at the first time. At this time, it is easy to rise and conquer. When rising and conquering, it is easy to get on the train due to FOMO. Therefore, this type of target is easier to create retail buying orders during the rise; the second new track is just out, it is still in the early stage, and once it is confirmed or falsified, there is a period of safety margin time, which gives it a ceiling for valuation and narrative space. So from the perspective of market capital selection, if it is a new track, it is a pretty good target. The second is whether it has such data, because this industry likes to tell grand narratives, and each track has to subvert something, so people will become numb and disbelieve after seeing too much. At this time, if a coin wants to rise to billions or even tens of billions of dollars, in addition to the narrative, you really need to put some relatively large data there to convince others. This data may be true. For example, Uniswap rarely uses token incentives, but it also has so much trading volume, while Axie uses proxy incentives to have so many daily and monthly active users. No matter which one it is, it must have a lot of data to support it. This is the (feature) of the past round of Alpha. Of course, it does have the experience of looking at it through a rearview mirror.
If you ask which ones are Alpha in this round, it is actually very difficult. I think this round is very difficult because there is little money, many tickets, and a large market, so there can only be local market conditions. So far, the sectors with relatively good local market conditions are MEME, Inscription, and SOLANA. Among them, MEME and Inscription are beyond my control, and SOLANA is something beyond my own cognition. After the baptism of the last round, I think the war of Layer 1 seems to be almost over, but I really didn’t expect SOLANA to emerge suddenly, so I don’t think I am qualified to answer this question. What are the obvious characteristics of this round of Alpha? It’s really like this.
FC:
I see. Let me ask, for example, how did you see Pandora at that time? Because very quickly, I saw coffee saying in the group that it had risen to several thousand the next day, and then to tens of thousands, and it was probably completed in a week.
Stewart:
Pandora is a coffee and has its own circle. When he communicates with friends, some people will mention this project. In the beginning, they actually regarded it as a local dog. This thing, it is a picture-to-coin swap, it is not the first one, there are similar things in SOLANA and Inscription before. So at the beginning, we did not say that we looked at it from the perspective of this very classical value investment. The reason why we later made a layout is that coffee believes that although this thing is not the kind of target we classically invest in, it has a narrative and space for speculation. Because the picture-to-coin swap itself will not bring much innovation, but it can solve a very important problem, that is, the problem of liquidity. Although PUNK has risen many times in the last round, and NFT has been popular for several months, as far as I know, there are still many people around me who speculate on coins and Degen, but they just don’t buy NFT, because it is difficult for them to accept the kind of transaction method of buying and selling one by one, and ERC 404 or the type of picture-to-coin swap can solve this problem better. Then, we can verify from the subsequent transaction volume of Pandora and other ERC 404 that they actually completed the accumulation of NFT transaction volume for several months in one month. So we won’t talk about how much it is used, but at least from the perspective of capital selection and speculation, it can solve the liquidity problem and allow everyone to speculate on NFT like cryptocurrencies. It may have potential opportunities.
FC:
Ok, how did you sell it? It should be back to at least a few thousand now.
Stewart:
Because this project is specifically driven by coffee, I didnt ask him when he sold it.
FC:
Got it, Ill have to ask the boss to review it himself next time. Id like to ask, did you miss the inscription as well?
Stewart:
It wasnt just the inscriptions I missed, SOLANA missed a lot as well.
FC:
Let’s get back to the inscriptions. If we missed them, we won’t review them. I can understand that. But what I want to know now is, how can you ensure that you won’t miss these new things?
Stewart:
I can only say that I have changed my mentality. I think I can reduce the probability of missing out, that is, I am no longer obsessed with price investment. If I insist on price investment, I will not touch inscriptions even if time goes back 100 times. I will not touch many tracks, but I will not make money if I don’t touch them. After all, I have to be responsible for LP, so now I have the change of thinking I just mentioned. I no longer look at what the market will use, I will think about what the market will hype. In fact, inscriptions and MEME now think that they have a very good logic of hype. Of course, this is just my personal conjecture, and it is not a very rigorous inference. A big interest behind it may be the group of miners. I think that in every round of bull market, several important groups in the currency circle must have their own sense of participation in it and get some rewards. Inscriptions are actually a very good (way) to provide additional income to Bitcoin miners, so I think from the perspective of commercial interests, this is a natural thing.
I also think MEME is quite suitable. You just talked about VC coins. These may be a trend of thought in the currency circle, but I don’t think this is the core. In fact, the biggest point of MEME is that, first, the ceiling is high, and second, its chip structure is more suitable for the main force to promote it. Then no matter how high it is promoted, everyone can accept it. There are also very successful cases such as Dogecoin, which can give everyone that kind of imagination space. In this market, even in 2024, I think only MEME can make everyone have the hope of getting rich overnight, so it is a target that caters to the market. I can only tell myself that next time I see a new track or a researcher tells me something that sounds very surprising to me, I must not run away at once. I have to see which main forces and groups may hype it, how to hype it, and what kind of rise it can have. I tend to tell myself to think about these issues and not be biased anymore, otherwise I really can’t make money.
FC:
This is the last cry of value investing. Just now you said that we no longer look at what the market wants, but what the market will hype. My current logic is very simple. For example, when my colleague tells me something, I say forget it, I will buy first. There is a part of my own position called zero funds, which is not particularly large. For example, my colleague sent me Dogs yesterday, and I am going to buy it today. To be honest, if you don’t buy, there will be no play. If you study every day but don’t participate, there will be no play at all. I have verified this repeatedly. You see others are busy, but you can’t feel how great it is. So how do you solve this problem now?
Stewart:
For example, MEME, I have a friend who is quite good at MEME speculation. If he promotes it, I will buy a little bit, really just a little bit. Having a position in it can make me more sensitive to its market fluctuations. Because I havent found a universal methodology for MEME yet, I can only accumulate samples to observe. I basically didnt touch Telegram, except for Notcoin, which I briefly participated in. But I will observe, for example, the Dogs that you just mentioned that everyone can get, I also got 4,000 this afternoon, and I was quite happy. Lets see how these evolve in the future. Because of the logic of TON, I remember that you participated in ETH Denver last year, and later shared with me that many people abroad were watching TON, and then the TON network really had its own market. So its like this, either participate, or dont participate and observe to see how it plays, so that if you continue to accumulate, one day you can catch an explosive opportunity.
FC:
I think if TON rises again, I will have to write a serious review. When it was 0.7, they were OTC, and my eldest brother repeatedly pulled me to come and asked for 2 million US dollars. I said come on, and they ended up buying 20 million US dollars.
Stewart:
This yields very good results.
FC:
It is really amazing. He has his own logic. I think we can talk about his logic when we have the chance. I have a few more questions. You should be doing Mapping again recently, because I think the price is still good. What do you think will be good in the second half? The second half is an adjective. I hope it is 1/3. So who do you think will be good in the second half? What is your general logic?
Stewart:
In fact, there are still quite a lot of differences among people inside. I can only speak for my personal opinions. In fact, I am not thinking too much about which track will explode. I really havent thought about it, because the past six months have actually given me quite a lot of frustration. The ones that I was very optimistic about did not achieve the expected increase, and the ones that I was not optimistic about at the time all rose sharply. I think from the perspective of funds, I just said that there is little money, many tickets, and a large market. Now looking at these three variables, there is still little money, there are still many tickets, and there will only be more and more tickets. The market is better. After this period of baptism, many prices have fallen. But I think it is easier to do it, but you still need more money. Money is the most important thing. There is no way to change it for the time being, so I think it is still a local opportunity. It is really difficult for me to convince myself which tracks will be more popular. I am not keeping you in suspense. I just have some intuition in my heart. For example, if you say that TON is very popular abroad, there must be a lot of users and capital, at least projects or people to participate and cultivate. For example, in some meetings I attended in the past six months, I heard some voices that DePin and AI are the two tracks with the most investment that I have seen. Of course, if I were to invest based on price, I might not necessarily invest in them, but I think with so much capital and manpower investment, there may be another wave of investment in the future. This is a possibility, not a suggestion.
FC:
I understand. I am actually still doing one thing. I have been interviewing recently. For example, in a top 100 project, or it has increased 10 times since the bear market, from the perspective of the project, what did you do right? I think there are several types. The first type is this kind of pure fundamental project, such as SOL, Ethereum, and Avalanche. I feel that they are mainly studying capital, ecology, and timing. But I think these projects that may create gains with artificial motivations, I think they do several things at the core. The first is timing, the second is a unique reason to buy, and the third is to spend money at the right time. This is what I heard. Maybe the cycle track and fundamentals are the same, that is, when is it a cycle, is it the right track, and is its fundamentals good. You will find out where is the tragedy of this? Many of these projects that have pulled the market, or have increased a lot of projects, actually did a lot of projects, such as five projects, and he may have won one, but you have to know that I think most of our logic is still mainly Buy and Hold. In fact, he (the project) is no longer playing, he has made all the money, he left, and we still hold. This is something that I think has changed a lot from the previous cycles. People are starting to play tricks. In the past, people were more long-term, but now they are not. So I think there may be a very important premise for the secondary market now. First of all, we buy fewer small currencies, unless we are ready to go to zero, but we communicate more with the team for large currencies. In fact, communication with the team is very important, and I now think that communication is also very important. You just mentioned the AI computing power thing, because we wanted to buy Akash at that time, and I told you about it, including that we also invested in IO, several upstream and downstream, whether users or their competitors, we talked around, and then what did we find? The real ones that can be used have not issued coins, because they don’t need it, because they make money. Finally, after the chat, I roughly knew that in fact, many people don’t know that some projects are issued additionally, and they don’t look at these things, so I think these are very important points for us to look at the secondary market now. First, if you really want to buy and hold, you may just hoard large currencies. Second, you just mentioned the Ethereum thing. Actually, I also made a judgment last year that the Layer 1 (war) was basically over, but in fact, when Solana did the Hackathon, there were many voices both in China and abroad. I think to some extent, we should subjectively prevent overthinking and block out this information, so now this is my stop doing list. Whenever I think I don’t want to do this, I will do it, and the probability of making money will increase by about 50%. Do you have your own stop doing list now?
Stewart:
There are two points. The first point is that we should not be biased anymore, and should not insist on the core points in the architecture, such as this thing must be implemented, it must have real business, etc. The second point is to stop trading passionately. There is a term called crime of passion, which means that I did not premeditate, but just said that I was stimulated and committed the crime on impulse. I think I will do a lot of passionate transactions in the currency circle. This coin was not in my field of vision at all. It has risen very well recently. Then I went to research it, and it was indeed a bit touching. My friends also said yes, so I went in. In the 2021 round, this kind of passionate transaction could win two out of three times, because it was in such a market with a lot of money at that time. This round is completely impossible to do so. I have personally experienced, followed or participated in, and there are only three projects that are very good objects of passionate transactions. One is Pandora, one is BOME, and the other is NOTCOIN. These three are phenomenal, but in the process of participating in these three, I have to participate in dozens of large and small (projects), so the overall rate of return is not very ideal.
FC:
Why did you buy NOTCOIN? Not because it is TON in reverse.
Stewart:
I was actually inspired by BOME. I believe that many listeners should have a deep impression of BOME, the fastest to break through 1 billion US dollars in history, and the fastest to be listed on Binance. I was actually very curious at the time, why did this phenomenon occur? A friend of mine gave me a pretty good explanation. Although I don’t know whether this explanation is true, it is at least self-consistent. He said that the main force stretched BOME, and he actually had a bit of a drunkard’s intention. His final profit was not on BOME, but the main force, or the mysterious force, was actually a big SOL user. He needed to create a project that was a hundred times or a thousand times higher, a phenomenal project that would attract the attention of all people in the currency circle. He chose BOME, and after it was created, there would be a wealth effect. After the wealth effect, there would be a lot of rebounds. If everyone missed the first segment, they would want to buy the second one, so there was SLERF, and later there were various crowdfunding, such a MEME. In fact, those who have played MEME in this process will find that you actually need to have the SOL token first. Many times, transactions are unsuccessful when you buy it directly with USDT or USDC. In this process, he will bring a large amount of traffic, including some loyal users of Ethereum in the past. After experiencing such a pull-up, many people cant sit still and bring them into the SOL ecosystem. In fact, he finally wants to create a very good trading volume and a very fanatical trading atmosphere to sell what he has (SOL). If the cost of pulling BOME is about 100 million US dollars, he may sell 1 billion US dollars of SOL at the same time. I think I buy this logic.
The same is true for NOTCOIN. It was listed on Binance at that time. If you look at it by price, what is this? But I was wondering why it was listed on Binance? I thought about it, it was TON. What is the characteristic of TON? It has a large market value, but it has no spot on Binance. For a coin with such a large market value and no spot, it is actually difficult for the main force to complete a shipment. At this time, I was wondering if NOTCOIN is to TON as BOME is to SOLANA. The second is that TON is very popular. If you want to buy it or its related targets on Binance, there is no choice but NOTCOIN. Moreover, TON is TON and NOTCOIN is NOT. I don’t know if I can describe this feeling. Its traces are very obvious and the taste is very strong, but this is just my guess. So after listing on Binance, I didn’t buy it directly. I waited for it to rise in the first wave (trading). If you use the right-side trading method, it is easier to get on board with these logical preparations. This is the process of me buying NOTCOIN.
FC:
I think you have changed a lot, and are completely different from before. But I think you are very close to making money.
Stewart:
No, as I just said, you should be able to hear that these have nothing to do with fundamentals.
FC:
Yes.
Stewart:
On the financial side or in this industry, who has the intention to create something and hopes to achieve it through what means, its probably like this.
FC:
It’s about who makes the profit and how powerful this person is.
Stewart:
How to make a profit.
FC:
OK. Thats good. Last question, which trader do you like the most, whether in the cryptocurrency world or outside of it?
Stewart:
Ill mention two. The first one is my boss, and Im not trying to flatter him. There are many rich people in this circle, and many people who make money, but some of them are promoted and spread by word of mouth that they make a lot of money. But in fact, if you observe them closely, many people cant stand the test. I have been in this company for seven or eight years, and I have observed many of his transactions closely, so I admire him. I think what makes him great as a trader is that he has a very comprehensive ability. We say that some people are very good at speculating on MEME, but they may not be so good at price investment. Some people can hold on to it, and hold it for a long time and get many times, but they may not be able to grasp short-term opportunities. My boss is very versatile, and I think he is a talented person.
FC:
In what areas do you think he is talented?
Stewart:
I think it can be divided into several aspects. The first is thinking. It is indeed based on first principles. I will not be easily moved by those articles in the market. Including the example of BOME just now, in fact, after I explained this logic to my friend, he said that he also thought so. Now I don’t have the ability to deduce this logic myself, so I am more convinced by him. The second is that in terms of trading, he is quite able to go against human nature. Including when the market started to pick up in October last year, he said something. He said that this round might be a world of ice and fire. In fact, everyone was more FOMO at that time. Many people around me were more FOMO. They felt that the prelude to the violent bull market had been opened. It would cost tens of thousands of dollars. He told us at that time that he felt that the entire market had not been cleared and had not fallen through. From many dimensions he had observed before, he felt that the October wave was a very unexpected thing. In the case of the market not being cleared, the amplitude and sustainability of this wave might not last long. At that time, everyone was very FOMO, because FOMO is a kind of emotion that conforms to the market, and it is also the main force. For example, the markets hand hopes that we will be controlled by the emotion. He has the kind of emotion that goes against human nature and is based on experience, so I think this is also a talent. Like Buffett, many people evaluate Buffett. In fact, his greatest talent is character. Character is really a very important talent. Everyone understands the truth, but can you hold back, can you take action when you should, and can you leave when you should leave. Knowing is easier said than done.
FC:
I would like to add that although I don’t know Mr. Ba, after reading his biography, I think what I envy most is that he can sit still. For example, if you really read financial reports or research reports every day, it is actually quite difficult to read one every day. There are many things that interrupt your thinking and whether your thinking is correct. You have to doubt yourself. In fact, this process is very painful. If you don’t play well. You just said that coffee is the first, who is the second?
Stewart:
The second person I mentioned to you is Kevin Zhou from Galois Capital. He shorted LUNA before. He did it as an institution with funds. This may not be so common in my knowledge. In fact, if you are interested, you can listen to his conversation with Jason Choi and Laura Shin. He will talk in detail about why he shorted LUNA and other well-known transactions. In the podcast, he will talk a lot about the logic of why he made these transactions. I didn’t know much about his background at the time. When I finished listening to Jason Choi’s podcast, I said that this person must have come from mainstream finance, because the logic of his words is full of financial engineering thinking. When he makes a transaction, he will analyze it, for example, why did LUNA explode? It is not like what many of us say, that over-collateralized stablecoins without physical support or stable asset support will explode. He actually knew that LUNA would explode a long time ago. In the past extreme market conditions, LUNA actually decoupled several times, but it came back soon. He did not short it (in the previous few times), but only chose to short it the last time. The reason he gave was also very convincing, because he analyzed the market value of LUNA, the market value of UST, the reserves of Bitcoin, and the situation of some pools of Curve at that time. In the end, the conclusion he came to was that in that situation, his reserves and some buying orders that the market followed, such as the ratio of the coefficient of how many tens of thousands of market values it could leverage with 10,000 US dollars, in that market, can be said to be a very quantitative and precise thinking judgment. It will explode, so he shorted it. So this is in the currency circle, whether it is myself or the people around me, we often do transactions in a passionate way, even if we look at projects, it is a kind of emotional one. The shock he brought to me is something I have never felt among other people. He is a very interesting person.
FC:
The last question is, what is the information source that allows you to efficiently obtain new things every day? For example, Ni Da gave me a list of his little bells before, and you can also give me a few websites, and I will post them for him when the time comes.
Stewart:
Yes, or we can interact on Twitter.
FC:
Thats all for today. Thanks to Jindouyun. Half a year later, I think we can make an appointment. Assuming the bull market cycle is over, we can review the bear market. I think its really wonderful. To be honest, I think my feelings are very similar to yours. For example, my LP asked me, what do you think will happen in the second half? I said I really dont know. Im not sure how it will happen, but I know that I may find that thing soon. I think we may still need to change a little and find a new way of value investment.
