GCR Investment Review – Second Quarter 2022

GCR Investment Review – Second Quarter 2022

By Cosmo Jiang, Jin Kang, Junney Kang

Highlights

GCR is a research and investment DAO. As a community, we source investments, conduct research, and diligence, and make investments together.

This piece lays out some highlights from the past quarter:

  • In Q2 2022, GCR invested in 16 deals and deployed $1.4M+ of community-sourced capital
  • The community saw over 150 investment opportunities in Q2, of which 55% were brought directly from the community
  • The top categories the community deployed capital to during Q2 were Consumer and Crypto Services
  • GCR Core Team’s macro review and outlook

Making Progress Toward Community-Driven Investing

At GCR, our goal is to create a community-driven investment DAO where the best Web3 investments are brought in by the community for the benefit of the community. Since launching this new initiative in March, we have seen incredible results:

  • The GCR community saw over 150 deals in our Q2 pipeline, of which 55% came directly from the community members. This figure highlights remarkable progress from Q1 where 33% of deals came from the community. We are excited to continue to see the trendline grow with the DAO’s membership
  • Of all the opportunities the community saw, by category: DeFi remains most prevalent at ~31%, followed by infrastructure/tools at ~27%, and consumer at ~20%.

We plan to continue sharing our progress on this front regularly to highlight the power of GCR’s community-led investing platform. This underscores GCR’s strong community engagement and our ability to leverage the community to add value to the projects with whom we partner. If you would like to learn more about how you can be involved with the GCR community, join our Discord.

Q2 2022 was an interesting time for crypto, to say the least (more specific details on the macro backdrop in the following section). The ripple effects from the implosion of the Terra ecosystem continue to be felt. Even in this adverse market, we remain optimistic for both GCR and the crypto industry’s future. As investors, we are fortunate that our portfolio companies are well-capitalized following the closing of their recent fundraising rounds and are able to take advantage of this time to proactively hire top talent to build and turn their vision into reality.

Further, GCR has been disciplined with our capital deployment during Q2. We refined our core investment theses and opportunistically captured value dislocation in the private markets as we began to see more reasonable valuation expectations. We remain bullish that industry-defining projects are in the works and we will be able to support such projects in the coming months. As a DAO, we will continue to play offense with a clear thesis and vision.

Below is an overview of GCR’s investments during Q2 2022:

GCR Investments During Q2 2022

Portfolio Companies Date of Investment Description
MorphoApril 2022Peer-to-peer liquidity platform (link)
T2April 2022Decentralized publishing platform (link)
SaplingApril 2022Metaverse marketing platform (link)
Infinity KeysApril 2022Play-to-earn treasure hunt platform (link)
April 2022Digital asset management platform on Ethereum (link)
May 2022Web3 publishing & newsletter platform (link)
FractionMay 2022Institutional-grade multi party computation (MPC) solution / custody technology platform (link)
MetatheoryMay 2022Blockchain gaming company (link)
Reality CoinMay 2022Imagery dataset platform that connects physical world to metaverse (link)
JiaMay 2022Emerging market DeFi platform (link)
zkLinkMay 2022Multi-chain L2 network secured by zero-knowledge technology (link)
GoldSkyMay 2022API platform for Web3 (link)
Utopia LabsMay 2022Payroll, expense, and operations management provider for DAOs (link)
Pwned No MoreJune 2022White hat guild (link)
ToucanJune 2022Carbon market infrastructure (link)
Magic EdenJune 2022Leading Solana NFT marketplace (link)
GCR Investments During Q2 2022

There are two themes that stood out as we reviewed the 150+ opportunities this quarter.

1. Consumer. We fundamentally believe that blockchain technology provides a disruptive platform for consumer applications. We have seen an increasing number of top talent focused on building applications to onboard the next billion users to crypto. “Move-to-earn” has emerged, best represented today by Sweatcoin (a GCR portfolio company) and STEPN. “X-to-earn” projects represent a new paradigm in user behavior incentivization enabled by tokenization. As these projects continue to experiment and build toward sustainable tokenomic models, the consumer applications with clear value propositions, easier UX / UI and mechanics to sustain engagement will succeed. Along this theme, we are excited to support the founders of T2 Labs, Infinity Keys, Paragraph, and Reality Coin. 

2. Crypto Services. The need for Web3 native B2B services continues to grow, which explains why we are seeing the creation of a wide variety of crypto services. From APIs to backend services, crypto services are the basic tools and services that can be leveraged by Web3 projects to scale more quickly and efficiently without having to build these functionalities in-house. There is a clear opportunity for first-movers to set the standards for this modern Web3 tech stack. Betting on crypto services is a picks and shovels approach to investing in the secular growth of crypto adoption. We are excited to support Fraction, Goldsky, Utopia Labs, Gnosis SAFE, Pwned No More, and Sapling as they continue to build at the forefront of this movement.


Market Outlook

Crypto markets experienced a sharp pullback in the second quarter after beginning the year in a slow but steady downtrend along with other risky assets. Relative performance worsened dramatically in the second quarter, however, due to idiosyncratic industry events, “decoupling” from equities for the worse. Primary drivers were the Terra ecosystem collapse and the ensuing industry fallout.

Terra Ecosystem Collapse. The event that catalyzed this drawback was the collapse of Luna and the Terra algorithmic stablecoin. History has shown that the market has a tendency to test points of fragility and this was no exception. A combination of a fragile and reflexive stabilization mechanism, a weak macro trading environment (crypto prices pulled back hard in the preceding weeks), and thin liquidity (depeg began on Saturday EDT, a low volume period) led to its unraveling and the destruction of nearly $50B of market cap in the span of just two weeks – roughly the same size of the Lehman Brothers collapse.

Deleveraging and Liquidity Crunch. Due to the high amount of leverage in the crypto ecosystem and the widespread ownership of LUNA by crypto funds, the collapse resulted in widespread contagion. Crypto assets were sold across the board as market participants re-adjusted their portfolio, whether deleveraging or just increasing cash positions. Since the collapse, BTC is down 50% and ETH is down 60%, and most altcoins are down 70%+.

Demand for liquidity increased, resulting in widening discounts between liquid and illiquid pairs. This is best evidenced in the stETH and GBTC discounts.

Ensuing Industry Fallout and Crypto’s “LTCM” Moment. The rapid sell-off and widening liquidity demand have resulted in the downfall of a number of large institutions, the most prominent of which include:

  • 6/12/22: Celsius, a retail lending platform that had $12B under custody (as of May 17th), froze all customer withdrawals and hired bankruptcy advisors
  • 6/14/22: Three Arrows Capital (“3AC”), believed to manage a $10B portfolio, had their positions liquidated on-chain. Off-chain lenders reported that the 3AC team had stopped responding to margin calls
  • 6/17/22: Babel Finance, an Asia-based retail lending platform with a $3B+ loan book (as of Dec 2021), also began limiting customer withdrawals
  • 6/23/22: Coinflex, an Asia-based futures exchange, paused customer withdrawals
  • 6/23/22: Voyager Digital, publicly-traded Canadian crypto brokerage with a $3B+ loan book (as of Mar 2022), also began limiting customer withdrawals as it works out a rescue financing deal

All of these institutions suffered from some form of the same balance sheet problems that famed hedge fund Long-Term Capital Management made in the late ‘90s – they were long long-duration assets (stETH, GBTC) and short short-duration liabilities (customer deposits), so when liquidity dried up the asset/liability mismatch worsened.

The fallout will continue to play out over the coming months. Losses will continue to be absorbed by equity holders and lenders alike as the liabilities from the now-defunct borrowers above get worked out. Crypto investment funds are likely to face redemptions over the next few months (June for those on monthly redemption cycles and September for those that are quarterly), which may result in more forced selling.

Private markets feedback. On the private side of the crypto landscape, it is a bit of a tale of two worlds. On the early-stage side, deal activity has slowed considerably. Valuation expectations are also becoming more reasonable, with some deals getting re-priced lower. However, dry powder is abundant and there is still a huge demand for founders with a clear vision and strong track record, talented team, and path to a real business model. In particular, the larger https://sharksinfo.com/ deals in infrastructure continue to be highly competitive because they are the main avenue where large VC funds can deploy larger checks.

Macro Backdrop. The current macro backdrop continues to be weak, with monetary conditions across the globe tightening as governments (e.g. US, UK, Australia, India) began to increase rates to combat inflation. The same concerns from earlier this year continue to play out (inflation, supply chain disruption, COVID-flare-ups, war, lower growth expectations, etc.). The most salient charts include:

  • US Inflation vs Wage Growth: inflation continues to outpace wage growth, impacting consumer spending
  • 10yr Rates and 2/10 spread: 10yr rates continue to rise, which reduce capital investment; at the same time, the near-zero 2/10yr spread suggests anemic future growth expectations

Reasons to be Optimistic. After this bout of aggressive forced selling and deleveraging, there are many reasons for investors to be optimistic and for those with longer-term horizons to begin investing.

  • Meaningful amount of leverage has left the system: on-chain stablecoin debt utilization is at an all-time low of 57% vs highs of 90% (Messari).
  • Asset prices have rebounded off the lows and duration risk appears to be lessening (see stETH and GBTC discount upticks above). On-chain liquidations have already tested the lows of $18K BTC and $900 ETH.
  • Underlying M&A bid now in play: Well-capitalized industry players have begun stepping in to provide rescue financing and acquire smaller players. In particular, FTX/Alameda has stated its desire in being a stabilizing force (link). In the last two weeks, FTX has offered debt rescue financing to both BlockFi and Voyager Digital and has also acquired Canadian exchange Bitvo. Nexo has also hired Citi to evaluate potential M&A (link).
  • Pressure makes diamonds: The ecosystem will be healthier as the excesses of last year’s bull run get washed away and crypto institutions embrace stronger risk management. Founders are increasingly focused on controlling cash burn and building sustainable business models.

As the saying goes, “Pessimists sound smart. Optimists make money.” That said, there is no need to be overly aggressive as the macro tape and industry newsflow will likely continue to be mixed at least for the next few months.


Conclusion

We continue to be excited about what lies ahead for GCR and the rest of the crypto community.

If you are a startup raising capital and are interested in learning more about what it is like to have the support of a community with 4,700+ members, please reach out to one of our GCR Core Team Deal Leads!

If you are a crypto / Web3 enthusiast and are interested in learning about new crypto projects, investing alongside sophisticated members, and sharing investment opportunities, hop into our Discord and join the conversation!

Please reach out if you have any questions, comments or feedback! We welcome the dialogue.

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