GCR Investment Review – Third Quarter 2022

GCR Investment Review – Third 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 Q3 2022, GCR invested in 7 deals and deployed $1.5M+ of community-sourced capital
  • Community saw over 150 investment opportunities in Q3, of which 40% was brought directly from the community
  • The top category the community deployed capital to during Q3 was Infrastructure
  • GCR Core Team’s macro review and outlook

There is a surprise at the end, so please read till the end!


Community-Driven Investing in Q3- Infrastructure, Consumer and DeFi 

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 2022, we have seen incredible results:

  • The GCR community saw over 150 deals in our Q3 pipeline, of which 40% came directly from the community members. This figure reflects GCR’s continued success in pushing for a true community-driven investment platform. With the significant growth of DAO’s membership, we are thrilled to further grow this figure
  • Of all the opportunities the community saw, by category: Infrastructure remains most prevalent at 38%, followed by Consumer at 33%, and DeFi at 18%

Every quarter, 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.

Later Stage Deals are Attractive in Current Market

Q3 2022 continues to be a difficult time for crypto as we witnessed a sharp decline in fundraising and trading volume. Since the publication of our last quarterly letter, macro conditions have not materially improved. As we emphasized in our last quarterly letter, we are fortunate that our portfolio companies have a war chest to experiment and pivot to find a product-market fit. However, adverse market conditions have also proven to be challenging to hire top talent as the narrative for crypto has worsened.

GCR has been proactive and opportunistic during this quarter by continuing to support strong founders early in their journey and investing in the growth stages of blue-chip projects that will become industry leaders. Although our focus remains on Pre-Seed and Seed-Stage investments, we believe later-stage investment opportunities have an attractive risk-return profile in the near term. By prioritizing our members’ desire to invest and support high-quality projects, GCR is abiding by its core objective to create a community-driven investment DAO and is well-positioned to support strong founders in the coming years.

Below is an overview of GCR’s investments during Q3 2022:

GCR Investments During Q3 2022

Portfolio
Companies
Date of
Investment
Description
GearboxJuly 2022Composable leverage protocol (link)

Soma Finance
July 2022Globally compliant multi-asset DEX and issuance platform for tokenized assets and digital assets (link)
StealthJuly 2022Software platform to sell furnished homes with optionality for short-term home utilization
TwaliJuly 2022Decentralized marketplace for Web3 freelancers (link)
CommJuly 2022Crypto-native messaging platform based on federated keyservers (link)

Mysten Labs (Sui)
August 2022Next-generation L1 powered by Move language (link)
UNDISCLOSEDAugust 2022 Omnichain interoperability protocol

One key theme that we would like to highlight from this quarter is the dominance of Infrastructure Projects. Due to the technology gap that continues to exist within the current crypto landscape, we have seen more projects that have emerged to solve this issue. We still face the same challenges that affected the industry a few years ago: difficult onboarding processes (e.g. on-ramp / off-ramp), latency / slow transaction speeds, security risks / hacks, and the list goes on.

Technological reality has cracked the market fervor around crypto and thought leaders and founders are focused on building a solid foundation for crypto applications to flourish, bringing mass adoption to the sector. We have seen these developments in the form of new Layer 1s with the new programming language and new protocol designs that are only possible with blockchain technology and cryptography. We recognize that this will not be an easy feat but rather it will be a marathon. With key milestones on the horizon, meeting visionary founders that are behind these projects helps us develop stronger convictions on the sector and its potential. With this, we are excited to support the founders of Gearbox, Soma Finance, Twali, Comm, and Mysten Labs (Sui).


Market Outlook

Crypto markets were resilient this past quarter after their sharp pullback in the second quarter. Its relative outperformance compared to traditional equities was meaningful. Much of the excitement was driven by Ethereum’s successful upgrade (“The Merge”) to Proof-of-Stake (“PoS”) and Bitcoin’s censorship-resistant and policy-neutral store of value raison d’être gained credence as global currencies rapidly lost value versus the dollar.

Source: Bloomberg

“The Merge”: The Merge was a software upgrade that transitioned Ethereum’s consensus mechanism from Proof of Work (“PoW”) to PoS and was completed on September 15, 2022. Much ink has been spilled on the benefits of The Merge so we won’t dive too deep, but in short:

  • Network issuance (e.g. dilution analogous to stock-based compensation) is reduced by roughly 5 million annually or 4% of circulating supply
  • Ethereum as a network becomes profitable with this reduced issuance. The reduced issuance coupled with buybacks (transaction fees are used to “burn” Ether), the overall supply is set to shrink over time which is accretive to per-token value
  • Ethereum now generates a yield of >6% (paid in-kind) for users who choose to stake their holdings to help secure the network (e.g. PoS). This is the first large-scale digital asset that distributes cash-flow-based yield (network transaction fees), which should attract a new institutional buyer base as well as provide a benchmark yield for other digital assets
  • For the ESG-minded user or investor, the upgrade eliminates the energy-intensive PoW mining mechanism and the network’s carbon footprint is effectively reduced to zero, making it now more environmentally friendly

Digital Assets as a Store of Value: Inflation across the world has accelerated this year, with the situation worse outside the US. This latter point is reflected in the rapid strengthening of the US dollar and the devaluation of other currencies. As foreign economies began to break down, dollar and dollar-denominated assets like USD stablecoin and Bitcoin started to be increasingly seen as a safe haven. Recently, when the Bank of England took emergency measures to inject liquidity and stop the forced sell-off in UK government bonds, investors responded by selling pounds and euros to buy Bitcoin in record numbers. This is seen in the record volume of BTC/EUR and BTC/GBP contracts traded that day.

Source: Messari Research

Private markets feedback: The overall pace of deployment slowed materially this quarter across private markets, with venture funding reaching a 12-month low in August.

Source: CoinTelegraph Research VC Database

Valuation expectations on the early stage are coming down. Seed rounds priced at $30M for equity or $50M for tokens earlier this year have settled down closer to $20-25M for equity and $30-40M FDV for tokens, although this is still not back to pre-bull run levels of $10-15M equity seed rounds. The dry powder remains abundant so there is still a huge demand for founders with a clear vision, strong track record, talented team, and path to a real business model.

Macro Backdrop: Liquidity is thin and the Fed is the only game in town. Tightening monetary conditions have created multiple cracks in the economy, including:

  • Housing turnover slowdown as higher rates reduce affordability – the average US 30 yr fixed mortgage rate has increased 300 bps since the start of this year to exceed 6%
  • Credit markets freezing up – multiple large hung M&A debt financing deals (Citrix, Brightspeed, Twitter) and the Bank of England taking emergency actions to inject liquidity
  • Currency devaluation for those outside the US, as foreign governments raise rates but at a less rapid pace to try to balance against weaker economies

There are reasons to believe crypto can continue to decouple from equities and outperform. Chief among them is that in any cycle, the longest-duration highest-risk assets (read: crypto) tend to bottom first but also rebound first. The deleveraging and forced liquidations across the crypto ecosystem were so severe during the second quarter “puke” that prices have already bottomed and positioning is a lot cleaner.

Additionally, getting out of the minutiae and looking at the big picture – the most encouraging signals to us are the continued drumbeat of increased institutional adoption despite the negative backdrop. Just this quarter alone we have seen:

  • Fidelity launched an Ethereum index fund and is preparing to enable individual investors to trade Bitcoin (link)
  • KKR is tokenizing a piece of one of its private equity funds on the Securitize platform, allowing it to be traded by accredited investors on the Avalanche blockchain (link)
  • EDX Markets, a new digital assets exchange, is launching with backing of Charles Schwab, Citadel, Fidelity, Paradigm, Sequoia and Virtu (link)
  • Nasdaq launched its Digital Assets arm, with initial plans to custody Bitcoin and Ether (link)

On the consumer side, there were meaningful announcements from major brands including:

  • Starbucks is launching Odyssey, a new loyalty program that incorporates NFTs, by launching its own private blockchain built by Polygon (link)
  • Warner Music Group is collaborating with OpenSea to give its artist roster support and improved discoverability as they explore monetization and fan growth via NFTs (link)
  • Stripe is being used to enable freelancer payouts denominated in USDC stablecoin (link)

Join Us

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 7,500+ 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! 

As part of our effort to onboard the next one billion users to crypto, we are giving away complimentary 6-month Gold memberships to people who are aligned with GCR’s core values and are seriously interested in investing with us. If you are interested, please fill out this form here.

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


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