Product Innovations Align with Investor Optimism
When product launches coincide with institutional investor optimism, innovation thrives.
As we begin 2024, we are cautiously optimistic that the digital assets industry is maturing in healthy ways. We have confidence in normalized valuations, aligned governance provisions, and the improved availability of venture capital for web3. We anticipate that the healthy recovery in 2H 2023 may sustain into 2024.
At Decasonic, we begin this fresh year with the optimistic realism that guided us through past bear markets. We hold optimism to help drive frontier product innovation, alongside the relentless realism for durable execution. Web3 adoption is still early and durable business models still need to be built. We balance the speculative noise and adoption signals and are actively monitoring how institutional investors and enterprises embrace digital assets across the financial and non-financial use cases of blockchain.
Our portfolio is well positioned for the tailwinds entering the new year. Our visions for blockchain, web3, metaverse, and AI still hold valid. Blockchain will speed up how you pay, borrow, and lend. Web3 will shape how you shop and engage with brands. The metaverse will transform how you spend time with others. AI will upgrade how you live and work intelligently. We are thesis-driven investors, with depth in our market research across these visions, to partner with future market category leaders. We are grateful to portfolio company founders who have welcomed us into their journeys.
We view the powerful technologies of today to drive the upgrade of the next-generation Internet: blockchain for verification of digital ownership, web3 tokens for new economic incentives, metaverse for immersive interfaces across physical and digital realms, and generative AI for intelligent personalization at scale. We believe that the intersection of these technologies creates market category-leading companies. As such, we see a powerful force today in this interplay of innovation capital to fund ideas and innovation.
Today: 2023 Yields a Healthy Adoption Cycle
Optimism in capital providers accelerates innovation. It takes seeds of speculative capital to birth new ideas and ultimately leads to productive capital. History provides a roadmap of the successful emergence of new industries, such as shipping, steel, rail, electricity, oil, autos, communications, and more recently, the Internet – all initially funded by speculative capital. Over time, these investments developed from frontier tech to core industries - speculative capital became productive capital.
Sustainable business models eventually emerge from the innovation failures, infrastructure is built, utility is cemented, and rules and regulations are implemented. Ultimately, the market achieves consensus concerning the best ways to use and value new technology. Productive capital investors consider fundamental metrics to direct capital allocation.
Innovation in web3 rhymes with that innovation history. We appreciate the co-existence of speculative capital funds ideas while the business models are still emerging. At Decasonic, we focus on the fundamental metrics tied to product cycles, key growth execution metrics, and resulting durable business models in our current innovation in Web3.
2023 was a year that helped rationalize the speculative capital and reset our industry towards a healthier path. During a year when key legal events and banking issues may have cratered it, the digital assets industry emerged stronger. The Silicon Valley Bank insolvency, the resolution of the FTX criminal case, the legal wins by Ripple over the SEC, and the contained criminal action against Binance - all of these cases helped to root out bad actors and set forth a healthier and more durable adoption cycle going forward.
Three large trends showcase how financial institutions accelerated their adoption of blockchain:
1- institutional investors expressed their belief in a “digital gold” through the Bitcoin trade to diversify against the risk of US dollar currency debasement.
2- financial enterprises settled international digital money remittances through digital stablecoins.
3- banks represented real-world assets on the blockchain with digital tokens.
At the same time, innovations accelerated the web3 technology stack. Significant improvements in blockchain scalability and speed, integrative technologies that bridged assets across multi-chain and cross-chain topologies, improvements in wallet and account accessibility, accessibility on crypto on and off ramps, the generative intersection of AI and web3, and the upgrade of mixed reality and physical immersive experiences - all of which are innovations released this year that solve for some of the biggest obstacles to ease of use and mainstream adoption of web3.
Investment money is re-entering crypto, stronger and faster than in past cycles. And this investor optimism has pushed the price of Bitcoin to a 2023 YTD peak in 2023 of $43.7K on December 3, up from $17.0K on January 1, representing a 157% gain.
Behind the tailwinds of the interest rate outlook, other narratives are also attracting interest for this trade in Bitcoin:
1- the anticipation of an SEC approved Bitcoin ETF in Q1 that brings institutional capital into the asset class, similar to funds flows into gold ETFs when they were originally released
2- Bitcoin halving in April 2024 limits the increase of new Bitcoin supply
3- the emerging “utility” use cases of Bitcoin ordinals NFTs, fungible tokens, and DeFi that have spawned in 2023 and gained initial adoption
4- the growth of spot and perpetual derivative products on venues such as CME, now totaling open interest of $2B in expiration futures and $164B in perpetual futures
5- other leading indicators that major institutions - Blackrock, Fidelity, NASDAQ, VanEck - are creating the infrastructure, products, and services for additional funds flows into digital assets.
Correlation trading strategies index the Bitcoin price to other altcoins such as Ethereum, Solana, Avalanche, Cosmos, and others, bringing the total crypto asset class market capitalization to $1.56T as of December 12, 2023, nearly double from $0.81T as of January 2, 2023. Bitcoin Dominance, or a measure of Bitcoin’s share of total market capitalization, stands at 52%, off the lows of 39% in 2022. As with other cycles in years past, the retail trader chatter on social media is ramping up, attracting additional speculative capital.
Visions for Tomorrow: Our Outlook for 2024
We peek around the corner in 2024 and see a macroeconomic environment that may favor web3 investments: the global central bank interest rate cuts, the regulatory and legislative pause during the 2024 US national elections, and the capital efficiency demanded by venture capital but also transformed by AI-enabled startups. In this macro context, we see the promise in the upcoming product launches in 2024 that may catalyze key areas of our investing activities.
Our outlook for 2024 reflects these key trends:
1- Blockchain scales with speed and throughput enabling high-performance use cases such as web3 gaming and metaverse. Product launches in 2024 that expand and speed up blockchain capacity are the Ethereum EIP 4844 ProtoDank Sharding release in Q3 and the Solana Firedancer launch in Q4. At the same time, other Layer 2 blockchains, Base, Avalanche, and NEAR, drive seamless accessibility for users.
2- Institutional investor interest expands beyond Bitcoin into other web3 tokens. Investors anticipate approval of the Bitcoin ETF in the 1H 2024, just before the Bitcoin halving event. We see the correlation trade to broaden investor interest into other web3 tokens.
3- Metaverse embraces mixed reality for multiplatform gaming and transmedia entertainment. Apple’s release of the Vision Pro mixed reality headset stands to catalyze developer and enterprise interest in mixed reality experiences. Apple’s ability to evangelize a developer ecosystem and its mainstream community provides the confidence for top IP creators to consider the spatial computing and media platform.
4- The exponential powers of Artificial Intelligence commoditize productivity software and accrue value to multi-party workflow and social experiences. The accelerating upgrades from OpenAI and other foundational AI models continue the performance path toward AGI or Artificial General Intelligence. A key industry event we are anticipating is OpenAI’s GPT Store launch in Q2, widely believed to bring in additional AI applications to the mainstream.
Today’s cycle of investor sentiment and token price recovery may sustain the healthy recovery beginning in 2023 to settle into a healthier equilibrium of speculative and productive capital in 2024. With the improved institutional investor sentiment, we view that this professionalism better balances investor narratives with the durable growth execution than in the prior cycles.
If you are investing and building along similar visions and trends, please don’t hesitate to reach out. We love collaborating with other outlier investors and innovators building this frontier of the next generation Internet.