We believe cryptocurrenciesdigital assets and blockchain are revolutionary technologies, which will change and disrupt our society. 

Main disruptive features of blockchain are:

  • decentralized governance (no single entity is in control)
  • immutability (miners or stakers make sure the state of the network is irreversible)
  • trustless computation (every party interacting with the network can trust that it will execute automatically as promised)
  • open access (everyone can access the network and review the code without permission)
  • public verifiability (data are public and transparent, lowering the costs for audits and proof of reserves)

Thanks to these features, we will start bypassing inefficient, rent seeking trusted third parties. Decentralized crypto-networks (computer layer) will replace centralized authorities (human layer) with trustless, decentralized protocols. That will lead to much higher social scalability. Think human-powered bell towers being replaced by automatic mechanical clocks.

Invention of mechanical clocks increased social coordination and freed “time” from trusted human agents to automated machine agents.

We define four blockchain segments, that will have the highest impact in the future. Please note that all of these are enabled only by open, public, borderless, neutral and censorship resistant blockchain networks.

1. Stateless digital money

Cryptocurrencies, such as Bitcoin are the first and simplest use case of blockchain, while also utilizing other technologies like asymmetric cryptography or Proof of Work (mining).

Although still nascent and volatile, we believe that existence of open, digital, uncensorable, sometimes transparent and sometimes fully private cryptocurrencies is inevitable at this point. They do not necessarily need to overthrow our current monetary system. However, they provide a healthy experimentation ground for alternative monetary policies. They also provide non-sovereign safety belt – alternative for people to escape to in case sovereign (government backed) money and monetary policies fail.

Unseizable, private cryptocurrencies could also provide a safe haven for capital from offshore and Swiss bank accounts, which are slowly losing their ability to protect privacy of their clients. There is a popular comparison, saying that Bitcoin is comparable to “digital gold”, but more liquid and easier to store and transfer.

Sub-theses of this thesis are also “sound money thesis” (supported by austrian economic school) and “ideal money thesis” (concept pioneered by inventor of Game Theory, John Nash). Arguably both sound money and ideal money should be independent of central banks and individual nation states, acting as an alternative and reserve asset to fiat currency, in similar way gold does.

Our society is slowly growing into an idea of purely digital, neutral crypto money.

Apart from Bitcoin, we monitor couple of other cryptocurrencies, such as Monero, and Ether. The reason why they may make sense from investment point of view is that their monetary policy is usually deflationary and their adoption is still nascent. If their adoption starts growing with exponential rate (as we expect with such networks), it will mean the price (nominated in inflationary fiat currencies) will rise significantly.

2. Open, decentralized financial system (#DeFi)

DeFi means stack of technologies that allow transparent, open, programmable and decentralized financial services (apart from just money). Services such as creation of assets and derivatives, lending, insurance, exchanges… are currently provided by institutions. Thanks to blockchains, they will be provided by decentralized protocols and smart contracts that are enforced by the network incentives, rather than law.

In order to get exposure to success of DeFi, we can invest in tokens of underlying smart contract protocols (such as Ethereum, Tezos or Cosmos), if we believe that these bedrock protocols will accrue most of the value.

Or we can invest in tokens of middleware protocols, that enable specific services, such as MakerDAO (“decentralized central bank”) or Synthetix (decentralized protocol for creation and trading of synthetic assets).

Digital assets (tokens) of these protocols are designed to economically incentivize all participants of the network to act on behalf of the network. Thus, if designed correctly, they should accrue value and grow in price if protocol/network will become successful, even though there is no authority – state or private firm – to govern and manage them.

Last but not least, we can invest in equity (or tokenized equity) of companies, building centralized customer facing services on top, such as cryptocurrency wallets.

We at Sigil are looking to invest especially in decentralized tokens of underlying and middleware protocols, which we believe can accrue a lot of value from the new digital financial systems being created on top of them. In couple of years, when technology will become more mature, it will make sense to look into tokenized equities of companies as well.

Four investable segments of open blockchains

3. Web 3.0

This term indicates evolution of structure of the internet. Web 1.0 were first simple HTML websites and communities fragmented among various discussion forums and chat boards. Web 2.0 is what we have now – majority of online traffic and online commerce is increasingly under control of corporations such as Google, Facebook, Alibaba or Amazon. These corporations have access to all our data and can even influence our behavior (e.g. Google can alter our shopping habits and desires by showing us customized targeted ads), thus becoming increasingly powerful.

Web 3.0 is a pushback against increased surveillance and centralization of internet and online commerce. Paraphrasing Peter Thiel – when pendulum swings too much in one direction (centralisation) over-correction in opposite direction (decentralisation) is imminent. Web 3.0 consists of technologies that enable users to reclaim control of their data and possibly monetize them on their own terms. Web 3.0 will be powered by decentralized protocols and crypto-networks, using technologies such as cryptocurrencies, smart contracts and encryption anonymization tools.

In other words, Web 3.0 will become a more decentralized, privacy oriented and open version of internet. We can invest in Web 3.0 thesis by betting on alternative decentralized networks such as FOAM protocol (decentralized community built GPS competitor) or NYM (privacy infrastructure). Many of these projects also employ tokens to align incentives of their decentralized networks.

4. Decentralized governance

The term “Governance” is an umbrella term that covers ways and processes on how we coordinate on scale. How we organize our societies, define and enforce rules and make collective decisions. Today our coordination relies mostly on governments and private companies protected by enforceable laws.

Decentralized networks enable us to create new ways of governance on large scale (as Nick Szabo argues) by transferring some of the rules and processes from our current systems (backed by lawyers and manual administration) to automated, trust minimized protocols, which are aligning economic incentives of participants.

It turns out that by utilizing crypto-economic incentives in blockchains, we can experiment with: 

We believe that decentralized digital networks such will accrue significant value if they succeed in creating new types of governance and tie the governing system into usage of their native crypto assets (as Decred). These assets (tokens) can then become a vehicle capturing and utilizing political influence within whole ecosystems and can also help us to implement better processes and align incentives in our current political systems.

We recommend our research for further reading on this topic.

Combining our theses together – Open Digital Economies

These are the main four theses that we are currently covering in our investment portfolio and approach. They are not contradictory to each other. They are complementary. If at least some of these visions materialize and get mass adoption, we should think about them as whole new open digital economies with their own currencies, markets, rules, decision makers and services.

Open Digital Economies will be built on top of unbundled financial and political primitives and allow for frictionless digital markets, more transparent governance and permission-less financial services. Enabled by open blockchains open digital economies will emerge globally without borders and create new ways how value is created and captured, disrupting many nation states in the process. Read about first principles – heterodox economy – from which we try to extrapolate this turn of events.

In conclusion, decentralized crypto-networks will change the way how we transfer value, conduct contracts, deal with data…, creating unstoppable protocols, which are solving some of the most pressing issues of digital age (such as centralization of digital services, surveillance, censorship, data ownership…).

We predict, that next wave of tech unicorns will include crypto networks. Picture is inspired by Fabric Ventures.

Our Investment Strategy

We are on the mission to seek and invest in the best opportunities in crypto-space, which provide asymmetric high risk – high yield dynamic. However, current cryptocurrency and blockchain markets are full of noise. Therefore we believe that by careful analysis we can find undervalued projects with long term growth potential.

We do not know which particular technology and decentralized network will succeed in the end (no one does). We are building our investment portfolio in a way that lets us profit from almost all possible outcomes, by smart diversification.

Majority of our capital is allocated in balanced portfolio of long positions for various cryptocurrencies, tokens and other digital assets. Part of our portfolio can be allocated also in equity shares of companies from the crypto/blockchain industry (public stock or private equity). In rare cases we may also hold short positions, if we conclude that given asset is strongly over-valued by the market and correction is imminent.

Our portfolio construction is described in one of our letters to investors.

Investment horizon for our positions is usually 2 – 10 years. However, we adjust the size of our positions more often by rebalancing the portfolio. From time to time we decide to take short term trade opportunities if they emerge based on our data analysis.

Fundamental analyis

  • Technology – code review and activity of developers in Git repositories.
  • Team – due diligence on core team members, ideally direct contact.
  • Community – quantifying the size and engagement of community on social networks.
  • Decentralisation – in case of cryptocurrencies it’s important to assess consensus, governance and ownership distribution.
  • Economic viability – estimating the potential upside by market analysis and assessing whether it´s viable to utilize cryptocurrencies or blockchain in given market.
  • Quantitative analysis – we utilize advanced models for analysis of market and non-market data
  • Macro analysis – for entry and exit timing we monitor state of the overall market, like media awareness, regulatory risks and sentiment
  • Evaluation of crypto-economics – every crypto network has a token with utility, that should be able to capture value created by the network. We focus on analysis of this token design and crypto-economic incentives.

We believe, that this approach will help us capture maximum upside from emerging crypto-asset markets while mitigating the downside by focusing only on projects with high chance of success and value capture properties.

Earning technical dividend

Crypto networks and protocols may incentivize active network participation. This often requires technical expertise and infrastructure, but can significantly boost the returns of investment portfolio. We try to participate in networks we are invested in and earn this “technical dividend”.

  • Staking – Proof Of Stake is alternative way (to mining) of securing blockchains, which enables token holders to validate transactions and earn protocol fees and subsidies. Example: Cosmos
  • Liquidity providing – Some DeFi protocols incentivize liquidity and share rewards with stakers, who participate in liquidity pool with trading fees. Example: Synthetix
  • DeFi lending – Ethereum based crypto-assets can be lent out for a yield. We may use some of our assets to earn this additional yield. Example: Compound
  • Governance – Some protocols encourage token holders to participate on decision making via voting. This gives political influence to big token holders, who can then steer the project in the right direction. Example: Decred

Investing in new asset class such as crypto-assets brings many challenges. There are very few valuation models and metrics that investors can use. We see it as an opportunity to be one of the pioneers in this emerging industry, testing our own models and participate on creating future standards together with other industry leaders.