By ED BONSOR
We hosted Ruud Smets and John van Marle for a lunch presentation in Cerno’s offices on 13th April 2022 to update us on the investment strategy of the Theta Blockchain Venture Fund.
Background
Theta Blockchain Ventures emerged from a established fund of hedge funds business based in the Netherlands. The initial foray by the fund manager into the asset class was an investment into Pantera, a high-profile fund managed by Dan Moorehead (formerly of Tiger Asset Management). Since 2018, Theta have developed extensive relationships with a core group of crypto native fund investors and accordingly have launched two fund of fund strategies for their client base. The first fund raised EUR115m with this capital deployed during the crypto winter of 2018. It was able to capitalise on a depressed market in digital assets, and as a result has delivered outsized returns for initial investors. The second fund (Theta Blockchain Ventures 2) launched last year successfully raising a further EUR250m before closing in December 2021. Today there are 400 investors across the funds.
Investment Approach
The fund seeks to invest in three different opportunity sets in blockchain.
- Layer 1 protocols such as Bitcoin, Ethereum, Solana or Avalanche. The logic for investing in these foundational layers is to capture value in the main base layers of blockchain. It is unclear which one, if any, will dominate DeFi and/or web 3.0.
- The application layer sitting on top of these foundational Layer 1 protocols. These could be decentralised finance applications, or NFTs. This can include ‘scaling solutions’ that will improve the performance of the Layer 1 blockchains.
- The listed service providing ramps into crypto. For example, Coinbase (a centralised exchange) or Flexa (decentralised payment rails aiming to replace traditional closed network monopolies such as credit card infrastructure).
What are the risks?
Regulatory oversight remains a key concern for investors. The said, it should be noted that support for blockchain technology seems to be growing at both a government and regulatory level in the United States; a critical determinant for the future of the technology. Likewise, Gary Gensler’s (Chairperson) prominence at the SEC suggests that the authorities have a proper grasp of the scope of this technology. Ruud was at pains to reiterate that the objective of the fund is not to speculate on the short-term fluctuations in the price of bitcoin or indeed any other cryptocurrency, it is to capitalise on what the team view as a generational opportunity to invest in the digital networks of the future. As with all new asset classes, investors must have a high tolerance for volatility in the underlying assets. Indeed, there are clearly short-term risks associated with a tightening liquidity environment for financial assets. Given the lack of oversight in the sector, there are plenty of bad actors, and to this extent most serious participants would welcome greater regulatory clarity and oversight.