Author: Chen Zhiyan
Source: Dark Waves
When you believe that all opportunities in one place are exhausted, leaving the table may not necessarily mean “acting like a deserter.”
In mid-April, we met Huang Yu, who had returned to Shanghai from a Web3 conference in Hong Kong. He described to us a long-lost, vibrant scene – a schedule filled from 9 am to 11 pm every day; meeting acquaintances while walking, sitting down to chat for an hour; no need to worry about blank spaces, “the previous person will naturally arrange the next schedule for you.”
“The scene is very lively,” Huang Yu said, like the golden age of Chinese VCs, “or, any thriving industry looks like this.”
A year ago, Huang Yu was the investment director of Blue Pool Capital – a family office established by people like Cai Chongxin and Jack Ma – and now, at the age of 36, he has become a founding partner of a firm called NextGen Digital Venture (NDV), focusing on providing investors with a compliant way to invest in cryptocurrencies.
In April 2023, NDV’s first fund was launched. The fund was established in collaboration with Metalpha Technology Holding Ltd, a cryptocurrency wealth management company (NASDAQ stock code: MATH).
“Dark Waves” learned that, as of now, the fund has raised $100 million from global investors, including institutional investors and top family offices. In more than a year since its establishment, the fund has achieved a performance of +170%, outperforming Bitcoin by over 50% and Ethereum by 100%.
Having the experience of being on the side of the investors, Huang Yu has some special arrangements for NDV: for example, addressing the concerns of wealthy individuals about the compliance and security of Crypto, NDV has chosen a “No. 9 Card” structure based on “Asset Management” in Hong Kong, ensuring assets are regulated. Using DBS as a custodian bank, daily transaction records are sent to the Hong Kong Securities and Futures Commission for filing, while a professional third-party fund administrator provides investors with corresponding net asset value updates. These designs allow investors to benefit from the Crypto industry without actually holding virtual currencies.
“This is the most investor-friendly structure in the market, allowing investors to obtain the industry’s profits within a compliant and mature custodian system,” Huang Yu said.
Despite achieving impressive results in a year, Crypto is still far from constituting a new world in Huang Yu’s eyes. He hopes that this new market can grow larger, but at the same time, as an asset manager, he also hopes for more rational and long-term investors. “Crypto is a high-potential and highly risky alternative asset, and we are operating in the highest-risk industry in the most compliant manner.”
The following is a conversation –
In the Midst of Crypto
“Dark Waves”: NDV’s performance in the first year outperformed the surging Bitcoin, what does this mean for you?
Huang Yu: I majored in history at Peking University, and in my opinion, individual power is insignificant in the face of the overall trend. What we are doing is simply following the trend of the times and making choices. Looking back since the reform and opening up, China has experienced several industry waves – from the global expansion of the manufacturing industry to the booming real estate sector in the urbanization process, and then to the prosperity of e-commerce brought by the Internet revolution. Each wave has been a major opportunity lasting for more than a decade.
Today, in the context of so-called “anti-globalization,” cryptocurrencies represent a new way of asset allocation and are an indispensable part of future mainstream allocation. It is not only a technological innovation; in my opinion, it is the best solution for global allocation. Any stage of success achieved by NDV at present is not worth complacency. Because the true hero behind this is the change of the times, providing unprecedented new opportunities.
“Dark Waves”: Crypto has indeed surged recently, but is it sustainable?
Huang Yu: Crypto itself is a new opportunity for over 10 years. I have been in communication with the world’s largest institutional investors (sovereign funds, pension funds, and charitable funds), and the current consensus is that global geopolitical instability will continue. The abuse of reserve currency issuance rights by the United States has led to excessive liquidity and rising inflation, further exacerbating the uncertainty of the US dollar. It is difficult for the high interest rates of the dollar to be sustained in the long term, so in order to maintain the dollar’s dominant position, war would be a natural choice for the United States. All these factors are driving investors to seek diversified asset allocation in terms of regions and categories. This is a long-term positive for Crypto. In fact, the invention of Bitcoin was also a response to the excessive printing of money by the United States in 2008.
The remaining question is: how much proportion are you willing to spend to buy asset security?
“Dark Waves”: If entering what you call the “big era” is a major decision, what are the small decisions that NDV has made right in terms of profit?
Huang Yu: We actually used a lot of quantitative indicators to make decisions, and much of the data in the Crypto world is transparent. For example, on June 15th last year, it was monitored that the top 10 Bitcoin addresses in the world increased their holdings by 7500 Bitcoins in a single day (worth $500 million today), and 13 days later the world’s largest asset management company BlackRock applied for a Bitcoin spot ETF. Although Crypto is anonymous, the movements of large holders’ chips can be monitored, and we heavily rely on data from a gaming perspective. Although NDV is a fund investing in cryptocurrency stocks, we use blockchain tools combined with traditional financial market methods for investment.
“Dark Waves”: Compared to those who have a “do not believe” or “all in” attitude towards Crypto, you have chosen a middle ground.
Huang Yu: In the public’s perception, Crypto is seen as a gamble. Objectively speaking, the unregulated part of this field does indeed breed many problems and scams.
For the natives of digital currencies, Crypto is a “gold rush” of the new era. In the early stages, it is easy to make a lot of money in this industry when the market is hot. Many Crypto practitioners will make a lot of money in this industry temporarily, but this does not mean that everyone can keep these profits.
Because of my previous work experience, I have a richer toolbox than others. Simply put, my family office experience makes me better understand the needs of LPs, and I also understand the impact of macro trends on a single asset class, while my VC background makes it easier for me to understand the changes brought about by technology with a long-term perspective. The future of Crypto is promising, but due to the high leverage, there is a cycle of over 70% correction every few years. It is not the most important thing to make money in stages; the important thing is to exit safely.
“Dark Waves”: Why did you choose to leave the family office and start a Crypto fund in 2023?
Huang Yu: From the outside, the change from the family office to Crypto seems significant, but for me, the difference is not that big because investment itself is about pursuing structural changes: after the pandemic, the instability of the global economic situation has increased, providing an opportunity for innovation in the asset side of Crypto. In long-term diversified asset allocation, compliance is more important than returns for investors. After spending six months researching all types of Asian institutions in Crypto, including primary, secondary, quantitative, and arbitrage, I found that there is a lack of compliant channels in the market for allocating Crypto assets, so I decided to turn to the Crypto investment field at that time.
There is also a more emotional reason. I have been a fan of the NBA for nearly 30 years. In 2022, I had a period of despair in Shanghai when my favorite NBA star, Curry, led the team to win the NBA championship alone, at the age of 34. I witnessed him change from a pure outside shooter to a player who could fiercely compete on the court. In the year when everyone least expected it, he led the team to the championship. This gave me great entrepreneurial courage. Even in the middle and later stages of his career, Curry never gave up on change. This made me realize that change is never too late.
“Dark Waves”: Before establishing NDV, did you predict the surge of Bitcoin in 2023?
Huang Yu: 2022 was a year of a major Bitcoin decline, and many people had already left Crypto at that time. Daring to do this at that time shows a clear understanding of the future direction of this specific asset.
In fact, Bitcoin has shown a clear trend towards mass adoption in recent years, and its value has increased tremendously as a result. The widespread interest in cryptocurrencies has led to a surge in demand for digital assets, with many investors seeking to diversify their portfolios by including cryptocurrencies like Bitcoin. This growing interest in cryptocurrencies has created a new investment landscape that offers significant potential for growth and profit. As a result, many investors are now looking to capitalize on the opportunities presented by cryptocurrency investments, with some even considering Bitcoin as a potential long-term investment option.
Overall, the surge in Bitcoin’s value in 2023 can be attributed to a variety of factors, including increased adoption, institutional interest, and growing recognition of Bitcoin as a legitimate asset class. As more investors look to diversify their portfolios and explore alternative investment options, cryptocurrencies like Bitcoin are likely to play an increasingly important role in the global financial markets.The fluctuations in the price of Bitcoin exhibit a clear periodicity, with most retracements occurring 1-2 years after reaching historical highs. For example, from $1163 in 2013 to $152 in 2015, then to $19666 in 2017, and down to $3100 at the end of 2018, before rising again to $69000 in 2021. After each peak, the price of Bitcoin tends to retrace by 80%-85%. This volatility stems primarily from Bitcoin’s issuance and mining mechanisms, the ebb and flow of the US dollar, and the high leverage effects resulting from its lack of regulation.
Therefore, I entered the entrepreneurial scene in Bitcoin at the bottom of this cycle. If investors can adopt a long-term perspective on Bitcoin, understanding and accepting its periodic nature, then its long-term returns are quite attractive.
“Anycast”: In 2023, we can hardly find a successful new fund raised in the primary market. From your experience, will Crypto be the only solution for future new funds?
Huang Yu: I don’t like making choices through the process of elimination. Moreover, the market is rich and dynamic, with phase-specific optimal solutions emerging at each stage.
Currently, I find NDV’s positioning most suitable for me. Due to my previous professional experience, I can directly feel Bitcoin becoming an asset class overseas, which has a positive impact on the entire Crypto market. I believe the market is currently in a phase where traditional finance is gradually accepting Crypto.
“Anycast”: Indeed, this year the US SEC and Hong Kong have successively approved spot Bitcoin ETFs. What does this mean for the Crypto investment field?
Huang Yu: After the approval of the Bitcoin ETF in the US at the beginning of the year, the price surged from $40,000 to $70,000, and the net inflow of USD through ETFs exceeded $15 billion. This means that these ten ETFs collectively manage $2.2 trillion, implying that their clients allocating less than one-thousandth of funds into this market can almost double the price of Bitcoin. If the future allocation reaches 1% – and this is not difficult – what does this mean for this asset class? It is challenging to estimate the magnitude Crypto will reach in the future. But one thing is certain, it is far from its peak yet.
Those who have previously invested in Crypto are very similar to Chinese VC practitioners before 2006. They were pioneers, many of whom came from other industries to invest. They were sharp but had little to do with professional finance. However, in the future, as a large asset class, Crypto will undoubtedly attract more funds and require correspondingly more professional management.
More conservative versus more adventurous
“Anycast”: In times of change, investors tend to be more conservative and stable in their attitude towards assets, which seems contradictory to the risky nature of Crypto.
Huang Yu: I don’t see it that way. We have always advised investors to allocate 1%-5% of their assets to Bitcoin as a hedge strategy against global uncertainties. The high volatility of assets should be managed through position control for risk management, rather than avoiding participation altogether.
Today, in the short term, Bitcoin is a risky asset, but in the long run, it is more of a hedge asset. In the short term, as a new asset, extreme price fluctuations are normal due to insufficient awareness among newcomers, and this is related to market capitalization and stage. Early-stage tech stocks were the same. However, in the long run, Bitcoin as a tool to combat the printing of the US dollar has long-term value.
In fact, colonialism has never disappeared from the world. The first colonial empire was the British Empire, which ruled the world by establishing direct stores and sending governors to collect taxes worldwide. The second colonial empire was the United States, which had a more advanced approach, equivalent to a “POS machine + franchise store” model for collecting seigniorage tax, specifically by printing money.
As the US continues to print money, more countries will begin to resist being harvested, decouple from the dollar, and gradually form a consensus network around Bitcoin. Countries and regions like El Salvador have already adopted Bitcoin as a reserve currency, which is a good start.
“Anycast”: How do you view regulatory risks?
Huang Yu: In general, it is clear that domestic investors are prohibited from buying Crypto with RMB, but there are some precedents indicating that the court recognizes Bitcoin as a protected asset ownership. From NDV’s perspective, we are focused on Hong Kong, serving overseas asset allocation. Currently, Hong Kong has legislatively recognized the legitimacy of digital assets, so our operations are based there.
Regarding Crypto itself, the attitude of the US is more critical. After the approval of the Bitcoin ETF in the US, it is now considered a new asset. From a policy perspective, both US presidential candidates, whether Biden or Trump, support Crypto, so the regulatory landscape of major countries has been largely determined. In the long run, whether it is US-listed companies or central banks of small countries, there will be incentives to invest in Bitcoin, and the future inflow of funds into this asset class will be in the trillions of dollars.
“Anycast”: Although NDV’s performance seems good at the moment, how many retracements have there been in the past year?
Huang Yu: A 20% retracement in Crypto is quite normal. In the past 13 months, there have been two significant retracements, one at 8% and the other at 15%. Even considering these two retracements, the overall floating profit is around 170%, with a relatively appropriate risk-reward ratio.
From the perspective of overall risk control, the fund has a lock-up period, mainly because this asset class is different from others, with clear volatility and periodicity. The lock-up period is also intended to encourage LPs to maintain a relatively long-term view of this asset. Over the past 11 years, Bitcoin has shown a pattern of long bull markets and short bear markets, but even in bull markets, monthly retracements of 10-20% are normal. However, any participant seeing a 20% drop in a new asset class would panic. But from our perspective, if a major trend is underway, exiting should not be the solution. We advocate for LPs to make allocations, putting 1-5% of their assets into Crypto-related products.
“Anycast”: We have studied some family offices in the Chinese market, and one common challenge for practitioners is gaining trust. How does setting a lock-up period address the trust issue?
Huang Yu: The core of the entire asset management industry is to earn money from trends, but under the trend, it is crucial to have a reasonable incentive mechanism that aligns your interests with those of investors.
On the one hand, NDV’s partners put $6 million into the fund on the first day, showing a strong alignment of interests with all investors. On the other hand, apart from a subscription fee paid for daily fund expenses, NDV currently does not charge management fees. This means that as a manager, profit-sharing is only collected upon exit. We don’t want to give ourselves too much risk-free return during the startup phase.
“Anycast”: What value does working in top billionaire family offices bring to you?
Huang Yu: Besides having a larger financial toolbox than ordinary investors, I look at global capital flows and the movement of major capital. I like to approach problems from a historical trend perspective. Compared to the past, the world’s current theme is more confrontational, so capital flows will be very unstable. In uncertain times, neutral third-party assets like Bitcoin are easily favored.
“Anycast”: What kind of understanding do you hope people have about Crypto?
Huang Yu: It is still a new alternative asset. In the future global asset allocation, Crypto is a stateless asset from a national perspective and can partially substitute for dollar VC in terms of returns. A qualified asset portfolio always includes high-risk, high-return allocations.
“Anycast”: Is Crypto the only choice for high-risk, high-return in the future?
Huang Yu: AI is also an option. However, the opportunity for AI to directly participate in assets in the primary and secondary markets is still limited. In the long run, I believe that at some point in the future, AI will also integrate with Crypto. AI itself is an advanced productive force, but any country or individual with control over AI poses a significant risk and will harm the promotion of AI. Crypto is a production relationship that no one can control, making it compatible with AI.
