This episode offers a deep dive into Hypersphere Ventures' multi-strategy approach to crypto investing, exploring the rise of treasury accumulation vehicles, the nuances of global market dynamics, and the evolving landscape of DePIN and community-centric token launches.
The Strategic Value of Podcasting in Crypto Venture Capital
- Mehdi Farooq, now at Hypersphere Ventures and formerly with Animoca Brands, views podcasting as a critical tool for research and network expansion. He emphasizes that hosting forces deep dives into subjects, leading to intellectual growth. "It kind of forces you to research to know what's happening," Mehdi notes, highlighting the learning aspect. Podcasting also serves as a scalable way to build a brand and network, as crypto is "as much as this is a financial game it's also a social game."
- Sal, the host, reflects on his podcasting journey, stating its power in "giving people a platform when spaces are nascent." He explains their early strategy focused on featuring the "best DePIN founders on no matter how early they were," which provided conviction for their investments in 2022-2023.
- Jack Platts of Hypersphere Ventures, newer to hosting but experienced as a guest, sees podcasting as a way to share insights on current trends or "evergreen" research topics. Hypersphere's podcast aims to "provide some look into what will be interesting in say one month or two months time," akin to forecasting future market interests.
The Rise of MicroStrategy-Inspired Treasury Accumulation Vehicles
- The discussion shifts to the trend of "MicroStrategy for X" type deals, where companies accumulate specific crypto assets on their balance sheets, often seeking public listings. Mehdi Farooq explains the core premise: listing on established exchanges like NASDAQ opens up vast capital markets.
- These vehicles allow for a "levered bet on that compounding effect" if an asset's growth outpaces the cost of capital. Investors can gain leveraged exposure to assets they are long-term bullish on without the liquidation risk typical of crypto derivatives.
- Jack Platts elaborates on the "yield opportunity," framing it as holding a top-performing asset while earning yield in a lower-risk manner compared to lending to centralized platforms or complex hedge fund strategies. The lower risk stems from reduced counterparty and execution risk. He cites Tether's $2 billion Bitcoin contribution to C (21 Capital) and SoftBank's $1 billion as pivotal moments, solving the "yields problem."
- Net Asset Value (NAV): This refers to the total value of a fund's assets minus its liabilities. The NAV premium occurs when a vehicle's market price trades above the actual value of its underlying assets.
- PIPE Investments (Private Investment in Public Equity): These are mechanisms where investors buy shares of a publicly traded company directly from the company, often at a discount to the market price.
- Hypersphere maintains discipline, investing in vehicles "pretty close to NAV through pipe investments or through convertibles," avoiding overpaying for high premiums.
Buyer Profiles and Market Dynamics for Treasury Vehicles
- Jack Platts identifies "nondirectional buyers" as a key innovation brought by these vehicles, particularly through convertible notes. These are debt instruments that can be converted into equity at a future date.
- ARB funds (Arbitrage funds): These funds exploit price differences in different markets. In this context, they buy convertible notes, hedge out asset-specific risk (e.g., Bitcoin), and bet on credit spreads or volatility. Their capital, however, still contributes to the company buying the underlying crypto asset.
- Directional buyers, like Hypersphere, invest based on a bullish thesis for the underlying asset, often seeking entry near NAV for a margin of safety.
- Mehdi Farooq adds that a segment of retail investors, potentially disillusioned with direct crypto trading due to "chart crime," finds these equity market instruments more appealing for speculation.
- Hedge funds also participate due to "mandate arbitrage," using these vehicles to gain exposure to assets like Bitcoin when direct investment isn't permitted by their mandate.
Long-Term NAV Multiples and Influencing Factors
- Jack Platts suggests the premium to NAV is cyclical and correlated with Bitcoin price excitement. He draws a parallel to the GBTC (Grayscale Bitcoin Trust) trade, where its discount/premium fluctuated based on ETF conversion expectations, eventually converging to NAV minus fees.
- He cautions about potential "duration mismatch" risks, reminiscent of issues seen with Three Arrows Capital, but notes tighter credit conditions this cycle.
- Mehdi Farooq argues that NAV premiums will vary based on the underlying businesses of these vehicles. For instance, Nakamoto's holding company structure with early investments and Bitcoin Magazine, or Solana vehicles running validators, add operational value beyond mere asset accumulation.
- "My mental model is as long as the growth of a protocol is higher than the cost of capital the premium will last because of compounding," Mehdi states. Lower interest rates could even increase premiums by reducing the cost of capital.
Deep Dive: Hypersphere's Investment in 21 Capital (C)
- Hypersphere's $40 million investment in 21 Capital (ticker: C) was their largest ever. Jack Platts outlines the rationale:
- Clean Structure: It was a SPAC (Special Purpose Acquisition Company), a shell company that raises capital through an IPO to acquire an existing company. This offered a cleaner vehicle than reverse takeovers.
- Strong Partners: Jack Mallers (Strike), Tether, Howard Lutnik's Cantor Fitzgerald (enhancing regulatory comfort), and SoftBank (their first crypto venture, described as "the BlackRock of Japan.")
- Favorable Entry: Bitcoin was around $85,000 when the initial $3 billion was contributed, offering attractive non-liquidatable leverage.
- Flywheel Potential: High-quality PIPE investors could support follow-on investments, perpetuating the cycle of premium-to-NAV issuance, asset acquisition, and yield enhancement.
Treasury Vehicles for Altcoins: The XTAO Example
- Sal discusses EV3's investment in XTAO, a vehicle for accumulating Tao (the native token of Bittensor, a decentralized AI network).
- The opportunity cost of holding Tao is changing due to evolving inflation dynamics and new yield opportunities like subnet token trading.
- XTAO offers a way to earn yield by "harvesting the NAV premium" on a risk-adjusted basis, particularly appealing given Tao's current custody and liquidity challenges compared to Bitcoin. Sal notes, "we felt like XTAO... was an asset that we held in in the form of Tao already... harvesting the SNAP premium... ended up being for us the best use of our capital."
- The operational complexity of listing and managing these vehicles is non-trivial, requiring skilled founders.
Diverse Strategies for Altcoin Accumulation Vehicles
- Mehdi Farooq mentions Strive, a company accumulating Bitcoin by acquiring undervalued public companies, restructuring them, and converting unlocked value into Bitcoin.
- For other altcoins, operating businesses like validator services, staking, mining, or restaking can be integrated. Hyperliquid is cited as a hypothetical example, accumulating HYPE, running validators, and market-making to earn yield.
- The "front person" or leader of such vehicles also matters, potentially commanding a premium if they can rally a community and investor base, citing a hypothetical Solana vehicle led by Anatoly Yakovenko.
Global Crypto Investing: A Multi-Hub Perspective
- Jack Platts, based in London, notes that while most treasury vehicles trade on US exchanges (NASDAQ), venture activity remains strong in the US, particularly New York, which has seen a resurgence. London serves as a flow-through hub with market makers and funds.
- Mehdi Farooq, based in Dubai, observes that Dubai's strength lies more on the liquid side, with exchanges, KOLs, and market makers providing alpha. However, the quality of venture founders is growing, and major foundations (Sui, Aptos) and exchanges (Bybit, OKX) have a presence, making it a key transit and meeting hub.
Lessons from Polkadot and the Resurgence of ICOs
- Jack Platts shares his experience at Polkadot, which he joined in early 2018. Polkadot was a pioneering parachain (an independent blockchain that runs in parallel within the Polkadot ecosystem) or sharded structure (a database partitioning technique to spread load).
- Gavin Wood's reputation as an Ethereum co-founder provided significant tailwinds.
- Jack emphasizes the increased competition today. "It's definitely not a Ethereum we will build it, they will come... Even Ethereum itself has found that over the past year or two that they need to be more commercial."
- Regarding ICOs (Initial Coin Offerings), a fundraising method where new crypto projects sell their tokens to early investors, Jack believes they were crucial for many top projects. "People cherish more what they have to pay for" compared to airdrops (free token distributions).
- He expresses concern about current ICOs throttling investment amounts (e.g., $2,000-$10,000 caps), which might not create enough "skin in the game" for deep community engagement. "I was hired out of the Discord, right? Cuz I was in there so much... I wouldn't have been doing that unless I had more skin in the game than $2,000 or $10,000."
- Sal agrees on the power of community rounds, allowing community members to invest at the same terms as VCs, but notes it's often not a top priority for early-stage founders focused on product and hiring.
DePIN Sector Analysis: Challenges and Opportunities
- DePIN (Decentralized Physical Infrastructure Networks) leverage tokens to incentivize the build-out of real-world infrastructure.
- Mehdi Farooq highlights a key challenge for DePIN projects: gaining access to tier-one exchanges for wider distribution and awareness, an area where L1s and middleware projects excel through KOLs (Key Opinion Leaders).
- Hypersphere invested in Reborn, a project at the intersection of robotics and crypto, using token incentives to collect data for improving robotics foundation models. They've partnered with Unitree and Galbot.
- Mehdi is also a fan of GeoNet, which has built a large RTK (Real-Time Kinematic) network for precise geolocation, crucial for robotics and self-driving cars, and is generating revenue used for token buybacks.
- Jack Platts notes Hypersphere's investments in compute networks like Gensyn and AI projects like Ritual and Sentient, which are early DePIN green shoots.
- A critical issue for DePIN, according to Jack, is that "demand hasn't been there as much as the supply." Competing with Web2 incumbents solely on cost is tough; value propositions like censorship resistance are often edge cases.
- Sal concurs, stating, "The question now is, is a go to market and sales really like business development... it's just about scaling the kind of sales function for the industry."
Conclusion: Navigating Evolving Crypto Investment Frontiers
This discussion underscores the dynamic crypto investment landscape, from innovative treasury strategies to the maturation of DePIN. Investors and researchers must track the interplay of financial engineering, operational business value, global market access, and effective go-to-market strategies to identify sustainable opportunities.
To learn more, visit Hypersphere Ventures at hypersphere.ventures or follow Jack Platts (@JackBPlatts) and Mehdi Farooq (@MehdiFarooq2) on X (formerly Twitter).
