What Liquid Funds Are Buying

This episode reveals how top liquid funds are applying traditional equity analysis to crypto, focusing on fundamental value and the strategic rise of Digital Asset Treasuries as a bridge for institutional capital.

Defining Liquid Funds: A Public Equities Approach to Crypto

Seth from CoinFund and Cosmo from Pantera, both with backgrounds in public equities, explain that liquid funds apply a fundamental, long-term investment approach to the crypto token market. Unlike venture funds, they invest in publicly traded tokens, treating them like equities by modeling revenue, identifying value capture, and constructing concentrated portfolios based on deep underwriting.

Cosmo clarifies the taxonomy of liquid funds, distinguishing between market-neutral funds (no directional risk) and absolute return or directional funds, like theirs, which aim to outperform the market through superior token selection.

• Key Insight: The strategy mirrors traditional stock-picking, focusing on finding high-growth opportunities that are fundamentally sound. This approach is becoming more viable as the crypto market matures and more protocols generate real revenue.
• Quote (Seth): "It's underwriting investments on a fundamental basis... they're starting to look more like equities where you can model out revenue, you can come up with a price target and you can construct a fundamentally focused portfolio."

The Bitcoin Dominance Dilemma

A major challenge for liquid funds has been Bitcoin's sustained outperformance. Cosmo explains that fund mandates and risk management rules, which often cap single-asset concentration at 25-40%, make it structurally difficult to outperform Bitcoin when it's the market's top performer.

This creates a difficult conversation with Limited Partners (LPs), who may question the value of an altcoin fund. The key is aligning with LPs who understand the fund's goal is to gain exposure to the broader blockchain technology ecosystem, not just to hold Bitcoin.

• Strategic Implication: Investors should differentiate between a pure Bitcoin thesis and a broader blockchain technology thesis. Liquid funds are a vehicle for the latter, betting that select protocols will eventually deliver superior, venture-like returns compared to the more mature Bitcoin.

The Shift to a Token Picker's Market

The speakers agree that crypto has evolved into a "token picker's market." Unlike previous cycles where a rising tide lifted all boats, today's environment demands rigorous analysis to identify the few projects that will succeed.

Cosmo highlights the extreme dispersion in 2024: while Bitcoin is up significantly, the average top-100 token is down, with only about 5% of tokens showing positive performance on the year. This market structure heavily favors funds that can perform deep, fundamental work.

• Quote (Cosmo): "The dispersion in the market this year has been like truly crazy... it's something like 5% of tokens are positive on the year in the top 100. So it's been quite a... token pickin's market, but unless your token is Bitcoin, wow, like good luck."

Portfolio Construction and Token Selection Strategy

Both funds run highly concentrated portfolios of 10-15 tokens, with the top five names often making up 50% of the portfolio. This concentration reflects their conviction-driven approach, which is built on a rigorous, fundamental underwriting process.

Their core criteria for selecting a token include:

• Product-Market Fit: The protocol must have a clear use case and user traction.
• Strong Management: Teams must be accessible, trustworthy, and fully aligned with the token's success.
• Value Accrual: The business model must ensure that revenue or user growth directly benefits token holders.
• Transparency: Clear insight into management incentives and token economics is non-negotiable.

Decoding "Fundamentals" in Crypto

Seth explains that fundamental analysis in crypto goes beyond simply looking at on-chain revenue, which is typically priced in by the market almost instantly. The real edge comes from forecasting future growth.

The market provides clues through valuation multiples. A compressing multiple may signal that the market expects revenue to decelerate, while an expanding multiple suggests anticipation of future acceleration. The job of the analyst is to determine if the market's expectation is correct.

• Actionable Insight: Researchers should focus on forward-looking indicators of growth, such as upcoming catalysts, competitive positioning, and reinvestment opportunities, rather than relying solely on historical on-chain data.

Navigating Market Narratives vs. Fundamentals

While acknowledging that narratives drive short-term price action, both speakers emphasize a disciplined focus on fundamentals. Cosmo expresses a strong aversion to the term "narrative," viewing it as a mental shortcut that oversimplifies complex systems.

He presents data showing that a universe of ~80 "fundamentally sound" tokens has outperformed the broader market by 20-30% this year, proving that fundamentals ultimately matter. Seth adds that even in equities, narratives play a role until fundamentals catch up, citing Tesla as a prime example.

• Quote (Cosmo): "I actually tell my analysts to never use the word narrative ever with me... I think the reality is that on average and over time the more fundamentally sound tokens are very clearly outperforming the not fundamentally sound tokens."

Execution and Risk Management

While token selection is the primary driver of alpha, both funds maintain institutional-grade infrastructure for trade execution and risk management. They use a mix of spot trading, OTC desks, and derivatives, with a heavy emphasis on managing counterparty risk to avoid another "2022-type event."

Their process is highly structured, involving weekly portfolio reviews with comprehensive data packets covering macro trends, sector performance, and KPIs for every holding. This ensures decisions are data-driven and disciplined.

Current Holdings and High-Conviction Themes

While hesitant to disclose full portfolios, the speakers shared several key themes and positions:

• Pantera: Remains bullish on Solana (SOL) as a leading L1 and holds positions in Bitmine (BITM) and another Digital Asset Treasury as proxies for ETH and BTC exposure.
• CoinFund: Has held a significant, out-of-consensus position in Ethereum (ETH), believing the market was overlooking its fundamental strengths and upcoming catalysts.
• Stablecoins: Both are bullish on the stablecoin sector, especially post-stablecoin legislation. They highlight Ethena (ENA) for its rapid growth and pro-cyclical nature, and Plasma Finance, an upcoming stablecoin-focused chain.

The Art of Selling: When to Exit a Position

Their sell discipline is rooted in risk management rather than attempting to time market tops. The general strategy is to let winners run as long as the fundamental thesis remains intact.

However, they actively manage positions by selling on significant drawdowns, with thresholds adjusted for each token's volatility. A position is also reconsidered if weekly KPI tracking reveals a sustained weakening of fundamentals or a break in the original investment thesis.

Digital Asset Treasuries (DATs): The Bridge to TradFi

A significant portion of the discussion focused on Digital Asset Treasuries (DATs)—publicly traded companies holding a single crypto asset, like MicroStrategy for Bitcoin. They serve two key functions:

• Education: They act as a marketing vehicle, educating traditional investors about the underlying protocol.
• Friction Removal: They provide a regulated, equity-based wrapper for institutional funds that cannot hold tokens directly.

Cosmo describes DATs as a "third leg of the stool" alongside a project's foundation and labs entity, able to aggressively advocate for the token in a way the other entities cannot.

• Strategic Implication: The rise of DATs for assets beyond Bitcoin and Ethereum is a key trend to watch. It signals which ecosystems are successfully attracting institutional interest and capital.

The Future of DATs: Fad or Foundational Shift?

The speakers firmly believe DATs are a foundational shift, not a fad. They represent the first wave of institutional capital flowing into crypto ahead of comprehensive regulatory clarity. While the high premiums (MNAP) may compress over time, the vehicles themselves are here to stay.

The primary risk is reflexivity—a falling token price can compress the DAT's premium, cutting off its ability to raise capital and buy more of the token, creating a negative feedback loop. The introduction of excessive leverage is another long-term risk to monitor.

• Quote (Seth): "I think this is squarely bringing us down the path of convergence between crypto markets and traditional finance... it's capital flowing in a very efficient way to where it sees the biggest opportunity."

The Great Convergence: Tokenized Equities and 24/7 Markets

The conversation concludes with a vision of convergence, where traditional financial assets like stocks move on-chain. Once a company like Coinbase tokenizes its equity to trade 24/7, asset managers may have a fiduciary duty to hold the more liquid, tokenized version over the traditional 9:30-4:00 stock.

This shift will create a tsunami of tokenization, forcing traditional exchanges and brokers to adapt to 24/7 operations—an environment where crypto-native infrastructure has a natural advantage.

Sector Spotlight: Who Wins from the DAT Boom?

The influx of capital from DATs is expected to primarily benefit protocols that are easily underwritten from a fundamental perspective. Key sectors poised to win include:

• DeFi: Blue-chip protocols like Aave and Pendle that offer sustainable, understandable yield opportunities.
• Base Layers: Major L1s and L2s with strong ecosystems.
• AI & Crypto: The intersection of AI and crypto is seen as a major theme ripe for a DAT, as it resonates strongly with traditional tech investors.

Conclusion

This episode highlights a market maturing towards fundamental analysis, with Digital Asset Treasuries acting as a critical bridge for institutional capital. Investors and researchers should prioritize protocols with transparent value accrual and strong governance, as these are becoming the new standard for institutional-grade crypto assets.