Early Coinbase investor explains why crypto selloffs are ‘quite common’

Initialized Capital Founder & Managing Partner Garry Tan joins Yahoo Finance Live to discuss Bitcoin’s volatile weekend after falling about 43% from its recent peak.

Video Transcript
AKIKO FUJITA: Let’s turn our attention back to the roller coaster ride that is the crypto corner. It seems like a daily conversation now here. We saw that big sell-off brought on by regulation concerns, both here in the US and China. But Bitcoin climbing back up above that $37,000 handle today. Ethereum also seeing a bounce back in the session, after falling to around 1,750 price point on Sunday. Now some of the rebound we’re seeing today helped by a research note out from Goldman Sachs, saying Bitcoin is now considered an investable asset. Also, Richard Bridgewater Associates founder Ray Dalio revealing he has taken a position in Bitcoin as well.

Let’s bring in Garry Tan, Initialized Capital founder and managing partner. Gary, always good to talk to you, especially in the face of some of these volatile moves. I’m curious to just get your thoughts on some of the moves we’ve seen on the back of these headlines coming out of China. Number one, in a broader crackdown on Bitcoin, which has been in place since 2017, but more recently, that headline coming out on Friday about cracking down on Bitcoin mining.

GARRY TAN: Yeah, I think that there’s some evidence from the mini crash from this weekend around this Chinese regulation on Bitcoin mining activity. And mining is heavily concentrated in China. So one of the things that I’ve been really tracking on my end is the fact that Ethereum is going to 2.0 version using proof of stake. So what that means is that instead of using proof of work, which requires an incredible outlay of both capital and energy resources, as Elon Musk pointed out, you know, Ethereum 2.0 is actually going to bring that energy use down by 99%.

So it’s really just far more efficient. And not only that, the fees that go to miners are actually going to go to people who are staking their Ether into the security of the network. So I think that that’s going to be a really big shift. I think regulation will continue to evolve over the coming years and months because I think that you’re going to see countries like China, perhaps even the United States, consider this technology is not going away. It’s durable, it’s valuable. And so, we want a part of that.

AKIKO FUJITA: You’ve highlighted, of course, that a drawdown of 50% or more has happened six times before. If you couldn’t necessarily stomach the volatility, you wouldn’t be invested here. But I wonder what you make of what we have seen over the last week or so in terms of what that says about how much more there is to fall or whether there is, like you said, another leg up here on catalysts like the energy concerns.

GARRY TAN: Yeah, you know, I think the big thing for people who are new to crypto right now is that these sort of drawdowns are actually quite common. And I would say that if you look at what the terminology and the memes coming out of the GameStop world of diamond hands, you know, a lot of the people who came up with those terms, they came out of the crypto world that, you know, you have to basically hold on if you believe that the fundamentals of what you’re holding continue to hold, even despite a 20% or 50% move.

And I think that that’s just really, really key for people who are freaking out right now. You know, I totally understand that. And the strangest thing that I’ve learned about crypto over five or six of these cycles at this point– I guess this being the seventh– the best time to buy, if you have a very clear thesis about the use case for these things, is actually when there’s maximum pain. And so, it’s incredibly counterintuitive. But I think that’s really bled over to how a lot of people are approaching– you know, earlier, you were referring to meme stocks. So it’s interesting to see the crypto culture really bleed over to the stock culture.

AKIKO FUJITA: Garry, last time we talked to you was on the public debut of Coinbase, which, of course, you invested early on. The stock is up today. But of course, that’s kind of traded in tandem with Bitcoin. You mentioned then that it is sort of the Microsoft or early days of Microsoft. It’s sort of how you view it right now. A lot of concerns right now about the transaction fee and how reliant the company is, but also some of the competition it now faces from decentralized exchanges. I know it’s been only a month or so. But I’m curious how you’ve been watching the moves and how Coinbase has been trading.

GARRY TAN: Yeah, I think one way to really look at Coinbase is actually sort of highlighted by my interview on my YouTube channel with Brian Armstrong, the CEO and founder. You know, he ended that interview with a thing that really jumped out at me. He said we were at 1% along the way of the journey. And to piggyback on Microsoft, you know, Microsoft has been able to build not just one, but several incredible cash cows on that initial base case, which was actually ability to own MS-DOS on the IBM PC. After that, you had Windows. After that, you had Office.

And I think that you’re going to see similar, really, evolution for the Coinbase business. Just a moment ago, we were talking about the future of proof of stake cryptocurrencies. Other really promising cryptocurrencies that have reached Mainnet and are in broad use today include Avalanche, Token, and Solana. I’m paying attention a lot of attention to those today because proof of stake is the future. And Coinbase, for instance, right before the IPO, actually bought a portfolio company of ours called Bison Trails. And so Bison Trails is turning into the gold standard. If you’re a corporation that needs to run a proof of stake node to secure your network, you know, this is really the hosting provider, the most trusted hosting provider.

And so, looking at some of the other tech giants, if you look at Amazon, Amazon built one of the most profitable businesses on the planet off of Amazon Web Services. And that was really empowered by their initial sort of toehold and their initial growth as that– from book sales. And so, that’s sort of the thing that I think will continue to occur with a company like Coinbase. Your initial foothold might be exchange, but when you’re talking about a platform that will end up being the on-ramp, the identity, you know, the safe place with compliance, with insured assets, you know, these are all sort of the necessary steps to having the crypto ecosystem that actually touches all the parts of the real world.

And that’s what put Coinbase into business. That’s what Coinbase will use to actually continue to build this crypto ecosystem. You know, I think speculation on the Bitcoin price or the price of various tokens, that’s really just noise to me. It’s really about the use cases over the next 10 to 20 years.

AKIKO FUJITA: Garry, obviously, work very closely with a lot of startups, as they look to sort of build out the company and look at their potential path to going public. SPACs have been a very popular way over the last year. But it does feel like the wind has sort of been taken out here, largely because of the SEC increasing its scrutiny on it. A number of EV companies, for example, getting a lot of scrutiny, being investigated now. Is that still a path that you advise for some of the startups that you work closely with? Or is that something that you think maybe is one option that’s been taken off the table, just given the uncertainty around it?

GARRY TAN: You know, I think what’s really important for retail but also institutional investors to think about when they’re looking at SPACs is, who is bringing these SPACs to the world? And, you know, I think the public market doesn’t get going public correct every single time. A very obvious example of this, to me, is look at Blue Apron versus HelloFresh. I mean, Blue Apron was blessed by, quote unquote, the “capital stack.” A lot of really really prominent growth investors sort of blessed that as the clear winner in the space.

And what I’ve learned as a very early stage investor, having invested in this space, is that often, the one that is blessed by the capital stack, actually, it’s the Blue Apron, right? And Blue Apron never had great economics. I think that there’s sort of a sense that if you get the right investors on the way up in the private markets, you might be able to be blessed, but that’s bad for the ultimate investor.

And so, I think the SPAC is actually a very interesting tool for things that were not necessarily blessed by the powers that be, you know, who says who gets to IPO, and I think that in the end, you know, a lot of these SPACs are really not going to make it. On the other hand, enough will build durable businesses that I’m pretty excited and I’m still relatively bullish. But you really got to look at who is putting these SPACs together and what’s the reputational risk. And I think as that develops, we’re going to see more activity and more things that we’re actually going to be happy that we have invested in.

AKIKO FUJITA: How many of those SPACs you think get filtered out when you talk about sort of being a little more selective? It sounds like you think it’s still an attractive option for these companies.

GARRY TAN: You know, I think it really just depends on how much money you can actually raise, and can you– are you ready to be public. And there are a great number of companies that might actually be ready that could actually become profitable. And the SPAC in the pipe option is turning out to be attractive if your competitors that might be the Blue Apron have raised too much money. And I think that that’s one pattern that we’re starting to track.


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