Tokenized stock revolution: VanEck investment manager looks ahead to the future of the crypto market

Author: The Rollup; Compiler: Yuliya, PANews

After the cryptocurrency market has experienced multiple rounds of bull-bear conversions, VanEck's portfolio manager Pranav Kanade is undoubtedly one of the best perspectives to observe the flow of institutional funds. In the latest in-depth dialogue with The Rollup, he revealed the strategic shifts that institutional investors are experiencing, the structural opportunities in the liquidity token market, and forward-looking thinking about the upcoming wave of tokenized stocks, especially how institutions can re-examine their capital allocation in the crypto field after the market crash in 2022. PANews has compiled and sorted out the text of this dialogue.

What does "institutions are coming" mean?

Moderator: Many people often mention "institutions are about to enter the market", but the actual process does not seem to be in line with expectations. From the perspective of VanEck, how can institutional capital really enter the crypto field?

Pranav: Institutional funds are gradually entering the crypto space, mainly in two forms: one is capital directly purchasing related assets, and the other is to build on-chain products through asset tokenization for others to use.

These two types of institutional groups are different. The former includes investors who purchase assets, while the latter are institutions focused on product development. Currently, the flow of global capital is mainly controlled by family offices, high net worth individuals, endowments, foundations, pensions, and sovereign wealth funds. These capital holders usually make investment decisions through passive strategies (such as ETFs) or active strategies (such as professional managers).

These capital pools are involved in the crypto space in various ways, but they have not really "arrived". Family offices may have entered earlier because they saw the return potential in liquidity. Last year, many institutions began to buy Bitcoin ETFs, which is an easy way to get in touch. Another way is through venture capital, where they find large blue-chip managers for allocation. However, there are still many institutions that have not yet entered the field of liquid assets or their proxies, and I think this is where the advantage is now.

Moderator: You mentioned that there are advantages in the liquidity token market. What do you mean specifically? Why are institutions relatively lagging behind in entering liquidity tokens?

Pranav: Since 2022, about $60 billion of capital has flowed into venture capital projects in the pre-seed and seed rounds, and many founders prefer to exit through tokens rather than the traditional IPO path. It usually takes 6 to 8 years from seed round to IPO, while it only takes about 18 months through token issuance. For some business models, token exits are more attractive.

However, this trend also exposes the liquidity problem of the market. Many projects that have exited through tokens have generally seen token prices fall in the past 12 to 24 months due to the lack of sufficient market demand to support the value of these tokens. In traditional financial markets, venture-backed companies have deep public equity markets as support at the time of IPO, but the liquidity token market has not yet formed a similar ecosystem. This has made some capital pools begin to realize their over-allocation problems in the venture capital field.

Primary Early Stage VS Secondary Liquidity - Is Money Moving?

Moderator: My partner Robbie and I run a fund and have done about 40-50 deals in the past 2 years. But this year we have only done one or two. Now I look at the charts of Bitcoin, Hyperliquid or ETH and wonder why I would lock up money for 4 years waiting for a big explosion when there is a clear liquidity benefit right now? Do you also see this shift in early capital allocators?

Pranav: In the crypto market, there is a significant imbalance between supply and demand, especially in terms of liquidity. Due to the insufficient supply of capital and the huge market demand for tokens and projects, investors need to screen out potential projects among many tokens. The reality is that 99.9% of the tokens on CoinMarketCap are garbage and their value is far below the market value. Only a very small number of projects with clear product-market fit, which can generate revenue and give back to token holders, are worth paying attention to.

If the market value of all cryptocurrencies other than Bitcoin, Ethereum and stablecoins (currently about $750 billion) grows several times in the future, certain projects will directly benefit from this trend, and their tokens may attract most of the value inflow. Such investments are considered to have higher risk-adjusted return potential while retaining liquidity advantages. Investors can adjust their strategies at any time, enjoying similar returns to venture capital while maintaining the flexibility of exit.

On the other hand, since 2022, due to the hostility of the US government to the encryption field at that time, the quality of talent entering blockchain application development has declined, and many outstanding founders have chosen to turn to AI application development to more easily obtain financial support. However, since the election, talented founders have begun to return to the encryption field to promote the construction of blockchain applications. Compared with investors who deploy capital between 2022 and 2024, investors who start now and will deploy capital in the next two years may get better returns because they can attract better talent.

At the application level, although there are some talented founders involved, the pricing of related projects is still lower than that of L1 imitating projects. Many venture investors still focus on past successful models rather than looking forward to possible opportunities in the future, which may limit their investment potential.

Income/cash flow narrative

Moderator: How long will the "income model" last? Is it a temporary trend or the end? Is cash flow the only important thing?

Pranav: The crypto industry is currently facing a binary choice, either becoming an appendage of the Internet or focusing on creating real value (such as income). Most of the world's large capital pools either want to allocate "store of value" assets-only a few assets in the world can play this role, such as gold, Bitcoin, real estate, etc. It is a miracle that Bitcoin can be among them. Not all assets can become a store of value.

All other assets other than value stores will eventually be considered "return of capital" assets. For example, if I invest $1, how much money will it bring me in 25 years? No one asks when SpaceX will start returning capital to shareholders, but people think that SpaceX is worth X today because of how much money they can make and how much money will be returned to us when we colonize Mars in 20 years. Although many areas can support disruptive innovation, they still need to return to the framework of capital return.

The crypto industry has always seemed to avoid a key question, which is how to prove the true value of its assets. This avoidance is partly due to regulatory pressure, and many projects have tried to avoid being classified as securities, so they have turned to narratives such as "community currency" or "value storage". However, if the crypto industry hopes to attract mainstream capital, it must focus on product-market fit and clearly explain why these assets are valuable. The most common question investors ask when considering investing in crypto funds is: "Why is this asset valuable?" Because they are accustomed to the thinking framework of stocks and bonds. Only when the answer to this question becomes obvious will there be a large influx of funds and the size of the crypto asset class will expand, otherwise it may be limited to trading assets such as Meme coins in a small circle.

The value of future cash flow forecasts

Moderator: So, forecasts of future cash flows are also important. If we only look at crypto projects that can generate scalable revenue at present, there will be few investment targets to choose from. But if we take into account the expected future cash flows as in traditional asset valuations, the possibilities will expand.

Pranav: Our strategy allows for investing in both tokens and publicly listed stocks to allocate where there is the most potential, rather than being limited to holding altcoins. At present, there are indeed fewer altcoins worth investing in.

However, we are still happy to look for projects that have excellent products, even if the tokens of these projects do not currently have a clear value capture mechanism. Because tokens are programmable, value capture mechanisms can be designed in the future, as long as the team is good and responsible, ensuring that value does not flow only to equity and make the token meaningless.

If a team develops a good product, even if the token value capture mechanism is not yet clear, it is possible to foresee how these mechanisms will be realized in the future through imagination, which is an investment opportunity in itself. Once the product is successful and value flows to the token, the token may go from obscurity to a top 30 asset by market value, thereby driving the return of the entire fund. The key is to identify projects that can achieve value capture in the future and invest in them at the right time.

When should the project start charging mechanism?

Moderator: How do you view the relationship between the user growth curve and starting charging (realizing revenue)?

Pranav: In cryptocurrency investment, whether the project has a moat is an important consideration. The existence of a moat means that the product or service is difficult to be replaced and can maintain an advantage in the competition. However, many current cryptocurrency projects lack moats, especially when projects may lose customers once they start charging, which indicates that their business models are not sustainable. Such projects are generally not considered good investment targets.

Although some cryptocurrency products may have excellent technology or innovative functions, this does not mean that they have good investment value. The feasibility of the charging model and the customer's acceptance of the fees are one of the important indicators for evaluating projects. In addition, charging fees and returning these fees to token holders are two independent decisions and cannot be confused. Therefore, investors need to consider these factors comprehensively when choosing projects to avoid potential risks.

There are problems with the structure of many current crypto projects, where funds are driven by foundations, while the actual product team operates in other entities. Ideally, products with moats should be built to support the team's further research and development by capturing fee reflows, thereby promoting the birth of better products or new products.

This model is similar to traditional business operations, such as Amazon building AWS through the cash flow of its e-commerce platform and then using AWS profits to expand advertising services. This method of allocating capital is considered more efficient than returning it directly to shareholders, especially when the return on investment in R&D is higher than a simple return. For crypto projects, if the founders are able to build excellent products and generate revenue, it is better to encourage them to continue to develop new products to achieve long-term value growth rather than returning the proceeds to token holders.

Moderator: People misunderstand this when talking about buybacks. They think this is a very efficient way to use capital, but in fact it is quite inefficient.

Pranav: In the current market, the token world is in a stage of scarcity. Although the supply of tokens continues to grow, the overall market size is basically fixed. Compared with traditional capital markets, large capital pools such as pensions and endowment funds have not yet entered the token market on a large scale. Their main investments are still concentrated in Bitcoin and public equity of some crypto businesses. At the same time, "capital return" has become the focus of the industry. Buybacks are not new, but their importance is particularly prominent in the current environment. Each project should clarify the tokenization path of its products, but whether it is realized in the form of tokens depends on the characteristics of the current market.

The current market value of alternative coins other than Bitcoin, Ethereum and stablecoins is about $700 billion, and it reached $900 billion after the election, but the overall market has not seen significant growth. While demand is limited, market supply is increasing significantly. In this scarce environment, capital returns have become a focus, such as buybacks. However, in the next 24-36 months, regulators may approve multi-token ETFs, which are similar to S&P 500 index funds and will allow capital to have broad exposure to the crypto market through passive investment. This change may bring new channels for capital inflows to the market, thereby changing the current scarcity situation.

Tokenized stocks - the next trillion-level valve

Host: Will the legendary altcoin bull market that people talk about come? What will trigger a bigger altcoin market? Will Bitcoin dominance only rise?

Pranav: In traditional stock and bond investing, the question we always ask is: Who will buy this asset from me at a higher price in the future, and how do they think about it? Basically, always ask who is the next marginal buyer and how do they approach it.

However, in the cryptocurrency market, marginal buyers are more speculators or gamblers, which is different from the logic of traditional value investing. Even if analytical indicators show that certain token projects are undervalued, these analyses may not apply because marginal buyers have different focuses. However, this situation may change over time.

There may be two main directions for the future evolution of the market. One is to drive market value growth through the popularity of tokenized equity, such as traditional companies choosing to exit the market in the form of tokens rather than equity. Tokenized equity not only has the attributes of traditional equity, but can also achieve more uses through programmable functions, such as rewarding users or creators. Take OnlyFans as an example. If its equity is tokenized and used to reward creators, it may bring greater market appeal. This pattern could further expand the current $700 billion altcoin market, with more companies likely to choose on-chain IPOs rather than traditional IPOs.

Another scenario is that existing asset prices rise, similar to the previous "altcoin season". If there is another stimulus policy similar to the one during the epidemic, such as issuing cash checks or injecting liquidity, investors may put funds into assets that have not risen significantly, thereby driving up altcoin prices. Looking back at previous cycles, after the increase in market liquidity, funds initially flowed into credit debt and large technology stocks, and then expanded to high-risk assets such as SPACs and Bitcoin, eventually forming an altcoin rally. However, this situation may require a background of falling interest rates and loose economic policies to occur.

Moderator: So how does this support your current liquidity position and thesis? From an industry perspective, what upside or opportunities do you see in the third and fourth quarters?

Pranav: I won't make any macro predictions because I don't have any advantage in macro. By observing the L1 chains on the market and the fee data they generate, only three or four chains generate significant fees, while other chains with larger market capitalizations have almost no fee income. The high market capitalization of these chains is mainly based on the expectation that they may seize the market share of the top three or four chains in the future, but the actual probability is low.

Our strategy is to remain disciplined, not get involved in these assets, and wait for better-quality assets to be listed on the chain. During this period, how to use funds effectively becomes a key issue.

Stablecoin Legislation Window

Pranav: I think stablecoin legislation is about to be passed, which is expected to drive a series of companies to adopt stablecoins to optimize their business cost structure. It is reported that some investors have begun to pay attention to companies in the public market that may benefit from stablecoins, from Internet companies to e-commerce platforms, gig economy and sports betting, analyzing the proportion of fees paid to the banking system as a cost basis, and evaluating whether the use of stablecoins can effectively reduce costs. Through screening, the list of these potential beneficiaries has been greatly reduced, but it still contains some investment opportunities worthy of attention.

If some companies can increase their gross margins from 40% to 60%-70% by using stablecoins, their profitability and market valuation multiples may increase significantly. This area has not yet received widespread attention from crypto investors and public equity investors, and is an asymmetric investment opportunity. At the same time, if more valuable token assets emerge in the future, we may quickly adjust our strategy to capture higher return opportunities.

L1 valuation - look at past fee income or look at monthly active users in three years?

Moderator: In your opinion, are top assets such as Ethereum, Solana, Chainlink or BNB also completely overvalued? Can they have a little bit of Bitcoin's monetary premium power?

Pranav: I don't think most L1 tokens will enjoy a "monetary premium" similar to Bitcoin. Although some assets in the top ten by market capitalization may not have a clear use, they are regarded as a store of value because they have strong community support. However, the market will ultimately view these tokens as assets based on cash flow multiples, which means some L1 tokens are undervalued, some are overvalued, and some are reasonably valued.

I don’t think the value of these assets should be judged based on the data of the last month or last week, but rather on the development in the next 2 to 5 years. Each blockchain has its consumers of block space, such as ETH’s L2 and Solana’s consumer-facing applications.

The key question is how much demand will the developers currently building applications on these chains generate for the chain’s block space if their applications become hugely successful in the future. At the same time, these chains are also constantly expanding their block space supply. Assuming that both supply and demand expand simultaneously, how will the revenue scale of these chains change in the future? Based on the future revenue level, is the current valuation of the assets reasonable? These questions will become an important basis for judging the long-term value of L1 assets.

Moderator: This is indeed a bit worrying, because if you try to use traditional methods such as discounted cash flow (DCF) to value, many L1s look overvalued.

Pranav: Traditional cash flow models may not be suitable for valuing the cryptocurrency market. Currently, there are about 50 million cryptocurrency holders in the United States and perhaps 400 million holders worldwide. However, there are only between 10 million and 30 million active on-chain users. If these users only grow by 5% per year, then the valuation of the entire industry is indeed high. But I think the on-chain user base may experience explosive growth similar to ChatGPT in the future. In this case, the number of users who directly or indirectly use on-chain applications may reach 500 million in the next three years. This will make the current valuation of some first-level blockchain (L1) projects appear underestimated.

The Future of Infrastructure and Applications

Moderator: The current market is shifting from infrastructure to applications, and even the "fat application theory" has emerged. How important do you think it is for infrastructure teams to have user relationships? Is this key to industry growth?

Pranav: There have been no examples of killer applications migrating from their chains and building their own complete technology stacks. If applications choose to build their own technology stacks, there may be two results: one is user loss, and the other is an enhanced user experience and higher profits. However, the answer to this question is still unclear.

In other industries, owning users means owning the experience, and everything else may become commoditized, but the cloud computing field has formed a three-legged pattern of Amazon, Google and Microsoft. L1 infrastructure may also be similar. Applications may switch between a few giants instead of building their own chains. At this stage, the value of holding liquid assets lies in the ability to flexibly adjust investment strategies. Once killer applications can completely replace the underlying infrastructure and operate independently, the strategy of holding L1 assets may need to be re-evaluated.

Host: In the crypto field, the underlying infrastructure has gained all the brand recognition. For example, Ethereum is a brand, but you don't "use" Ethereum directly, you use applications based on Ethereum.

Pranav: I think there might be a different question here: do you think cryptocurrencies go mainstream through existing Web2 giants deciding to build on them or leverage these technologies? Or do they go mainstream through VC-backed startups creating killer applications?

If it's the latter, then the decision logic of these startups when choosing a blockchain is usually based on whether they can quickly demonstrate user traction in order to obtain the next round of financing. In the past two years, Ethereum and its L2 solutions have been considered the best choice because they can demonstrate results faster. However, this trend seems to have changed at this stage, and more and more projects choose to build on Solana because it is more efficient in demonstrating traction.

Currently, apart from Bitcoin and stablecoins, there are no real killer applications in the blockchain field. In addition, regarding the potential for mainstream applications, functions similar to WhatsApp integrating stablecoins may become the next breakthrough point, but the specific implementation method is not yet clear, including whether it will rely on existing blockchains or develop independent solutions. It remains to be seen.

Moderator: How do you find the core value of your existence and develop applications that really attract users?

Pranav: Everyone has different reasons for entering cryptocurrency. When I left traditional finance to do this, I believed that well-designed tokens could be an incremental capital structure tool for companies, even better than stocks and bonds in some ways.

If Amazon stock was just a tokenized Amazon stock, Amazon could develop Prime faster than the 14 years it took to build Prime because they could use it as a reward to develop this thing. So I'm here because I think tokenized stock is one thing, and then the question is, what do you need to make it manifest? Do you need the most decentralized blockchain? I don't know. I think solutions that can create a great user experience may be more critical.