Chain Venturer: Richard Galvin of DACM

Knowledge from decades in banking.

Marco Manoppo
August 05, 2023

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. It has been a super eventful week.

Curve pools were exploited due to a reentrancy bug and Michael Egorov’s loan almost got liquidated. Which, if this were to happen, would cause significant contagion to the rest of DeFi.
Over at the TradFi side of the world, Bloomberg ETF analysts are predicting higher odds of Bitcoin ETF acceptance after Gensler lost some cases and downplayed his controls at the SEC.

Anyway, during a stagnant bear market (crypto total market cap has stayed at $1.2 trillion for months), the best move is to assess underpriced public assets.

They are more liquid and the underlying themes have remained that: “deploying into a liquid asset during the bear market and seen better returns than investing in early-stage venture deals within the theme” — Decentralised.co

For this week’s issue, we have just the perfect guest for that: Richard Galvin from Digital Asset Capital Management (DACM).

Enjoy this conversation.

If you would like to participate in a future episode, DM me here.

-Marco

Enjoy your weekend

— non aesthetic things (@PicturesFoIder)
1:55 PM • Aug 4, 2023

Richard Galvin, Co-Founder of DACM

Richard Galvin is the Co-Founder and CEO of Digital Asset Capital Management (DACM), an Australia-based crypto investment firm that’s active on the liquid and venture side of the market.

Hailing from down under, Richard also has decades of experience in the banking sector, having been involved with Goldman Sachs and JPMorgan during the technology IPO boom.

Now, he’s bringing his extensive experience into the crypto asset investing landscape.

Here’s my conversation with Richard Galvin.

Quick takeaways:

Crypto is reminiscence of the technology sector in mid-90s.
Banking infrastructure continues to not be a challenge for crypto businesses, including crypto funds.
Activist investor strategy is not the best fit crypto, given that it’s still a fast growing sector.
Web2 businesses with a large user base conducting low value transaction have traditionally not been the best use-case of crypto given the tech’s historical limitations.
Alternative L1s should focus on finding more users and attract more use-cases, the economics model will eventually resolve itself.

The following paragraphs are not verbatim quotes. These are paraphrases of our conversations optimized for written media format. Some context and nuances might have not been conveyed properly in the process.

The author of this issue is not responsible for any misconstrued statements made in the issue.

All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.

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What was the defining moment that made you decide to work in crypto?

Richard was on a career break after spending decades as a banker at Goldman Sachs and JPMorgan. During this break, a good friend pointed him to crypto, asking him to take a closer look at it.

Perhaps unsurprisingly, crypto’s captivating excitement in its early days and Richard’s experience with technology IPOs, made him fall down the rabbit hole as he found similarities between crypto and the early days of the tech boom in the mid-90s.

Eventually, Richard found out about further use-cases and infrastructures in crypto such as stablecoins, centralized exchanges, and others — which made him feel that it was the right time to jump into the space.

What is DACM?

DACM is an Australia-based crypto investment firm that focuses on long-term investments thesis, not on short-term trade cycles. DACM does its research on which crypto assets to buy and hold for a longer-term time frame, until their thesis plays out.

DACM has both liquid funds investing in primary market crypto assets and venture funds investing in early stage startups. It’s crucial to be a bit more flexible when one manages a crypto fund.

Being an active investor in both the primary and private markets also provide DACM with a better insight into current private market valuations, which often translates into how primary markets tokens will trade.

Which areas are DACM most interested in?

DACM is relatively sector agnostic. So the firm is heavily invested in L1, L2, and DeFi, and many more.

That said, the guiding principle for DACM is to invest in technology that will help crypto reach more mass market adoption. Projects that have a highly distributed customer base conducting super low value transactions is not an area that DACM is excited about. The firm’s thesis is that projects that have a customer base conducting less number of transactions but with a higher value fits crypto’s current technical capability more.

DACM is also interested in infrastructure type projects, aka projects that are operating under the hood to help tie the whole crypto space together. (e.g., bridges). In general, it’s important to have more projects that are less consumer facing but provide critical infrastructure for the next development cycle as the tech matures.

You start to think using something like Metamask is normal, but it’s clearly not normal. There’s only a small part of the people that have the time to watch videos to understand how to use that and that’s not the mass market.

The good news is that this also happened in the past when the Internet was awkward and difficult to use where only a small bunch of people were using it.

It is a cycle and we will eventually get through that. It starts to build and developers get better, the user interface gets better, the underlying hardware gets better.

You start to open that more and more market and friction to transactions gets lower and lower.

What sort of risk management that one needs to implement for a liquid fund?

On the liquid side, DACM’s mandate is pretty rigid for a reason. It means that DACM’s investors know the exposure they’ve got. DACM is a long only investor, with 80-100% of the portfolio always invested. Obviously, the firm needs to take into account available liquidity and redemption capability for investors, but in general it always stays long the market.

The lever that DACM utilizes to express its view is by allocating towards BTC and ETH more when the outlook is bearish, and vice-versa when the outlook is bullish. Sometimes the firm also carries up to 20% cash.

DACM believes that the crypto market goes up more than it goes down so they aim to position their capital for long-term growth.

What are your thoughts on activist play in crypto?

DACM is active in the way they are managing their portfolio around voting and staking or providing LP liquidity. DACM always looks to generate the most income they can from the tokens that they hold. If you’re into crypto, it’s kind of like a participation sport. You got to do everything you possibly can.

That said, DACM is focusing on long-term growth in the space. The firm believes that for a high-growth space like crypto, squeezing the remaining value via an activist investor strategy is not as intriguing. The activist investor strategy is better suited for a low growth sector.

And for the time and the risk that it takes to try and extract that potential squeeze in value, such as assessing your actual legal claims over the governance tokens, you might find better opportunities investing in mispriced liquid crypto assets.

What is the situation around crypto banking infrastructure in Australia?

Banking has been an issue since DACM started its business in 2016. Crypto banking infrastructure has always taken an outsized amount of effort and time than it should. It’s always been difficult to particularly connect cashflow (cash inflows and outflows) to exchanges. That’s always been somewhat of a challenge.

While it has never been easy, the past 12 months was certainly worse. DACM was a happy customer of Silvergate Bank since 6 months into DACM's journey until Silvergate collapsed late last year, which was disappointing to see. With that, DACM definitely had to rethink its approach to banking relationships.

For DACM, the vast majority of our business is offshore and denominated in US Dollar, so DACM currently has banking relationships in the US and Switzerland, which has taken a long time and effort to acquire.

In Australia, local banks have been reluctant to support the industry. There are hopes that at some point political pressure moves to a rational footing, and crypto businesses that are legal and licensed should be able to receive banking, and customers doing legal and licensed activities should not have risk of banks pulling away their accounts.

Which regions are you seeing the most active private deal flows from?

DACM makes sure to run a global VC portfolio because of the global nature of crypto as an asset class. The firm had been invested in projects from all over the world; the US, Eruope, Israel, Middle East, Asia, and Australia.

On deal flows in the past few months, Asia’s activities does seem to be a little outsized in terms of activity at the moment, which is good, since Asia also has an outsized number of user base in crypto. The region is also less concerned about the possibility of regulatory actions, so many entrepreneurs are at the forefront in experimenting with cool products.

What are the roles that non-US countries have to play in crypto?

The nice thing about crypto is that it’s a borderless tech. When one jurisdiction is being antagonistic, we tend to see other jurisdictions that are taking the opposite stance, and being more open towards the asset class. For instance, Hong Kong is starting to become more friendly again towards crypto as the US is becoming more antagonistic.

Every jurisdiction has their own incentives related to their approach towards crypto. These dynamics will continue to play out as crypto is a truly global asset class. That said, most developed countries definitely want to find a way to accommodate growth in the crypto space. The biggest issue at the moment is a lot of entrepreneurs don’t have clarity on the regulatory/legal side as to what they can build.

99% of entrepreneurs will generally take the risk to build something as opposed to waiting for clearer regulation. It’s not abnormal for technology to be ahead of regulations. Instead, it has occurred many times in the past. There’s a good quote that we like to use in the office from the book called “The Sovereign Individual”:

“Old law seldom can resist new technology” - disruptive technology doesn't wait for regulation.

You’re outspoken about your multichain view, can you elaborate a bit further?

DACM always asks what products are attracting users and generating utility. The firm believes that if that goal can be achieved, the economics model will resolve itself eventually. Obviously, there are important considerations such as whether or not the asset requires continuous new capital flow to sustain its functionality.

While Ethereum is the great example for a sustainable blockchain economic model today, it still took 7 years to achieve that. For most blockchains, builders should focus on getting the tech right to attract users and generate use cases instead of over-focusing on the economics of the chains.

Alternative L1 chains such as Cosmos or Solana economics models are also getting better now. They are not perfect yet, but it’s more about how they are still on the path to grow and acquire users. Once they reach a certain scale, the business model will be sustainable.

Rapid Fire Questions

What’s one book that any aspiring investment professional should read?
- The Sovereign Individual by James Dale Davidson and William Rees-Mogg
What’s your biggest investment mistake?
- Luna
What’s the most underrated use case of crypto?
- Stablecoins
What’s your most contrarian view in crypto right now?
- We still think we’re very early in the disruptive cycle, we view that this technology is gonna remake entire sectors of the global economy
What’s the biggest risk that the crypto space is facing?
- The speed of the development. It has to keep moving fast and never stop attracting new users

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.