DCG Insider #2 - Our Busiest Summer Ever

Investing in frothy markets is like the later rounds of a grand slam tournament in tennis: weaknesses in a player’s (head) game are exposed and exploited, just as wavering in your investment approach can cost you dearly. Champions tweak and elevate their play to claim an edge, while the best investors see currents in real-time and resist following the herd. The agony and ecstasy of sports run highest as the title nears; hot markets are an emotional rollercoaster: growth is alluring, while stretched valuations increase the potential for losses.

Reflecting on our recent investments, we stuck to our approach and deployed a few winning tricks:

1. Buy the plumbing, not the hype

Since the start of this year, “DeFi” has surged. As with many market frenzies, what starts as promising innovation can devolve into baseless speculation and steep prices. We don’t know which DeFi projects will win, but we believe it’s likely to be a few. “Spray and pray” is one way to play it, but timing the peak is a fool’s errand, and if you’re still holding assets indiscriminately when the music stops, you’re likely to suffer considerable losses.

Instead, we’ve looked to the plumbing—the tools that enable the DeFi speculation. An example is Zerion , where token-holders can see all of their holdings in a simple web and mobile interface, and interact with them in the application.

Investing in Ethereum, the gas that currently powers DeFi, is one way to bet on the market’s long-term development—no matter the individual winners. Another is to bank on a company like Multis, that brings the best of DeFi (apps) to its startup customers, as non-traditional financial services. The stronger the DeFi applications, and the more fervent the movement’s fanbase, the greater the appeal of Multis’ offering.

2. Double down on products we use

Sourcing and diligencing deals efficiently is key in a hot market. The best hack? Look at what’s right in front of you and ask colleagues and friends to do the same. At DCG, we’re fortunate that this isn’t confined to our ten-person parent-company team, and we receive input from across our five subsidiary businesses. We have Genesis to thank for our recent investments in Paradigm and X-Margin.

Paradigm allows investors to submit derivative pricing requests to many exchanges at once, alleviating what were formerly major obstacles to institutional crypto investing: inefficient communications and large trade spreads. X-Margin lets investors use one pool of collateral to trade across multiple venues. It may not sound sexy, but for investors that formerly had to park large amounts of capital across disparate venues to trade, it’s a game-changer.

If these solutions seem like they fit together...they do. Paradigm and X-Margin, along with our portfolio company Fireblocks, partner to offer institutional customers, like Genesis, a first-rate automated margin monitoring and trade settlement experience. What’s better than investing in products you use? Investing in an experience you can’t live without!

3. Leverage small teams doing big things

Of the eight companies that joined our portfolio since June, three are at the seed stage, three were “post-seed” bridge investments, and two were Series A investments. The smallest company by headcount is Dune Analytics, which lets users query key stats across blockchain projects, build data visualizations (charts, tables), and see other users’ popular creations in their internet browser. Founded in late 2019, it has just two employees—the co-founders, who have built the industry-leading product with thousands of users and strong revenue growth on a shoestring budget from their native Norway.

It’s anyone’s guess where markets go next, but we’re certainly not banking on a quiet fall.