Podcast Notes | Interview with DeFiance Founder: How to Find 100x Cryptocurrencies in a Bull Market?
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Podcast Notes | Interview with DeFiance Founder: How to Find 100x Cryptocurrencies in a Bull Market?
Arthur believes not all unlock events are equal.
Navigating Web3 tides with focused insightsCompiled by: TechFlow
In this episode of "Crypto Market Wizards," Taiki Maeda interviews Arthur0x, founder of DeFiance Capital. As a seasoned cryptocurrency expert and investor, Arthur0x shares his deep insights into the crypto market, including his personal investment strategies, market analysis, and predictions for the future of cryptocurrencies.
Host: Taiki Maeda, Founder of HFA Research
Guest: Arthur, Founder of DeFiance Capital
Release Date: November 14, 2023
Arthur0x's Background
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Arthur said he entered the crypto space in 2017 at the age of 20, finding it fascinating due to its global nature and active participation. After exploring various roles within the industry—including running his own startup and working for Layer 1 protocols—Arthur found success in investing.
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He added that he became a fundamentals-based investor, focusing on potential use cases of cryptocurrencies beyond speculation. This led him to dive deeply into DeFi in early 2019 and capitalize on the opportunities presented by the DeFi Summer.
Market Conditions
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Arthur mentioned that since their last conversation three years ago, the crypto market has undergone significant changes. Many well-known organizations or individuals have collapsed, leading to a reshuffling within the crypto space. In particular, the collateralized lending sector no longer exists, and this shift has impacted market infrastructure.
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Arthur believes that while it may take time for people to readjust, demand for leverage will always exist. He predicts that before under-collateralized loans become more common again, there will be increased transparency and auditing requirements.
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Arthur expressed a bullish view on current market conditions. While he doesn't expect the market to reach peaks like those seen in 2021, he believes the market has bottomed out and is currently experiencing a small bull run.
Advantages of Liquid Crypto Markets
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Arthur emphasized that imbalanced capital inflows can distort crypto market structure. He categorizes market participants into four groups: retail investors, crypto companies, large corporations, and VCs. Among these, VC capital inflows may disrupt the natural flow of the market.
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Arthur explained that because of VCs' influence on market dynamics, retail investors often hold negative views toward them. He stressed the importance of retail investors understanding how VCs operate and their role in shaping markets.
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Arthur discussed some distortions caused by imbalanced capital inflows:
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Overvaluation of certain projects due to excessive funding from VCs.
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Misallocation of resources, with projects prioritizing fundraising over product development.
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Intensified competition among projects for VC funding, leading to inflated valuations.
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Arthur emphasized the need for a balanced market structure where each participant category plays its part, without any single group dominating excessively. He suggested that a healthy market structure would allow fair competition and innovation.
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Arthur noted that due to frequent volatility in crypto assets, many investors opt to invest through venture deals. They seek private deals and hold investments until lock-up periods end, as large institutions typically avoid direct purchases of crypto assets.
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He added that a healthy capital market requires both early-stage VC and public market investment. Although many investors focus solely on venture funds due to crypto price volatility, liquidity in public markets is crucial for sending accurate market signals.
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Arthur stated that in the crypto space, capital chasing a limited number of high-quality private deals is oversupplied. Institutional investors often overlook good projects with liquid tokens because they specialize in venture fund investments. This distortion has gradually corrected over the past 6–12 months, but previously, about 80% of crypto financing was concentrated in venture funds.
Fundamentals vs Narrative
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Arthur said fundamentals are important in crypto investing, though defined differently than in traditional stock markets. Community and narrative are considered part of crypto investment fundamentals. While narratives drive attention-based markets, empirical evidence shows fundamentals still play a role.
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He added that evaluating crypto fundamentals involves more than just cash flow income. Community attention and other intangible factors are part of fundamental assessment. Having strong fundamentals alone may not be enough—new information or developments can impact prices.
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Arthur said the narrative-driven nature of crypto markets is influenced by attention-based dynamics. Narratives around speed, innovation, and other factors can attract attention. It remains unclear which—fundamentals or narrative—will have a greater impact on price increases in the next wave of adoption.
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He added that without new price-moving information, strong fundamentals alone might not suffice. Strong fundamentals combined with new marginal information can influence price movements.
Characteristics of “Home Run Trades”
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Arthur said home run trades involve identifying trends that ultimately turn out larger than expected, such as DeFi, gaming, and NFTs.
TechFlow Note: Home Run Trades typically refers to financial or investment transactions that generate exceptionally high returns.
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He added that early entry into a trend is crucial for maximizing returns. Position sizing depends on risk tolerance and market volatility. There’s no fixed rule, but for high-conviction investments, positions usually range between 10%–20%.
Decentralized Derivatives
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Arthur added that decentralized derivatives are seen as a promising area within DeFi. The derivatives trading segment is projected to generate annual revenue between $10 billion and $150 billion. Certain subcategories within DeFi still have room for growth and offer favorable risk-adjusted returns.
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He said that assuming total leveraged crypto trading volume remains constant, decentralized platforms are expected to grow five to tenfold due to increasing market share. This growth presents opportunities for substantial returns.
dYdX & Impact of Token Unlocks on Price
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Arthur expressed strong confidence in the decentralized platform dYdX, noting that they were a lead investor in dYdX’s Series B round and remain bullish on the project.
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Arthur said not all unlock events are equal, and two factors should be considered:
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Investor base: Long-term-focused venture firms are more likely to hold, while smaller investors may sell.
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Project performance: If a project delivers expected returns, or if investors realize their thesis was wrong, they may choose to sell.
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He added that cryptocurrencies are reflexive asset classes, meaning market conditions affect investor sentiment. In bear markets, investors may feel pessimistic and consider selling. Conversely, during bull markets, they may see further growth potential and choose to hold.
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Arthur said unlock events can act as catalysts for price volatility and draw attention to a project. However, unlock events alone should not form the sole basis for investment decisions.
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He added that despite heavy investment in decentralized derivatives projects, none have managed to replace dYdX as the market leader.
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Arthur believes that from a valuation standpoint, dYdX isn’t expensive compared to similar-valued projects. He added that many investors prefer holding top-performing category leaders rather than selling their positions.
Sectors Arthur Is Bullish On
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Arthur said decentralized derivatives protocols offer investment opportunities due to their revenue-sharing models with token holders. These protocols capture value from trading volume, making them investable and providing exposure to the broader crypto market.
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He added that Layer 1 solutions like Solana and Layer 2 solutions like Polygon are also seen as trustworthy investments. Solana demonstrated significant growth and resilience during market downturns. Polygon benefits from an information asymmetry advantage, contributing to bullish sentiment.
L1 & L2
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Arthur said EVM’s dominance in the L2 ecosystem is unlikely to disappear soon. Due to incentives around developer familiarity, user base, and tool availability, non-EVM chains face difficulties competing against established EVM ecosystems. While success for non-EVM chains isn’t impossible, it’s highly challenging. L2 solutions that compete without adopting EVM (e.g., Solana and Cosmos) are outliers, not the norm.
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Arthur believes the technology behind Polygon, especially its zkEVM, is a key reason for its bullish outlook. He highlighted potential challenges with Optimistic Rollups, such as lack of fraud proof and long withdrawal times. From a technical perspective, ZK-Rollups are expected to gain wider adoption in the future.
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He noted developers prefer building on familiar smart contract languages, making zkEVM an attractive choice. The market may be overlooking these factors, positioning Polygon as one of the best L2 solutions today.
Gaming
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Arthur believes gaming aligns well with crypto due to its community-driven nature. Gaming is considered a major industry, even larger than the combined revenues of music and film. Cryptocurrencies can bring improvements to the gaming industry.
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He added that tokens can gain value depending on their design—for example, through governance rights or in-game currency. Timing plays a critical role in determining the success of token integration into games.
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He added that Web3 gaming offers game studios an opportunity to reach a global audience without relying on traditional publishers. Large publishers often take a significant cut of game revenue and impose restrictions. Some mid-sized game studios see Web3 as a way to bypass these challenges, especially in Asia.
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Arthur said not all games have the same lifespan—some types are short-lived. Single-player games with limited playable content may not be suitable for crypto integration. MMORPGs and strategy games are considered types that offer lasting gameplay experiences. Community engagement and active user bases contribute to the success of these genres.
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He said he prefers games with longer lifespans over short-term projects. Different game genres have varying levels of longevity, affecting their suitability for crypto integration.
How ATOM & Osmosis Work
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Arthur said Osmosis should be viewed as a combination of a DEX and an L2 protocol. It serves as the central liquidity hub of the Cosmos ecosystem and acts as an IBC center. Historically, Cosmos projects faced issues with liquidity and accessibility, which Osmosis aims to solve.
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He added that Osmosis has become the de facto IBC hub for Cosmos app-chain tokens. Many high-profile projects in the Cosmos ecosystem have launched on Osmosis, increasing demand for its token. $OSMO is used as the base pair for trading other Cosmos app-chain tokens via IBC.
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Arthur said if liquidity flows into the Cosmos ecosystem, Osmosis stands to benefit significantly. Pairing new Cosmos tokens with $OSMO on DEXs will create more demand for $OSMO. Decentralized derivatives are expected to gain market share from CEXs, further benefiting Osmosis. Considering these factors, investing in Osmosis offers strong risk-return potential and exposure to ecosystem growth.
Common Traits of Successful Traders
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Arthur said risk management is crucial for successful trading. Poor risk management can lead to significant losses. There are examples of traders who, despite having various advantages and resources, suffered losses due to inadequate risk control.
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He added that successful traders have a trading framework that fits their style and stick to it. It's easy to be swayed by others’ opinions in the market, but having a clear framework helps avoid unnecessary risks.
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