HGR 2018 Market Outlook

2017 and the first month of 2018 have been quite a ride in the crypto world. At the beginning of 2017, Bitcoin and Ethereum were at $1,000 and $8, respectively. Global mindshare and capital piled into the space throughout the year, driving the two bellwether cryptoassets to a local maximum of ~$20,000 and $1,450, respectively, during January 2018. As we write this today, sentiment in the market is much more subdued and we are experiencing a long overdue correction. That said, given our conviction that many significant developments will be achieved during 2018, and that the crypto space will generate considerable investor surplus over the long run, we could not be more excited to be evaluating projects amidst this market drawdown.

As we have detailed, our investment sourcing process is driven by multiple sources, including a top-down view on attractive investable themes. Today we would like to share with you three of such themes below.

We look forward to an eventful 2018.

Sincerely,

The HGR team

The Pronounced Need for Scaling Solutions
Mature blockchain-powered tokens such as Bitcoin and Ethereum have experienced well-documented growing pains during 2017, with both chains’ experiencing more unconfirmed transactions in their mempools, which have driven higher transaction fees and prolonged confirmations.

Most industry-grade applications require throughput capability of thousands of transactions per second. For mature blockchains to reach such levels, scaling solutions are necessary. While there are many approaches to scaling, here we focus on token-level investable opportunities, which typically can be categorized as either: layer 2 solutions and parallelization. We believe both present investable opportunities in 2018 as scaling becomes more of a topical issue.

Layer 2 solutions, or side/off chains, are networks that process transactions on offline channels, thereby taking the transaction load off the main chain. Investable layer 2 solution tokens include: Enigma, Raiden Network, and iExec RLC. Lightning Network and Plasma, as projects without tokens, are uninvestable.

Parallelization refers to distributing the work of validating new transactions to multiple nodes to be performed simultaneously, thereby increasing transaction throughput and confirmation speed. The most visible example currently is sharding as contemplated in Ethereum (Casper), though this is uninvestable. Investable parallelization tokens include: Zilliqa.

Directed acyclic graphs (DAG), altogether an alternative to blockchains as a potentially better way to reach high levels of native processing without additional add-on solutions, are likely to gain attention in 2018 as well. Early indications of such projects prove promising. Besides IOTA, DAG-powered tokens with a potentially better risk-reward include Byteball Bytes and RaiBlocks.

Consistent with scaling issues, we believe that the most valuable tokens in the near term will be those providing the “middleware” layer of the decentralized tech stack. We believe infrastructure-related projects that provide solutions within the crypto space (e.g. stablecoins, off-chain computation, decentralized exchange protocols, digital identity) will see value realized quicker in the near term, which will then be subsequently used to facilitate the rollout of projects that target end users. For example, 0x offers a protocol for developers to build user-facing decentralized exchanges. Beyond decentralized exchanges such as Paradex and Radar Relay, its infrastructure is also being utilized by dApps requiring back-end token exchange functions such as Augur, Aragon, Maker and Melonport.

Modern Demand for Privacy and the Liberalization of Personal Data
Catalyzed by Edward Snowden’s surveillance disclosures in 2013 and subsequent mass security breaches (Equifax, Adult Friend Finder, Ashley Madison, Anthem, eBay, JP Morgan, Yahoo), privacy as a fundamental right appears to be gaining mindshare inside and outside the crypto community, especially in Western countries.

Since then, there have been increased interest in a more private way of life by using tools such as private messages (Snapchat, Telegram, Messenger’s secret messages) and private transfers of wealth (crypto tokens such as Monero, Zcash). Several ongoing consumer privacy-related class action lawsuits have been filed against Google and Facebook. The European Union’s General Data Protection Regulation (“GDPR”) takes into effect during Q2 2018, which empowers EU citizens to gain control of their personal data from companies that currently hold them.

The crypto community is also responding with increased privacy measures. Ethereum implemented zk-SNARKs in the Byzantium upgrade. Monero’s Project Coral Reef outreach effort has been successful at increasing awareness of privacy and adoption of its coin, signing up 50+ prominent music stars to accept XMR.

We believe that privacy in medium of exchange is a near eventual certainty given evolving consumer and merchant needs. Given this, privacy coins are a focus (Dash, Monero, Verge, Zcash, and Zcoin), as well as protocols that enable privacy, such as Enigma.

Tokens that emphasize consumer privacy are also likely to gain faster adoption and experience increased interest in 2018. Such include Enigma and Shopin (currently launching ICO).

Chinese Crypto Adoption by Enterprises and Governments to Accelerate
Despite China’s ICO and crypto exchange bans/shutdowns in 2017, we believe such measures are meant to protect Chinese citizens from speculation and not reflective of crypto adoption in the country. In fact, we believe crypto adoption for enterprise use cases is among the fastest in the world, facilitated by structurally close alignment between crypto projects, governments at various levels, and companies.

A number of such partnerships have already been announced. Notable ones include VeChain with the government of Gui’an (national level partnership) and Waltonchain with China Mobile IoT Alliance. We expect a large number of partnerships to be announced over the next couple years given the increasing amount of focus on the space by all players (crypto, government, and enterprise).

Tokens that natively support the Chinese market include NEO, Qtum, VeChain, and Waltonchain