Web3 Breakdowns Ep 34 - Andrew Steinwold: Investing in NFTs
Primer: Andrew Steinwold is one of the leading voices in the NFT space. Often, he plays the role of the interviewer on his Zima Red podcast. Today, the roles are reserved. Get to know him better in this episode of Web3 Breakdowns.
How Did Andrew And Josie Got Into Crypto/NFTs?
Met Josie in Mexico in 2017
Started dating and digging into crypto together
She was into CryptoKitties
Went to NFT NYC in 2019. Met Jin and learned about the Metaverse, VR, AR, and NFTs
Crypto OGs Dismissing NFTs
When he was raising for his NFT fund, he approached the Crypto OGs
The OGs were the harshest critics
After DeFi summer, the crowd went into NFTs
The DeFi crowd realized that their skill set did not apply to NFTs
People started to approach him to talk about NFTs
What Metrics Does He Use?
In 2018, he used OpenSea because they are responsible for 80-90% of NFT trade volume
Back then, it was $7.8 million in trade volume
In 2020, it’s $82 million of trade volume
This year, the NFT market broke $18 billion in trade volume
During the bear market, people fled towards blue chip NFTs
This mirrors the mini bull-bear cycle in 2019
People were unfazed as they are holding NFTs not purely for monetary reasons
Is He Surprised That Blue Chip NFTs Have Held Up Well?
He thought that people would not care about NFTs and would want to spend on groceries instead
The pain in NFTs could happen in a few months’ time
Their thesis is that NFT market participants are gamers, hobbyists, collectors. They just want to have social status within a community
“Crypto is like the money of the metaverse and NFTs represent the goods and services economy.”
- Andrew Steinwold
Crypto is all about economic incentives while NFTs are these fun, friendly markets of collectibles, gaming, art, virtual land, etc.
Deciding To Start An NFT Fund
Discovered Bitcoin in 2013. Sold Bitcoin in 2014 because he did not understand what blockchain was
In 2014/2016, he attended 2 different blockchain startups but they did not work out
In 2016, he understood the value proposition of Bitcoin
Instead of focusing on one startup, he decided to deploy capital to the best team/startups to support the ecosystem
Teamed up with his friend, Dan Patterson, who has a background in PE
Launched their fund in July 2017. They beat the market but were underperforming their peers because they don’t do venture
Decided to focus on a sector where they can do very well
When Josie attended the NFT conference, that was when it clicked for him
NFTs will become larger than crypto:
Our communication technologies have become more immersive
The average screen time people spend on their phones have increased
Launched a newsletter/podcast called Zima Red — Learned that brand building is important for deal flow
“It's like a cheat code. If I asked some of these founders, hey, can you spare an hour? Like, err, no, but if it's a spare an hour on a podcast like oh, hell yeah. I love that. That, to me is the biggest source of learning for myself, and at the same time get to build my brand.”
- Andrew Steinwold
Pitching Their NFT Fund To LPs
LPs get venture-like returns in a condensed timeframe (3 months - 1.5 years) for buy and hold
They are not traders
A lot of their LPs are crypto people or finance people
Setting up their fund was a complex process
Early on, they self-custody. Now, they use a custodian
Plenty of people say that they are experimenting with NFT custody, but actually only a few people do
If your AUM is over $150 million, you need to register with the SEC. At that point, you have to use a qualified custodian
Hired a lot of technical people to build a fund-grade infrastructure
Any Plans To Hold Direct NFTs In Their Venture-Backed Fund?
Have a few physical punks:
Printed CryptoPunks out on these great prints
Actual punks were transferred to a paper wallet inside the frame of the asset
They deal with physical goods that are custody in a warehouse
Is multifaceted — NFT infrastructure, financial infrastructure, social infrastructure, gaming infrastructure
Have to find domain experts in each submarket
Their Investment Process
Process
4 step process:
The fundamentals (team, product, tokenomics, community, market, etc.)
Figuring out the core function (game loop and value drivers)
Understanding the investable universe and its economy
Thesis on the project itself
Capita Allocation
It’s purely about the value. The allocation does not matter
Heavy allocation into virtual lands and collectibles
Little allocation to art
Increasing allocation to gaming assets
At the end of last year, they started to sell a lot of their collectibles and virtual land:
Collectibles are driven by narratives. In a recession, people are not going to spend on them
Gaming is driven by utility. It is least affected by macro
He spoke to the former CEO of Second Life. During the 2008 recession, their in-game economy performed very well
“They're not paying attention to macro. They don't care about the CPI. They're like, no, I want to kill the dragon. I want to raise my horse or whatever. So that to us was really, really compelling.”
- Andrew Steinwold
NFTs As The Trojan Horse To Mass Adoption
Crypto is hard for people to understand and many people don’t care
People love art, video games, collecting, and belonging to communities
NFTs will be the trojan horse to mass adoption
Nifty Gateway and NBA Top Shot kicked off the 2021 NFT bull market
Switching From Direct NFT Trading To Venture Infrastructure
Always had plans to launch a venture fund
Raised funds for their venture vehicle in Sep/Oct 2021
Next year is going to be hard for their NFT fund. Have been sitting on a lot of cash and blue chips
Conversely, valuations have come down tremendously on the private markets. Have plenty of dry powder to take advantage of the opportunity for their venture fund
Seeing a rush of talent from the venture side
Looking to acquire more ETH and Solana
Their Deal Flow
Novel ideas within the NFT ecosystem has dropped off
Still getting a lot of emails, LinkedIn messages, and Twitter DMs
Thoughts On Funds
Creating your own NFTs have the highest returning opportunity
They are a regular investment fund and are not set up to create their own NFTs
NFT funds come in all sorts of flavours
The Arca NFT fund is more similar to them
Would They Bid On Distressed Assets?
Their strategy has always been buying assets that they consider undervalued and undiscovered
If everyone knows about something, a lot of the alpha is gone
“But if the original purchaser purchased something for $40, and the buyers buying it for $250,000. That terrifies me, it's not something that we would do. If we're going to do that, we want to see years of history and a really, really strong thesis backed by some evidence that makes sense.”
- Andrew Steinwold
Was He An Early Collector Of Axie Infinity?
Not an early collector. Was a collector at some point
Thoughts On Investing In Games
Making a game that’s enjoyable, fun, and addictive is difficult
Axie’s tokenomics is a customer acquisition play. It will be done for a period of time
At some point, when there’s no longer huge growth, it will not work
There should be a tokenomic model 2.0, 3.0, etc that’s lined up and ready to go
Important to have diverse economies in the game (e.g. he’s a miner in World of Warcraft. He would sell his raw materials to smelters. Smelters would smelt equipment and sell it to others)
What Is He Most Excited To See In The Future?
Better onboarding
More stable in-game economies
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