[Research Analysis] Understanding Chinese Crypto Investors

19 Oct, 2018 01:38

Author:Jason Fang,Managing Partner of Sora Ventures.

If you don’t know much about the Chinese crypto market, it has always been very political. I once told a friend if China was a democracy, it would be like the crypto market today. The Chinese crypto scene has always been a clan-like society in which you have several popular clans with many followers and subordinates. When our market is doing well, these clans are self-sustaining themselves quite well . When the market is bearish, everything is much more dramatic and chaotic. This leads to the core topic of this post. What happens to these clans when we’re in a bearish market, and what can we learn about Chinese investors? Well, I like to use the following diagrams to illustrate the scenarios here.

To make things simple, during a bullish market its difficult to identify who your investors are: if they’re value-add investors or not, and how are they value add investors. I’ve used the example of water being wealth (as water translates to wealth in Chinese), spikes and pillars being Chinese crypto investors, and tides being our market. When the tides are high and the there is plenty of water covering the spikes and pillars, it is safe to swim. When the tides are low and water levels drop, the spikes and pillars reveal themselves, thus making it very difficult to swim as every pillar you swim into is a direct hit on the head.

The truth is the crypto market is so unique that many of the projects which recently entered don’t have the time and energy to do their due diligence on their investors. This is especially true for western projects taking money from Chinese funds. This inevitably leads to a lot of misunderstanding and misassumptions about the Chinese crypto investment community.

Unlike the traditional world of investments where there are angel investors, venture capital firms, private equity firms, hedge funds, etc…, our market is primarily a combination of venture capital funds and hedge funds. Currently, the majority of the Chinese crypto funds are hedge funds with the largest portion of capital coming from the teams personal pockets. Their strategy is very different from Sora Ventures’ model, which is highly positioned more like a venture capital fund.

For example, these funds’ primary business revenues are from secondary market trading like OTC and market marking, so naturally they have strong ties with exchanges. However, when these funds help list a project, they are doing it for themselves and not for the project as they are positioning to liquidate and profit quickly. This is the reason why a significant number of Chinese projects will have a waterfall graph during their first week of listing.

If you look at how Sora Ventures is positioned, our approach is completely opposite. We don’t do any market making and secondary market management. Our focus is community development and very application-driven for our token projects. To further assist with growth for our incubated projects our execution starts from phase 1 with Sora Ventures, phase 2 with Sora Foundation (the community driven project for our portfolio companies), and phase 3 with our projects integrating their token with an existing product used by average consumers.

8 to 12 months may seem like a long time for one project in the crypto space, but this is why Sora Ventures only incubates 1 project every 6 months. Especially in a bearish market, only a product that has real use cases and adoption will survive. Of course, we may seem like outliers in this market as we probably are if you only consider Asia-based funds, but I am confident we will see more funds mimicking our model — I truly believe this is what we need.

To further evaluate if your investors are dumpers or non-believers in your project, I would strongly recommend following their wallet address to see if they’ve sent it to any exchanges. If they did send it to an exchange, always assume they dumped it even if they tell you they did not. For obvious security reasons, its ill advised to put large sums of crypto in any exchange so why would any investor keep their crypto in an exchange unless they’re ready to liquidate.

To put things simple on how I like to differentiate Chinese and US investors, I would reference what Peter Thiel explained in his book Zero to One where he described American being inventors while Chinese are copycats. I would further add that Chinese businessmen are simply better at identifying market opportunities (note that China has one of the largest markets in the world).

So the next time you engage with or look to work with any Chinese crypto fund, understand the pros and cons for taking their money. There are no surprises. You just need to know what you’re signing up for. Whether what they are doing is ethical or not is a separate issue. The point is that if you’re selling your tokens to a crypto hedge fund, they have their obligation and mandate to operate like a traditional hedge fund.

I hope this article clarifies most of the confusion and negative sentiment around Chinese crypto investors. If you wish to get in touch with me, feel free to follow my Twitter @Jason_SoraVC or find me on Linkedin.