A simple strategy for where to put your money is to search among your passions, hobbies and obsessions.
Culture is the new currency. For the first decade of cryptocurrency’s existence, investing in the space was relatively simple: You could buy bitcoin, ether, XRP, ADA or any of the thousands of more exotic alt-coins. Prices soared, prices flopped.
Then, something changed. In the last two years, ever since the awkward acronym “NFT” [for non-fungible token] went mainstream, crypto has seeped into every corner of our culture. Sports: NBA Top Shot racked up 1 million users. Art: Crypto was such a juggernaut that even Sotheby’s, founded in 1744, began auctioning NFTs. Pop culture: Celebrities like Jimmy Fallon, Madonna and Kevin Hart changed their Twitter avatars to cartoon apes.
“We’re seeing this convergence of culture, finance and technology,” says Jamie Burke, CEO of Outlier Ventures, a VC fund and accelerator. “It’s no longer just a technological paradigm shift. It’s no longer just a new financial system. It’s also a new way in which culture is made, consumed and distributed.”
For potential investors this represents an opportunity. An investment in crypto “culture” is a bet on the passions, hobbies and obsessions that regular people actually care about. “The average person doesn’t care about the underlying technology. They care about what it can do for them,” says Magdalena Kala, founder of venture fund Double Down. “When you look at the growing awareness of Web3,” says Kala, “it’s always tied to consumer culture.”
To find alpha, hunt for the passion. That’s essentially the investment thesis for Jarrod Dicker, partner at The Chernin Group (TCG) and a former vice president at The Washington Post. “When we look at investments we look at passion first and then say, how is this uniquely unlocked by crypto?”
He gives the example of music. “I have a ton of passion for music,” says Dicker. “Would I love to be a record label exec? Sure. But do I have any skills for that? No. I’m never going to get hired by Warner.” In today’s world of Web2, Dicker’s passion is just a wispy fantasy. But with Web3? He points to projects like Hume, a decentralized record label, that lets the community (through NFT ownership) find and grow musical talent.
Or maybe you have a passion for museums? “That might be a passion of mine,” says Dicker, “but would I ever be able to curate the Smithsonian? Hell no.” Enter Web3 projects like Arkive or PleasrDAO, where members act as curators and vote on which assets to acquire.
If your passion is sports? Then LinksDAO could help you become a part-owner of a golf course or WAGMI United could help you own a soccer team or SailGP a racing yacht. “These are fascinating, and for some reason, very under-discussed,” says Dicker. “I talk about it constantly, and we invest across that thesis.”
Let’s say, hypothetically, that you buy this underlying premise – that culture can be a good bet. How do you leverage this? How, specifically, do you gain exposure to this strange new market?
Web3 is gaining exposure
The beauty of the crypto market, from an investor’s perspective, is that you can take a stake in a number of different ways. VC funds like Outlier directly invest in projects at an exceptionally early phase. “We’ve got a particular way of investing in the space as an accelerator,” Burke explains. “We work with Project X, we take a stake in them at an early stage, and we help them raise money, hire people, develop product, go to market and, hopefully, grow their user base.”
That level of hands-on isn’t necessary, of course, for early-stage investing. “For the way that we’re looking at the market today, early exposure – the traditional equity-type of exposure – is probably the best right now,” says David Nage, portfolio manager at Arca. Specifically, Nage says that in 2021 the “lion’s share” of investment deals were for SAFTs, or Simple Agreement for Future Tokens. Once the prices dropped in early 2022, Nage saw a shift from SAFTs to the more traditional SAFEs (Simple Agreement for Future Equity), along with a warrant for future tokens. (In other words, an investor would get a chunk of equity ownership, along with a stack of tokens at a future date.)
If you’re not interested or able to invest directly into a founding team? Then you can gain exposure through tokens. If you’re bullish on the potential of Project X, you can simply purchase X tokens in the same way you would buy shares of Tesla.
Or you could simply invest in the NFTs. This has been the playbook of the pseudonymous “Whale Shark,” who has bought over 400,000 NFTs and is one of the most prolific collectors in the space. “Each investment ‘class’ has their own pros and cons,” says Whale Shark over email. “While equity [investing in a founding team] provides the highest growth prospects, it lacks the liquidity of tokens.”
And don’t sleep on another way to gain exposure, and it could be the simplest method of all: The underlying blockchain protocols. “If you believe in these business models, why not just buy a bunch of Ethereum?” says Kala, referencing the fact that many of these projects operate on the Ethereum-based Polygon platform. Or you could make an “index bet” by spreading your investments across a number of platforms – Ethereum, Flow, Solana and others.
Nage agrees. By analogy, he notes that in the early-1990s internet, the protocol of TCP/IP was the main hub that SMTP and HTML were built upon. If you were a savvy 1990s investor who was confident in the future of the internet, wouldn’t it be nice to own a piece of TCP/IP? But that couldn’t be done. Those financial instruments didn’t exist. Today, however? If you believe in the promise of Web3 culture, as Nage puts it, “you have the ability to invest in the protocols where all of these things will be built.”
All that said, the word “culture” is almost comically vague and tricky to pin down. Culture can mean art, sports, fashion, music, gaming, archeology, dating, religion, movies, food, poetry – it’s a long list. And Web3 could disrupt each of these verticals. So rather than try to exhaustively (and futilely) catalog every potential investment opportunity as a way of sparking ideas and encouraging future research, we’ve highlighted a few of the use cases that professional crypto investors find particularly tantalizing.
Some are here right now. Others are imminent. And still others are perhaps three to five years from going mainstream, which could make now the perfect entry. (This could also, of course, all “go to zero.” Many, if not most, projects will fail. Risks abound. Caveat emptor.)
To find a solid investment thesis, Nage likes to look at the wider macro trends – and a big one is gaming. “There are about 3 billion gamers around the world,” says Nage, who notes that since the days of Pong, “Gaming has grown through recessions and depressions and wars.”
The implication for Web3? Nage closely followed the explosive growth of Axie Infinity because “for the first time, players were able to use and play a game and extrapolate value instead of being locked into the circular economy that larger corporations own.” Nage acknowledged the subsequent decline of Axie (which highlights the risk in all of these projects), but says “the idea behind it is still there.” Seventy percent of Arca’s portfolio is devoted to gaming projects, and they’re currently tracking 1,000 games in development.
Dicker is also bullish on gaming. “There are very unique things that crypto enables that could help evolve experiences that people already love,” he says. He gives the example of chess. “Chess is a centuries-old game,” he says, but a play-to-earn chess game (such as Immortal Game) takes the classic game and injects it with new life. It’s the same user experience and user interface of chess, but it layers on crypto-infused “micro games” for added strategy. Other examples are crypto fantasy sports (such as Sorare) or crypto horse racing with Zed Run. As Dicker puts it, “People love horse racing, but it’s pretty cost-prohibitive to buy a horse and get to Belmont.”
For Whale Shark, it’s smart to invest in things with utility – things that people will eventually need to do. That’s why he likes ENS. “It’s impossible to remember one’s ETH address,” says Whale Shark, “and with the ETH mainnet becoming an irreplaceable part of the ecosystem, everyone will eventually need an ENS domain for convenience’s sake.”
The creator economy
Film, music, art, entertainment – Web3 can help creators monetize their hard work, and the projects enabling this could flourish. “What are the interesting and creative ways where we can increase revenue streams for artists and engagement points for fans?” asks Kala. This is already happening. The Kings of Leon released an album as an NFT, for example, and Kala points to early decentralized content projects, like Tally Labs, that partner with Neil Strauss and members of the Bored Ape Yacht Club to collaboratively write a book.
Web3 to drive human behavior
“Humans are funny,” says Kala. “We know what we should be doing, but we don’t do it.” We know we’re supposed to exercise. We know we’re supposed to save money. Eat healthy. Drink water.
That’s the premise of Web3 projects like Stepn, where you need to buy an NFT to participate and then are rewarded for how many steps you take in the physical world. Kala can see projects like this gaining mainstream adoption (and therefore providing a juicy ROI), as this would be a “Web3 dopamine hit to drive human behavior.”
Use cases around the corner
Whale Shark predicts that the next wave of NFT assets could be photography because it’s a field “ripe for disruption.” His thesis: More photographers are now digitally native, and “the majority of content that we consume on the internet, whether through Instagram or other social media platforms, is photographic in nature.”
NFTs as brand loyalty programs
“I do love this notion of free-to-own,” says Dicker. Here’s what he means: A company drops a free NFT into a customer’s wallet and that NFT can unlock certain benefits over time. (It’s essentially a Web3 version of a frequent flier program.) “What the wallet is going to evolve to is way more powerful than email,” says Dicker, as it could enable a “tighter relationship” between a brand and consumer.
Mobile Web3 gaming
The first phase of Web3 gaming was almost entirely focused on laptops and desktops, as you generally needed to connect to a wallet (such as MetaMask). But this only reached a small slice of the world’s gamers. Of the 3 billion global gamers, says Nage, “50% to 70%” are playing on their phones. “We’ve seen over the last six months that designers have been focused on mobile as a deployment mechanism for Web3,” says Nage, and predicts mobile gaming will be “incredibly important in the next year or two.”
Nage thinks that the next bull run will not arrive until there’s mass adoption of new users. This adoption, in turn, won’t come until there are significant upgrades to both the user experience (making it “frictionless”) and tighter security. “The security layer has to be pronounced, it has to build out,” says Nage, pointing to security-focused projects like OpenZeppelin (which does code audits) and Forta (real-time threat assessments) as a way to get exposure.
Most of us are now more concerned about protecting our online privacy, which makes the potential of “zero-knowledge proofs” (proof of identity without disclosing data) so alluring. And that upside could be larger than you think. “It’s not from a consumer perspective, it’s from an institutional perspective,” says Burke. He notes that the recent crashes in decentralized finance (DeFi), which “seemingly came out of nowhere” actually happened “because everyone can see what everyone else is doing, and everyone can see everyone else’s trades, on-chain.”
Burke sees this as a “huge vulnerability if you’re an institution, trying to trade and take positions.” He acknowledges that many people consider full transparency to be a virtue, “but the reality is that people who have billions, and want to deploy it in the space, don’t like that.” He likens this financial transparency to “Wal-Mart having their entire supply chain online” – it exposes vulnerabilities that others can exploit. Burke suspects zero-knowledge privacy tools will be invoked as a solution, and it will be “driven by institutional demand, to basically obfuscate aspects of their trading activity.”
What should count as “around the corner” and what should count as “the Future,” of course, is admittedly squishy because no one has a crystal ball. It’s possible that any of these could be in the prior category, and vice versa.
“Meta-Fi is a big theme for us,” says Burke. It applies the new tools of DeFi to the world of NFTs and the metaverse. “If culture can be financialized and turned into an asset, and that asset can be borrowed and lent against, then all of the sudden you have a huge amount of people whose current wealth is not recognized by the existing financial system.”
A simple example: You have an NFT, and that NFT can be used as collateral to get a loan or even fractionalized and sold to multiple buyers in smaller chunks. A more provocative example: Let’s imagine a star gamer who spends 16 hours a day crushing Fortnite. She has maxed out her armor and weapons – and these are incredibly valuable in the game. But outside of bragging rights and Twitch content, what can you actually do with that?
As Burke puts it, “Good luck going to a bank and saying, ‘I’m a millionaire in Fortnite.’” With Meta-Fi, in a decentralized game, players could flip those assets to real-world buying power. As with all of these categories and use cases, the precise way this happens is still a giant TBD – and that’s what makes it an investment opportunity. (For any category, Burke says that Outlier invests in multiple early-stage start-ups as a way of diversifying and spreading their bets, as “we can’t predict the winner.”)
Burke says that while NFTs have tremendous potential, realistically there are still severe limitations on how they function in the current version of metaverse. “How much volume is actually being bought in Decentraland? Not much. It’s not really designed to be a shopping experience,” he says. Often the UI of the metaverse “degrades the thing people are shopping for,” because it’s “made to be a social space rather than a high-end retail experience.” In other words, a luxury piece of jewelry might look like pixelated garbage.
Someone will eventually fix this problem. Burke predicts that what will “drive a huge amount of users” is an “extended reach and distribution of NFTs.” Maybe that’s a more creative way of showcasing NFTs. Maybe it’s smoother integration into Web2. The exact how and what is still to be determined, but Burke is now eyeing “startups coming to market that evolve or upgrade how you experience an NFT.”
Vertical NFT marketplaces
As Kala puts it, we’re still in the “eBay era” of NFT marketplaces. The space is early and crude. She predicts that just as e-commerce became more niche – “with marketplaces for fashion, marketplaces for beauty” – the same thing could happen with Web3. “Over time when you have more adoption, I don’t see why you wouldn’t have more vertical categories,” she says. For example, she envisions a hub for music that has music content, a music community forum, a music NFT marketplace, and even a digital concert hall. “There could be a platform that serves your needs, and you’re able to engage in the entire ecosystem of music NFTs,” says Kala.
“One thing I’m excited about over the next three to five years is the notion of an open metaverse,” says Dicker. Many “closed” systems are being created, he says, such as Facebook and The Sandbox, but “I love the idea that these mechanics start to become more interoperable.” If this does indeed happen, then it will take new infrastructure and projects to build the tools to make these worlds interoperable. Dicker points to infrastructure projects like Altered State Machine as an opportunity.
E-commerce? That’s so Web2. Burke expects the eventual emergence of decentralized commerce, or “D Commerce,” that would effectively replicate everything that Amazon does, from payment to fulfillment, without trusting a centralized corporation.
The mainstreaming of digital ownership
This is less of a specific slice of culture and more a broader trend that could become dominant in the next five years. It’s a trend that underpins all of the above ideas.
“The most exciting thing about Web3 is giving people that ownership mindset,” says Kala. She has a simple but powerful argument: People like owning things. They like owning homes, they like owning cars, they like owning stocks. “If you believe ownership matters, Web3 should be important to you.”
Whale Shark agrees, and in the final analysis he uses one word to encapsulate investments in crypto culture: Inevitability. His reasoning is that “life is going digital.” And if it’s true that life is going digital, he says it’s also true that “without blockchains like Ethereum and Flow, it’s not possible to bestow an equal level of ownership, scarcity management, and provenance” to digital assets. As he sees it, “The minor bear and bull cycles are irrelevant in the greater context in the digitization of life.”