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Multicoin Capital 2018 Annual Letter

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Multicoin Capital 2018 Annual Letter by Kyle Samani and Tushar Jain

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Multicoin Capital 2018 Annual Letter

  1. 1. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 1/13         MULTICOIN CAPITAL  2018 ANNUAL LETTER                    By Tushar Jain & Kyle Samani    Multicoin Capital is a thesis-driven cryptofund that invests in tokens reshaping entire                        sectors of the global economy. We rigorously research blockchain protocols, teams,                      and market opportunities to deliver venture capital economics with public market                      liquidity.              © CONFIDENTIAL 
  2. 2. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 2/13       Multicoin Capital   January 23, 2019      Dear Multicoin Partners,    This is our inaugural annual letter.     In the spirit of our monthly LP reports, we have conducted a thorough review of the market and  our performance since inception with the intention of synthesizing major learnings. Although we  formalize this thinking in the form of an annual letter that we share with you, it is also an incredibly  valuable exercise to help ourselves better plan for the year ahead.     Before we dive straight into analysis, we’d like to share a personal aside on the firm. Multicoin  Capital is our second full-time venture as founders. In the 18 months since we launched the firm,  we've exceeded our most optimistic forecasts with respect to team building, brand growth and  industry impact. Starting from just the two of us, today we’re proud to report that Multicoin Capital  is now 13 strong. Both of us could not be more proud of our team and their work. For them, we are  grateful.     Similarly, our early partner base—that is, you— has been a critical component of our success to  date. It brings us great joy knowing that we are working with diverse and sophisticated partners  that recognize crypto’s once-in-a-lifetime potential. The fact that you are reading this letter is proof  that you possess the foresight to identify disruptive technologies and the patience to endure the  volatility and uncertainty that accompanies the maturation of a new asset class. Su ce to say, you  all are an impressive group and we’re incredibly proud to call you partners.     We know that we are fortunate to be standing in the position we are today, and we don’t take it  for granted. In fact, we have every intention of leveraging our position to capitalize on lucrative  opportunities presented by the bear market in the year ahead. And as a firm, we’re doubling down  across all fronts—building out the team, processes, relationships, and infrastructure so that we can  continue to meet, and hopefully exceed, your expectations.     This letter has five sections: 1) a fund performance summary, 2) an analysis of the 2017 run up and  the subsequent 2018 downturn, 3) our outlook for 2019, 4) an overview of how we’re building the  firm to deliver repeatable, durable alpha, and lastly, 5) an appendix.              © CONFIDENTIAL, 1 
  3. 3. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 3/13     Performance Summary    The Fund’s inception was October 1, 2017. Since inception, the Fund has returned 67.5% . This 1 compares to Bitcoin, which returned -13.7%, and the Hold 10 Index, which returned -25.6% during  the same period. In 2018 the Fund returned -32.9%, while Bitcoin and the Hold 10 Index returned  -73.6% and -79.2%, respectively.    To provide some context on our returns, since the fund’s launch we’ve seen the biggest bull market  in crypto history, quickly succeeded by the most violent downturn and subsequent bear market in  the history of the asset class.    All investing comes with tradeo s, and the crypto markets are no di erent. Crypto o ers  tremendous return potential, however the cost of having upside exposure is the roller coaster of  volatility and nascent market infrastructure. Managing this level of volatility is challenging, giving  those with su cient patience and discipline a key advantage in generating alpha over sustained  periods of time.     As proactive managers, we think critically about portfolio construction and work to develop a  thesis for how the technology will evolve over the next several years, and use that perspective to  guide our investment strategy. We are not in the business of making fast money, we’re in the  business of growing long-duration capital. With that in mind, 2017 was an exceptional year, and  2018 was an exceptionally di cult one. Combined, over the course of the previous 15 months, we  weathered the storm well and we’re proud of our performance.    Looking ahead to 2019, we have many reasons to be bullish on the fund, and have strategically  positioned ourselves to deploy capital into high quality assets at favorable prices.    A Look Back At 2018    2018 was clearly the hangover from the party that was 2017. What caused the bubble, and the  associated pop? Like most bubbles, the answer is leverage. Although in crypto, the leverage was  indirect and manifested di erently than traditional asset bubbles. A brief explanation:     Long holding periods are one of the most challenging aspects of traditional early-stage venture  investing. However, the ICO funding model generated rapid public listings and the ability to realize  markups in a matter of weeks or months rather than years. In 2017, pre-ICO sales to institutions and  brand name investors, followed by quick public liquidity, led to huge markups for insiders (e.g.,  1 MG Stover & Co., our fund administrator, calculates Multicoin’s official unaudited returns. Please note                              that an investor’s specific returns may vary based on the timing of the investment.   The Hold 10 Index returns are calculated using historical data provided by Bitwise Asset Management.                              Bitcoin daily returns are calculated using the daily closing price on CoinMarketCap.     © CONFIDENTIAL, 2 
  4. 4. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 4/13     Icon-100x, Dragonchain-70x, Waves-89x). This attracted a plethora of “pre-ICO investors” who had  limited ability (or desire) to properly diligence their investments and were simply monetizing their  access to early rounds, selling their tokens on the open market, and recycling that capital back into  new projects. This, in turn, attracted more entrepreneurs to the space, incentivizing huge new asset  issuances at crazy valuations because capital was so freely flowing (e.g., Basis, Sirin Labs, Wax,  Tezos).    Most of the capital that early-stage teams raised in 2017 was raised in BTC and ETH, and most teams  continued to hold the BTC and ETH on their balance sheets after their ICOs concluded. This scarcity  led to further price increases in BTC and ETH, increasing the wealth of investors, entrepreneurs, and  employees, allowing them to re-invest even more capital.    This was exacerbated by the unique challenges in pricing major Layer 1 cryptocurrencies like BTC  and ETH:     1. They cannot be valued, only priced. (i.e., one cannot value EUR in USD; instead, EUR is simply  priced in USD as a function of supply and demand).  2. Price movements beget price movements (i.e. reflexivity).  3. Copious and hyperbolic press coverage.    Furthermore, this was the first opportunity that retail investors had to invest directly in early-stage  tech, and this was in the immediate wake of the greatest consumer tech megatrend in history  (smartphones). Unsophisticated investors, who lack the experience to diligence and price these  assets, poured in fresh capital, further compounding the dynamics described above.    By January 2018, everyone in the market was sitting on massive, recycled, paper gains. Just as  capital was recycled on the way up (e ectively creating systemic leverage), it had to un-cycle on  the way back down. This is precisely why many of the smaller market cap assets were down more  than 90%, while BTC was ‘only’ down 74%.     These forces which drove the 2017 bull market also shaped how the 2018 bear market played out.  Once prices started to fall, it reduced the risk appetite of many investors, which led to selling and  further markdowns. Along the way, projects that had balance sheets with significant exposure to  BTC and ETH started panicking and thinking more critically about budget and preserving capital. As  prices continued to decline, these projects began liquidating their holdings to preserve whatever  runway they had left.    With that backdrop, we can examine what we got right and what we got wrong.            © CONFIDENTIAL, 3 
  5. 5. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 5/13     OUR BIGGEST WINS:    1. Our biggest macro thesis of the year—that midcap market cap assets would fall against  Bitcoin—was correct. This is evident by comparing the performance of Bitcoin (-73.6%) to  the Bitwise 20 Mid Cap Crypto Index (-88.8%).  2. During the two worst months of 2018—March and November—in which the Hold 10 Index  was -40.0% and -37.1%, our portfolio returned -4.2% and -0.6%, respectively. We almost  entirely avoided the two most painful market drawdowns of the year.  3. We are committed to staying on the forefront of available instruments to best execute our  investment strategies. As such, we’ve spent the last 12+ months building relationships with  counterparties to enable us to borrow assets and use derivatives to establish short  positions. The lending market for cryptoassets is quite nascent but we have been able to  work with our counterparties to increase the availability of assets we can borrow. In 2018,  we successfully used short positions to: (1) take on short positions in highly overvalued  assets; and (2) manage our portfolio’s net exposure and beta.   We have relationships with all of the major exchanges, OTC desks, and lenders. This access  a ords us the best prices and execution possible. We expect to build new counterparty  relationships and expand our relationships with existing counterparties in 2019.   4. Idiosyncratically, we shorted XRP, LTC, and ETC. These assets declined 29.7%, 74.3%, and  60.9% respectively over the time frames we held short positions. We were able to capitalize  on market ine ciencies while others were either incapable of doing so, or did not have  enough conviction in their thesis to absorb the volatility. Our risk management policies  were instrumental in allowing us to be comfortable taking on the inherent risk associated  with short selling extremely volatile cryptoassets. The saying “be greedy when others are  fearful” applies to the short side too.  5. Despite volatile market conditions, we were able to successfully execute on our investment  strategy and manage our liquid vs illiquid exposure within our targeted range. Due to the  drawdown in public markets in 2018, and the fact that illiquid investments have infrequent  price discovery, it is easy for a manager to find themselves with a lopsided portfolio that is  majority illiquid—silently transforming the fund from a hedge fund into a venture fund.  6. We were able to lead early-stage investments in some amazing protocols: The Graph,  SKALE, and Solana, and participate in a dozen more (alphabetically): Algorand, Bakkt, Coda,  Dfinity, Hedera Hashgraph, Kadena, Keep, Mobilecoin, Rightmesh, Spring, Starkware, and  Tari.   Our access to these deals gives us the ability to construct a more e cient portfolio. For  example: As the Ethereum ecosystem continues to accelerate over the next 12-24 months,  we expect that our investments in The Graph and SKALE will appreciate substantially more  than ETH itself will because these solutions solve acute, painful problems that the Ethereum  ecosystem is bottlenecked by today, and because their valuations are multiple orders of    © CONFIDENTIAL, 4 
  6. 6. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 6/13     magnitude lower than that of ETH. Thus, we gain asymmetric upside exposure to the  growth of the Ethereum ecosystem, reduce our capital at risk, while preserving the option  to purchase more ETH directly at anytime.  7. At the start of 2018 we had 5 employees. Today, we have 13 employees. We also established  a headquarters in a beautiful o ce in the heart of downtown Austin, and have built a  tremendous amount of infrastructure. We’ll touch on this more below.    OUR BIGGEST LOSSES:  1. Our EOS thesis did not play out as we expected in the timeframe we projected. Our thesis  was based on three key projections:   a. EOS would o er a meaningfully di erent and in many ways better developer and  user experience than Ethereum.  b. Early EOS-based applications would garner more users and usage than early  Ethereum-based apps because of (a).  c. The Ethereum blockchain would hit capacity, transaction fees and latency would  increase, and developers and online community would complain, causing them (and  their capital) to go elsewhere.  While we were generally correct about (a) and (b), we were incorrect about (c). While the  first two theses were fundamentals-based views of the tech, the 3rd was a specific market  catalyst, and it did not materialize.  2. We had a few opportunities where we had high conviction and where we ended up being  right, but we were too conservative in position sizing to fully capitalize. For example, we  were extremely bearish ETC after Coinbase listed it, and we had the opportunity to increase  the size of this position but chose not to because we were concerned about the risk of  retail investors buying the new ‘cheapest’ coin on Coinbase (this irrational behavior was a  major phenomena in the Q4 2017 bubble).  3. We didn’t appreciate how much ‘leverage’ was in the system that needed to be unwound,  and as a result weren’t bearish enough throughout 2018.  We regret that our partners who joined us in 2018 are currently underwater on their investment.  Though we have substantially outperformed the market, we are not running a mutual fund and  relative outperformance is not the only thing that matters. We never lose sight of our primary goal:  to outperform on an absolute basis over the long term.   Managing a crypto portfolio in 2018 was exceptionally di cult and we have learned tremendously  from the experience. We are humbled by the market and know that we can always do better. We  have a plan to get all of our partners into the black and are executing aggressively.     © CONFIDENTIAL, 5 
  7. 7. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 7/13     Looking Ahead To 2019  We’ve identified 11 trends that we expect to manifest throughout 2019. This list is not meant to be  comprehensive. There are a myriad of niches that we don’t touch on. Instead, we consider these  some of the most important high-level trends that will either directly impact prices, or change  technology and market fundamentals in a meaningful way. As such, we’ve built proactive strategies  around each of them to ensure we’re fully prepared to capture opportunity when it presents itself.  1) Most of the assets in crypto have organic, perpetual selling pressure in the form of inflation  (primarily by miners), or through the sale of large treasuries. For example:  a) There will be 657,000 new BTC created this year, representing $2.37 billion at current  market prices.  b) There will be 4,212,000 new LTC created this year, representing $133 million at  current market prices.   c) Ripple Inc. sold $404 million of Ripple tokens (XRP) in the first 3 quarters of 2018 and  there are no signs of them slowing down as they liquidate their 58.9 billion tokens.  At some point, demand for fundamentally worthless assets like LTC and XRP will dry up, and  when combined with perpetual selling pressure we expect to see prices of these assets  collapse.   2) Unsophisticated retail investors are not entirely washed out of this market, yet. For  example, Coinbase currently stores a staggering 25% of all LTC in existence. Given that  virtually no smart money owns LTC, this implies that the vast majority of LTC is held by  retail investors who are still anchoring to the 2017 prices. Anchoring bias takes time to  resolve and as it does, these investors will realize that LTC was never worth what they paid,  and they’ll eventually sell to recoup whatever is left of their investment.  At the same time we are seeing the launch of additional crypto focused vehicles from  sophisticated investors with global brands. For example, a16z launched a $300M crypto fund  last year, and shortly thereafter Sequoia seeded Paradigm, a $400M crypto fund. These  professional capital allocators are taking an analytical approach to understand the value  proposition of these assets and won't buy assets that are inherently flawed or  fundamentally broken - unlike many retail investors who do not have the time nor expertise  to properly diligence these assets. Therefore we believe that assets like LTC will  underperform through 2019.  3) We expect to see more 51% attacks on weak networks. In the first few days of 2019,  Ethereum Classic, a top 20-coin by market cap, was successfully 51% attacked. As this  pattern becomes clearer, we expect exchanges will delist these unsafe assets, causing  liquidity to dry up, and ultimately causing large price declines.  Mining hardware naturally lags price movements: when prices quickly rise, it takes time for  chip manufacturers and mining operations to ramp up capacity. When prices subsequently    © CONFIDENTIAL, 6 
  8. 8. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 8/13     decline, this creates a lot of idle hashpower. Miners started turning o their hardware as  mining became less profitable. This is evident in the 31% hashpower drop for BTC, 38% for  ETH, and 50% for LTC from their respective all time highs to 12/31/18. Further, the mining  industry continues to su er heavily in the bear market and miners will be incentivized to  turn to attacking the network to make a profit.  This glut of available hashpower will make 51% attacks cheaper, easier, and more common  in 2019. While BTC and ETH are extremely unlikely to be successfully attacked, many smaller  market cap proof of work assets are vulnerable.  4) We expect significant short-term upside volatility during this bear market on the way to the  inevitable bottom. For example, after bottoming at $82.83 on December 15th, ETH rallied to  $160.82 in just 21 days, while staying in an overall downtrend. Moves like this inject a fresh  new wave of unjustified optimism into the system. These moves are rarely sustainable, and  managers, traders, and investors who chase returns by buying into rallies will be punished  by the quick and painful downturns (ETH is down 26.2% since that local maxima).  5) Market infrastructure is improving rapidly on all fronts: custody, prime brokerage, lending  and margin, derivatives, OTC desks, dark pools, etc. We are working with the majority of  these players and are committed to staying on the forefront of available instruments to  best execute our investment strategies.   6) We are closely watching the growth of the open/decentralized finance movement (DeFi). A  few things we’re closely watching:  a) Volumes on Augur (a prediction market), especially as better user experiences  become available (e.g., Veil and Guesser).  b) DAI creation using the Maker system and DAI usage in other dApps.  c) Loan origination using Compound and Dharma.  d) DEX volumes as Binance, which is the world’s largest crypto exchange, rolls out a  decentralized exchange (DEX) and seeks to disrupt itself.  7) While the crypto community has been talking about Layer 2 networks for a long time, we  expect to see meaningful Layer 2 traction in 2019.  We are watching the Bitcoin Lightning Network very closely. Since launching in March 2018,  the Lightning Network now hosts $2M across 2,722 nodes. Both of these numbers will likely  grow 10x in 2019, and may grow upwards of 50x. We don’t expect any major exchanges  (Binance, Coinbase) to roll out any serious Lightning Network initiatives due to large capital  requirements and a lack of ROI. Exchanges are one of the only plausible Lightning Network  hubs that can operate at a meaningful level of scale.     © CONFIDENTIAL, 7 
  9. 9. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 9/13     We are impressed with the Lighting Network’s progress but are still unconvinced about its  long term success, especially as it relates to capital e ciency. We will publish a blog post  about capital e ciency in the Lightning Network soon.  An array of Layer 2 networks will launch on Ethereum, including Raiden, Celer, and SKALE.  While Raiden and Celer are similar to Lightning Network, SKALE is unique. There are already  about a dozen teams privately using SKALE, and we expect to see many implementations  on Ethereum mainnet by the end of the year across a range of verticals including, but not  limited to, electricity, gaming, and prediction markets.  2019 will give us the first taste of Layer 2 in action, and will help us more accurately project  Layer 1/Layer 2 dynamics moving forwards.  8) We will see many new smart contract platforms come to market and compete for the  limited dApps/users in the crypto ecosystem today. We expect that the most trusted  issuers of fiat-coins (USDC, GUSD) will have tremendous power to ‘legitimize’ a smart  contract platform by issuing fiat-coins on their platform. The issuers of fiat-coins are seen as  trusted arbiters of which smart contract platforms are safe enough to use.   9) More teams will shut down or lay o sta (e.g., Bitmain, ETCDEV, Steemit, ConsenSys)  primarily due to irresponsible treasury management. Although teams finally began selling  their crypto holdings in November and December, they’re still irresponsibly sitting on  hundreds of millions of dollars of crypto that they will eventually have to sell to fund their  runways.  10) We expect that the SEC will provide some clearer guidance as to what is and is not a  security. We also expect the rate of enforcement actions against nefarious actors pick up,  however we do not expect to see heavy handed retroactive enforcement actions against  market participants devoting good faith best e orts to compliance.   11) We expect to see more startups emerge - other than exchanges - that build meaningful  businesses on top of decentralized protocols. These are traditional companies that see a  viable opportunity to asymmetrically compete with incumbents by leveraging blockchain  technology. Some examples to date include Veil and Figure.    FIRM STRATEGY  We are generating alpha in many distinct ways. In 2019, we are doubling down on these, with the  explicit goal of refining our existing processes into scalable, repeatable, perpetual alpha-generation  machines.  1. Fundamental research: We go as deep as we can on all fronts, both qualitative and  quantitative. This means rolling up our sleeves and analyzing blockchain data, diving deep  into technical specifications, modeling token economics, analyzing market opportunities,  and (flying across oceans when necessary) evaluating teams. As a result of this work, we    © CONFIDENTIAL, 8 
  10. 10. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 10/13     can identify opportunities before the rest of the market. We have a nine person investment  team spearheading these e orts now. For every piece of research we post on our blog, we  produce about three times as much that we don’t publish. We believe we have one of the  most comprehensive research and knowledge foundations in the industry, and we’re going  to continue to build on those advantages this year.  2. Access, relationships, and information flow: We operate across liquid and illiquid markets. In  illiquid markets, investors typically compete for the best entrepreneurs. To that end, we’ve  built a strong brand through our thought leadership, and entrepreneurs want to work with  us because we are value-add across many fronts (we’re formalizing these processes and will  write about them in the coming months). Moreover, other investors often invite us into  deals they’re in because they know we can be value-add.  We believe our investments across both liquid and illiquid markets give us a structural  advantage that generates a positive information feedback loop. Our research and analysis  of public assets helps shape our overall perspective on the space and identify market  opportunities for new entrants - driving our investment strategy for early stage, illiquid  investments. This also works in the opposite direction: our investments in early stage  projects give us further knowledge into how the various pieces of the Web3 stack can  potentially interact & fit together, helping us make better decisions for our public portfolio.  3. Data science and proprietary analytics: Since inception, we’ve known that we could unlock  incredible insights from analytics on the blockchains. We’ve been building out tools and  infrastructure since Q4 2017. Although we haven’t spoken or written about these e orts  publicly, we will this year. We intend to share some of our learnings at the Multicoin  Summits in the Spring and Fall, and selectively with the public as blog posts.  4. Team composition: The crypto ecosystem is incredibly complex and covers a vast range of  disciplines, including but not limited to technical expertise (distributed systems, virtual  machines, cryptography, programming languages, etc.); a sound understanding of economic  and monetary policies (token economic design, token valuations, value capture mechanism,  inflation and burning, etc.); business strategy (go-to-market strategy, value proposition  refinement, marketing, sales, and PR, etc.); and investment knowledge (public markets  portfolio construction, risk management, and early-stage venture capital investing).   As we grow, we’re covering an increasing percentage of these disciplines. Our team has a  diverse array of experiences across the technical, business, and financial worlds: chip  design, architecting and building AI and machine learning systems, structuring investments,  M&A, managing liquid and illiquid equity portfolios at hedge and private equity funds,  operating businesses, founding startups, and raising capital. We have a remarkably diverse  investment team in terms of background, expertise, and training.  5. Institutionalizing processes to make the best decisions: Both of us have been passionate  about the science of decision making and human biases for years. At Multicoin, we have  developed a systematic approach to mitigating our own biases. Although nothing about    © CONFIDENTIAL, 9 
  11. 11. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 11/13     this is rocket science - we explicitly don’t try to develop any psychological insights  ourselves, but instead rely on the science others have pioneered - we are rigorous about  designing and enforcing processes to systematically reduce our biases. A few examples:  a. We force ourselves to build a new portfolio - without looking at our existing  portfolio - on a monthly cadence to try to mitigate status quo bias.  b. Our default portfolio view does not include the entry prices for any of our liquid  positions. By choosing to continue to own a liquid position, we are e ectively  choosing to rebuy it at the current market price.  c. For any position, long or short, we require that someone on the investment team  rigorously argue the other side to reduce our own confirmation bias.  d. For any new investments, we require the deal sponsor to write prose (inspired by  Amazon), as writing exposes logical fallacies more e ectively than every other  communication medium we’re aware of.    In Closing     Decentralized systems allow for more freedom and innovation than centralized institutions in the  same way that capitalism allows for more innovation than centrally planned economies. The  freedom to tinker and try new ideas creates a vast new design space for permissionless innovation.    Blockchain technology is the perfect design space for permissionless innovation in the financial  system. The status quo financial system is a closed, centrally planned system with many barriers to  entry, governed by dated, byzantine rules and ideas. The opportunity cost of the legacy financial  system is the stifling of innovation. Blockchain technology will reshape the global financial system  in a profound way. The decentralization of our institutions will pave the way for innovation that will  create $100T of value.    We see the tremendous opportunity that crypto represents and are betting our careers on it.     At both the firm and fund levels, we’re well positioned for a strong 2019. And despite a tumultuous  2018, we have strong conviction in the underlying technologies being built and the entrepreneurs  who are building them.    We’d like to thank you for your continued support of both the crypto ecosystem, and Multicoin. We  couldn’t be here without you.    Best,  Tushar Jain & Kyle Samani  Co-Founders and Managing Partners      © CONFIDENTIAL, 10 
  12. 12. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 12/13     Appendix     RETURNS ANALYSIS    A summary of our returns can be found below. These figures generally recognize side pocket  investments at cost. For side pocket investments in which we have invested in multiple rounds, the  position is marked to the most recent valuation to ensure a consistent asset price. If there have  been subsequent transactions for a position in which we did not participate in, the most recent  transaction price is used with a substantial liquidity discount.    Please note that a partner’s specific returns may vary based on the timing of when they invested  and which side pockets they participated in. Some of you have asked us to provide more details on  the side pocketed illiquid investments in which you have participated and your exposure to each. If  you have not already requested this information and would like to see it please reach out to us at  ir@multicoin.capital and we will share it with you.     Returns Comparison (as of 12/31/2018)    Multicoin  Bitcoin  Hold 10 Index  December 2018  3.0%  (6.8%)  (5.4%)  Q4 2018  6.2%  (43.5%)  (45.9%)  FY 2018  (32.9%)  (73.6%)  (79.2%)  Since Inception  67.5%  (13.7%)  (25.6%)    Percentages can be deceiving. In order to meet our performance, BTC needs to appreciate 194.1%,  and the Hold 10 Index needs to appreciate 225.1%.              © CONFIDENTIAL, 11 
  13. 13. 1/23/2019 2018 Annual Letter - Google Docs https://docs.google.com/document/d/119f4ZIUGSpoyPXiuUpeh1YK11l0_XyrlU5Jt0-zjRuE/edit?ts=5c47dc8a 13/13     MISCELLANEOUS ITEMS    Upcoming events:    ● Kyle will be speaking at Binance Blockchain Week in Singapore during January 20 - 23.  ● Tushar will be at Graph Day in San Francisco, CA on January 25.  ● Ryan will be at Grincon in San Mateo, CA on January 28.  ● Matt will be speaking at Digital Assets for Professional Investors in NYC on January 29.  ● Ryan will be at Stanford Blockchain Conference in Palo Alto, CA during January 30 -  February 1.  ● Kyle and Matt will be at Context Summits in Miami, FL during January 30 - February 1.  ● Tushar will be at Satoshi Roundtable in Cancun, Mexico during February 1 - 3.  ● Kyle and Spencer will be judging at ETH Denver in Denver, CO during February 15 - 17.  ● Matt will be speaking at Oppenheimer’s Blockchain Summit in NYC on February 20.  ● Kyle will be speaking at SXSW in Austin, TX on March 16.  ● Matt will be at Barron’s Independent Summit in Salt Lake City, UT on March 20.  ● The next Multicoin Summit will be April 24-25 at the Ritz Carlton in Half Moon Bay, CA  (near San Francisco). We’ll share more details as the event approaches.    If you aren’t already, we recommend that you subscribe to our blog, and follow us on Twitter (Kyle  and Tushar). Note that we frequently employ Cunningham’s Law on Twitter, so take Twitter with a  grain of salt. Twitter is where many of the best crypto conversations happen. Twitter has an  intimidating learning curve, but once you find your groove, you’ll come to love it. Kyle curates three  lists that can kickstart your crypto Twitter experience.    Lastly, here are a few recommendations for our favorite 3rd party sources of news and commentary  in crypto. Most of these are weekly publications, so the volume is manageable: Token Economy,  Tony Sheng’s blog, Messari’s Unqualified Opinions.        © CONFIDENTIAL, 12 

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