Hey all! Hope you’re getting as much sleep as you can in these volatile, exciting and uncertain times. If there’s something that’s coming to the collective conscious of Crypto Twitter it’s the idea of how treasuries will be effectively deployed and utilised to create new forces of good in the world. Over the past year through running ARCx, I’ve gotten a glimpse of how money as a product works and wanted to share some insights that help relate to how DAOs might think about allocating capital.
Liquidity Constraints
A key realisation I’ve personally had is that one of the world’s largest problems is actually capital allocation. There’s three kinds of entities that hold wealth:
Entity squanders away the wealth doing extravagant things to enrich the entity itself. This often leads to wealth re-distribution fairly quickly.
Entity doesn’t really do anything with the funds but knows that it has a large war-chest to tap into for operations and expansions.
Entity has a massive war-chest but literally can’t deploy the money fast enough in an effective way. 90% of billionaires, hedge funds, venture capitalists, family offices and DAOs fall into this category.
It’s easy to say “wealthy people are selfish hoarding all the wealth”, but that completely ignores the realities of what it takes to grow and distribute wealth. How so? Well let’s run through an interesting thought experiment:
You purchase tokens for $1,000, the “price” goes up 10x. You’d now like to sell it for $10,000. Most normal people can afford this given it’s the price of a standard car.
You purchase tokens for $10,000, the “price” goes up 10x. For $100,000 that’s maybe a house down-payment that some people have spent enough time saving up for. Not impossible at all but not for everyone.
You purchase tokens for $100,000, the “price” goes up 10x. For $1,000,000, there’e probably enough crypto millionaires who could fork up that amount of cash but you’re definitely not targeting the middle class anymore.
You purchase tokens for $1,000,000, the “price” goes up 10x. For $10,000,000 your class of buyers is now in a more specialised class. Ideally you need someone with deep pockets in the 10s of millions or the hundreds of millions. However, someone with $1b+ probably won’t care as much unless that $10m can become $100m through some clear path. This is the category that venture capitalists play in, raising $100m+ funds to hopefully convert to $1b is not an easy job given that the liquidity constraints that start arising in this part of the game
You purchase tokens for $10,000,000, the “price” goes up 10x. For $100,000,000 your class of buyers is almost very, very exclusive. At this point the only class of buyers you have is endowment funds, venture capitalists and billionaires. At this point your bags are so large that moving them requires a specialised transaction. Bitcoin/Ether are the only coins in the crypto market where you can probably buy/sell $100m with enough buyers & sellers collectively.
You purchase tokens for $100,000,000, the “price” goes up 10x. For $1,000,000,000 your class of buyers is starting to dwindle very quickly. Now the only entities left to purchase your bags are solid deca billionaires and institutions with tens of billions on their balance sheet. The list of entities here are quite literally the 0.001% elites. Selling here is a much tricker equation given your size since you are quite literally the market itself. Remember, at this point the point is to preserve wealth rather than growing it aggressively. Even allocating 10% of your balance sheet to something is extremely risk since you’re risking hundreds of millions or billions. Fun times.
Now through some bizarre turn of events, DAOs basically jumped from step 1 in this process to step 6 in the span of 3 years. Never in human history has capital allocation become such a pressing problem so quickly.
Going back to the last point (6), the time required to become a sovereign wealth fund/billionaire is usually in the span of 5 years with tech money and decades with old money. Crypto entities have quite literally gotten much richer than they can handle and it doesn’t seem like an issue yet. However, as more wealth gets sucked into this new financial system - we’re going to be creating inefficiencies in the new world through inactive treasuries.
Bet Sizing
Okay so we realise by this point that actually acquiring a lot of wealth via whatever entity actually creates it’s own challenges. However, there’s an additional problem that we haven’t touched on yet - the work required to make/grow an investment versus the maximum potential pay off. There’s a running joke on Crypto Twitter at the moment
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