Sonya Kim: Analyst of the Month

What is your story? Where did you grow up and what was your journey into investing and as an investor?

My initial interest in the markets was sparked by my father’s ill-fated investments in speculative internet companies during the tech bubble of the 1990s. The aftermath of the dot com bust inflicted an emotional toll on my family but also kindled a curiosity within me to understand the world of finance and prudent investing. After college, I worked in risk management at Baillie Gifford (a global growth investor), then as a deep value investor at boutique asset management firms, Kiltearn Partners (a global value manager) and Aberforth Partners (a UK small cap specialist). I believe that fundamental investing, which involves analyzing the factors that influence a company’s performance and holding onto attractive investments for the long term, is the most effective strategy on a risk-adjusted basis.

Why did you decide to focus on crypto after your time in equities?

During the pandemic, I discovered a16z’s crypto start-up school videos which led me to delve deeper into crypto. The lightbulb moment for me was when I realised that protocols are akin to internet-native businesses; they can generate revenues, build book value and even return earnings to token holders through dividends or token burn. Up until that point, I, like most, had erroneously believed that tokens lacked intrinsic value. The combination blockchain technology’s disruptive potential and protocols’ emerging fundamentals convinced me that crypto could be the market that produces many multi-decade winners.

We loved your post on token analysis and valuation framework. Where do you think the crypto markets are in valuing economic value, utility value and speculative value? 

Many market participants would currently identify themselves as narrative or momentum investors. The short holding periods of top 100 tokens (median of 43 days vs. 304 days for US stocks), indicate a focus on short-term gains and speculative value in the crypto market today.

However, as the industry matures, I suspect there will be a significant shift in market participants’ approach. As protocols establish a sustainable user base and generate fees, investing based on utility and economic value will gain prominence. This shift seems underway already. I’ve had the pleasure of engaging with a group of fundamental crypto investors who are working towards establishing a framework to help professionalize the industry. Artemis has been playing a vital role in connecting like-minded investors and driving advancements in crypto data analytics to facilitate fundamental analysis in crypto.

What do you think most crypto fundamental investors are missing today in their frameworks when evaluating digital assets?

Crypto fundamental investors, many of whom come from traditional equity backgrounds, may be inclined to apply their equity evaluation framework to analyzing protocols. I too may be culpable here. But this direct translation has three potential pitfalls.

1. Inadequate appreciation of distinct maturity and risk profiles: Equity investors use valuation multiples to evaluate economic value but applying this approach to crypto could risk oversimplifying the landscape. Firstly, the Lindy effect would suggest that public companies have longer lifespans compared to younger crypto projects (the average age of a Russell 3000 company exceeds 30 years, while crypto projects are probably closer to 5). Secondly, the liquid token market encompasses a wide range of protocols at different stages of development, from pre-PMF to those generating sustainable value for token holders. I think this necessitates a more flexible due diligence approach for investors in the liquid token space.

2. Over-reliance on quantitative metrics: Crypto naturally attracts scientific and quantitatively driven minds and the investment community is no different. But quantitative metrics like on-chain data (high-frequency and backward looking), and valuations (reflecting current sentiment), do not provide forward-looking insights. Contemplating human motivations and how/why a product might gain users is in my opinion far more important for long-term alpha generation. Drivers of adoption are arguably more closely linked to human psychology than superior system architecture or mechanism design. For instance, does the product increase time efficiency/convenience? Offer competitive pricing? Provide easier access? Ensure higher levels of reliability and security? Grant users control? Offer either tangible or intangible membership benefits? Enhance social status? Increase the likelihood of wealth accumulation? Deliver entertainment value?

3. Evaluating a DAO’s fundamental value solely through the capitalistic lens: The mission orientation of a public company and a DAO are distinct. Companies aim to generate profits and maximize shareholder value, while DAOs often focus on supporting community initiatives and funding public goods beyond profit generation. Evaluating a DAO’s value creation and capital allocation feels like a delicate task that has not been extensively debated within the crypto investment community so far (regulatory uncertainties have further hindered the exploration of this topic). The question of whether a DAO gains more value from accumulating a treasury for funding high-impact public goods or by distributing maximum protocol fees to token holders remains open.

What frameworks from traditional internet/software investing apply to crypto?

I think the power law is a highly valuable insight from traditional internet/software investing that also applies to crypto. Despite aiming for decentralisation, the crypto industry exhibits winner-takes-most dynamics in many areas. Specifically, liquidity, dapp composability, availability of funding and concentrated developer interest are factors that further compound network effects of crypto projects. 

Appreciating network effects and asymmetric distributions is crucial for portfolio construction. In my view, long-term investors should generally run their winners rather than add to their underperformers; when the strong gets stronger, it is important not to “pick the flowers and water the weeds.” 

What are some theses in crypto that you’re currently researching or excited about?

In recent years, blockchains have made significant progress in scalability, particularly through the adoption of Ethereum L2’s. However, different ecosystems have been scaling in silos and the industry still lacks robust and scalable interoperability infrastructure. Interoperability is crucial for not only addressing liquidity fragmentation but also facilitating, for instance, cross-chain governance for Dapps deployed on multiple chains.

In this context, I’ve been excited about Axelar, a Delegated Proof-of-Stake generalized messaging protocol. Axelar’s architecture tackles the Bridge Trilemma effectively: it achieves 1) trust-minimization through a decentralized PoS network of 75 validators  that secure the protocol through cryptoeconomic guarantees and quadratic voting, 2) it is generalizable, in that any arbitrary message can be passed along the bridge, not just asset transfers, and 3) it is extensible since new chains can join the network and achieve interoperability with the existing chains within the Axelar network (which is not possible with pairwise bridges). While this design does sacrifice capital efficiency due to the staking requirements of AXL tokens in the PoS network, it enhances security. Security is of utmost importance considering the substantial losses of >$2 billion from bridge hacks.

How have you been able to use Artemis in your fundamental research?

I use Artemis for two main purposes: monitoring and analysis. For monitoring, Artemis offers pre-assembled dashboards that track chain and application activity. These are helpful for identifying emerging themes and patterns. For more detailed or ad-hoc bottoms-up analysis, I use Artemis’ excel plug-in, which facilitates efficient data collection. As a former user of Bloomberg and Factset, I found Artemis’ plug-in intuitive and easy to learn. I have increasingly relied on both tools to ensure that the fund’s investments are rooted in the latest insights and data in the fast-evolving crypto market.

How to get in contact with Sonya?

You can follow Sonya on Twitter here or learn more about Progrmd Capital here.