William Scheinman: Analyst Of The Month

What is your story? What was your journey into investing and into crypto?

From an early age, I was an avid reader and genuinely curious about many subjects.  I loved history, economics, politics, art and  languages.  At Princeton, I took a variety of courses covering these areas which I framed as a degree in Public Policy; it was the only way to fit everything together. I encountered many professors and people along the way who inspired me, but I also had a feeling that the best expression of my interests was not immediately in the public sector.

I came away understanding that the forces of history were also pulled along by strong individuals, technological disruptions, and private sector enterprises. I geared a lot of my internships experiences to further understand these factors- I summarized books for an emerging-markets equities manager, another summer I worked for one of the most active seed-stage venture capital funds in Israel, and also made a friend who got me involved in several entrepreneurial endeavors; one of which was a developer tool to publish apps across global app stores.

After college, I did I-banking at an enterprise-software focused investment bank. I then joined a multi-strategy investment firm out of San Francisco called Cota Capital that did both long-only small and midcap equities, venture investing, selective growth investments, and incubations. It was a very “special situations”-oriented firm, but firmly focused on software and software-enabled hardware. Following that I worked at Generation Investment Management, a fairly large firm focused on energy, healthcare and other major areas of societal transition. I was on their Growth Equity team for several years doing Series B - Pre-IPO investing.

Since the summer of 2017, I have also been interested in crypto. My first point of contact with open-source was during banking, looking at infrastructure and security companies that maintained open source projects. When I was at Cota, I pitched several crypto startups and Bitcoin itself. At Generation, I researched some related areas in Fintech, tracked a lot of the crypto-related growth equity investments at that time, and spent my off-time exploring dapps during DeFi summer or otherwise avidly reading about crypto. There came a point where I became convinced that Web3 was the next 10-year+ secular opportunity. Helping Road Capital  off the ground was a natural next step. My background was basically in growth investing on the public and private side, and I wanted to apply that experience to a new area. Having now been a technology analyst for almost eleven years, I feel confident that Web3 is still the place to be.

How did you meet Thomas and team?

As I was working for Generation in San Francisco, I got introduced by a roommate of mine to someone raising a Wb3 focused on Asia; I befriended that guy, and he introduced me to several people in getting to know me. While that opportunity wasn't the right fit at the time, I ended up meeting Thomas through that set of introductions. Thomas was like-minded in wanting to make a difference in the industry long-term, in wanting to bridge market participants and users from Web2 and TradFi into Web3, and in holding a belief that fundamentals would eventually matter in crypto.

What is your role at Road Capital?

There are currently four of us that have been around since the beginning of Road. We all specialize in different functions at the firm. The easiest way to classify my work is as a “research head” - I look into themes in Web3, how those themes will be valuable, and how they will be valued. I then find investments within those themes, and share learnings with others from my team to hopefully empower their work. Practically speaking, my role is yet again a “special situations” one - I have made liquid token investments, PIPEs into liquid tokens, growth equity investments, early-stage investments, and have been involved with one of those early-stage ones more operationally too. I work with my team to prioritize where to focus, given the breadth.

What is the strategy at Road Capital?

It's a diverse job. I have invested across infrastructure, AI, DeFi, L1s, DePin, and in the identity layer. What ties this diversity together is focusing on situations where I have an edge. My edge is in investments where the time-horizon is long, where I have done work on the theme, and where I can clearly articulate the user value of a product, the strength of a team, and the value accrual mechanism of an asset.

We talked a lot about software stocks in 2019 / 2020 — how did your time in growth equity and investing in public/private at Cota shape your framework when investing in crypto?

What I got out of my prior roles at Cota and Generation were the ability to think from first principles about technology companies, regardless of specific sector or stage. I gained experience in three core areas, in this respect - (1) in using quantitative tools to measure asset value, (2) in using a general research methodology, and (3) in interacting with business operators and other people to exchange information. These constitute the elements of my investing framework, and nothing much has changed about applying any of it to Web3 vs Web2. What changes with Web3 are the common “multiples” to the industry, human capital considerations of protocols vs. companies, the degree of liquidity an investment can have at an earlier stage, and what types of moats are common.

On (1), I got experiences playing around with the valuation methodologies applied to assets at different stages, with different degrees of holding horizon; anywhere from a year to a decade. I learned about relative valuation and intrinsic valuation of value-producing assets. I learned about cost of capital, and about valuing existing and new business lines differently.

On (2) I boiled down my research to a general process I could flex around as needed. At a high level, that process includes writing research papers around themes, writing out the value chain in each of those themes, making claims about where value accrues within those themes, how value will be defended by winners there, and a thesis about how market participants will value the winners.

On (3) I learned a lot of hard and soft skills for dealing with people; not only to assist in winning a given deal, but to collaboratively develop an understanding of an industry. I learned about asking the right questions, who to ask, how to manage time, and how to give information and insights back to whoever I was speaking to. I find these skills are undervalued, and I credit any success to mentors, good books, and my mom and sister who are psychologists.

How much do fundamentals matters in crypto in December 2024 and do you think that evolves overtime with a Trump presidency?

First let's define “fundamentals” - which I think of as “measurements used to determine the attractiveness of buying value-producing assets, currencies, and commodities.” Given this definition, it seems fair to say that historically crypto has lacked an objective definition of value widely agreed upon, and lacked the metrics to measure the degree to which assets were truly valuable. Many people bought liquid tokens because they reflexively believed it would be attractive to someone else, vs having a strong view on value. I think in the past six months, the market has shown a shift where a pocket of assets might be appreciated more because of fundamentals, especially in DeFi. There are two reasons this may have started.

Firstly, we have platforms like Artemis growing, which are publishing and standardizing the metrics that Web3 assets throw off. They are highlighting usage, propensity to pay, degree to which transactions occur on protocols, and so much more. The availability of metrics may have caused some dispersion in liquid token market performance - where some assets have done well, and other assets have done less well across different market segments. Secondly, I see a growing group of TradFi analysts joining the space that are bringing their ways of thinking “with them” to crypto, as well as growing institutional interest in crypto. The shift is occurring. I caveat these observations by saying there are many areas today where the market is still functioning as an “attention-weighing” machine, vs a “value-weighing” machine.

I think the time horizon to complete the transition will take years. The new US presidency seems to hold a lot of promise in fairly regulating the space, and giving builders the comfort to remain onshore in the US. That said, it will take time for these Web3 protocols to determine the right value models for their tokens, for institutions to come into the space to appreciate these value models and bid the tokens themselves, and for related financial markets to form around liquid tokens markets to enable robust hedging, shorting, and other forms of risk management. Moreover, the global and permissionless nature of crypto markets may complicate the pace at which these changes unfold - the broader market is very much “whale” and retail-dominated, that are less naturally prone to doing deep fundamental research. But the shift has begun.

What do you view as the long term market structure changes enabled by blockchains and web3?

I think the primary value of Web3 is in connecting a global set of actors together on a public network, which is itself secured by economic incentives, transparency, and cryptography. We can use these public networks to build internet-connected applications that could previously not exist, because of trust problems between parties, and global coordination problems even when agents or entities trust each other. Blockchain are trust machines. They enable new types of coordination and commerce that couldn't exist properly before, and tokens are core features in the coordination and incentives process here.

What is the most contrarian view that you hold currently?

There are a few ideas that come to mind, but I’ll pick out one - that we can do better in valuing L1 blockchains on an intrinsic and relative basis. There are a ton of conceptions out there about how L1s ought to be valued - are they companies that throw off dollar-denominated cash flows? Is the best source of those cash flows MEV or priority fees? Are they all just stores-of-value like Bitcoin? Is it all just a meme? I think there is a ton of confusion and people online are talking past each other.

I think it is most helpful to think of L1s as currencies. Currencies can be used for medium-of-exchange, unit-of-account, and store-of-value use cases. In the rough math I have done, store-of-value sort of wins out as the most sensitive value lever in determining demand for a currency. You can measure store-of-value demand in four areas: (1) the staking demand for the token, (2) the use of the token as collateral in DeFi or otherwise, (3) the amount of unstaked and uncommitted tokens that have not moved for at least several years, and (4) the net burn value of the token that benefits all token holders outside of those staking and locking in Defi. The sum of these different levers in dollar terms represent the total demand, and the current market cap of an L1 can be thought of in reference to this total number. We can also evaluate the growth of the demand value, and the attribution of what is driving each of the sources of demand. We can also consider this collective demand over time in relation to the token inflation (supply). I think the approach may not be perfect, and may take some time to adopt, but it's a step in the right direction. A colleague of mine has called this approach “MSOV,” or “Monetary Store of Value” analysis. The degree to which we discuss, publish, and standardize this approach may determine its adoption across the market. It’s up to us.

There were a lot of private equity / hedge funds analysts who started or joined liquid token funds in 2021/2022. Do you see that accelerating again now that we’re in a bull market?

I see the analyst community and institutional participation in crypto growing steadily over time; prices will likely move beforehand and the labour and money will follow.

How does that change the marginal buyer of digital assets — do we become even more institutional and fundamentals as an asset class?

The bull market got kicked off by ETFs to core assets like Bitcoin and Ethereum, and was further accelerated by the US election. Asset prices changed ahead of labour market changes, and ahead of broad onchain participation by institutions. As protocols launch that generate valuable products and services, as metrics standardize, as rule-making in the United States and elsewhere clarifies, and as we progress through another “cycle,” I expect there to be more entrants from Web2 and TradFi into Web3 in terms of labour and investment. Labour markets may change markedly in a number of quarters. Institutions may begin by participating through ETFs, but may be more limited in buying more “alternative” crypto assets due to liquidity, custodial support, lack of historical coverage, and regulatory complexity. It is possible that most large institutions will gain exposure through more dedicated, nimble, and “crypo-native” fund investments for some time. And that is part of our bet here at Road. The learning curve is very steep and true expert-level practitioners are few at present.

What are real applications that you get excited about in crypto today? How come?

The first real application of crypto was neutral digital money, and the transfer of said money between self-custodied wallets. These are important. Many around the world from individuals to institutions need neutral, transportable, and transparent savings money. The idea of secured, self-custody for these assets is also profound. All of that said, there are at least a few areas that I am pretty excited about that I actively track today: (1) next-generation financial services, (2) next-generation marketplace, and (3) identity and reputation systems.

DeFi protocols are still really interesting. I think of them as more transparent, real-time and natively-global financial services, which potentially run on leaner operating margins and take-rates vs. predecessors. Some of them have fairly clear moats vs. many protocols in crypto where defensibility is fuzzy. I anticipate the maturation and extension of older primitives like AMMs for spot and perpetuals, lending markets, yield markets and stablecoins. I also see new DeFi protocols related to fixed rates, undercollateralized loans, credit default swaps and so much more. DeFi is no doubt one of the clearest sets of applications with product-market in the entire ecosystem.

I am also excited about next-generation marketplace protocols that extend commerce to areas and degrees previously not possible. Some people may call these marketplaces “DePins,” but I think the larger category is really general hardware and services marketplaces, which use Web3 primitives. Blockchains give these marketplaces more value in a few areas. Firstly, tokens issued onchain can act as a bootstrap to get the supply-and-demand flywheel going. Secondly, these marketplaces are natively global in reach, and reside on global and instant payment rails. Thirdly, the tokens in the system can be used to dictate ongoing behaviour of the actors in the marketplace - by using functions like staking, slashing, streaming, issuance, burns and other mechanisms. In this sense, you can think of the token as a capital investment that the supply-side nodes in the marketplace need to make in exchange for business flow.

Finally, I am excited about a new digital identity layer. Secure and long-lived blockchains seem like good places to house identity systems, which are less centrally controlled. Threats posed by central actors relate to making changes to records, censoring records, deleting records, or being responsible for record breaches. Every individual may end up with a self-custodied “data wallet” in the future, which is secured by social recovery, stored on the secure enclave of a phone, and which integrates with public blockchains. The purpose of this wallet would be to store user identity credentials, and to verify these with internet services. The wallet could issue privacy-preserving attestations based on data within it. Automated “signatures” can also be issued from them to verify origins of user-generated content. These digital signatures might be extremely important in weeding out deepfake content. These data wallets may also be core in re-invented marketing and advertising stacks that require user opt-in. The design space is really open here, so I am just painting a picture with all of the above.

Crypto and AI. Bullshit or real 🙂 ?

It's going to be real, but pockets seem fairly overvalued or early in terms of real adoption. We are in the venture phase. As an investor, you have to be extremely careful about where you play, what price you pay, and what your time horizons are. Today, it feels like “AI” is practically impacting crypto more than the other way around. That means the crypto crowd is incorporating AI agents into the digital asset creation process and into financial markets by issuing AI agents a crypto wallet. These are currently experiments where the objective function of agents seems to be maximizing attention from social media, or otherwise or to make money in crypto markets. I also see the idea of AI agents being applied to wallets, to abstract UI, security operations, and even to the core operations of an L1 blockchain itself. I see generative AI being applied to smart contract development processes too. I expect that in the long run, AI agents may be a core part of the interaction model with blockchains in a number of ways.

All that said, I think that Web3 incentives will also impact “AI.” There will be marketplace protocols to bring a number of AI model “components” online for consumption by developers and companies around the world; GPUs for inference at the very least, data, prompt engineering and human-provided feedback services, verification services, developer, data scientist collaboration, and so much more. These Web3 protocols can also be used to divide the economics of resultant models and related applications more transparently and fairly. Today, the maturity of these protocols is fairly early and yet many liquid tokens already exist for them. The current generation of these protocols are limited by UI, latency, limited security standards, and early supply-side liquidity and quality issues. But over the years, as these protocols mature, as new entrants pop up, as newer generations of chips and components emerge, and as regulatory regimes clarify I expect some major winners here backed by real value generation.

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

Artemis is a crucial part of my workflow at Road. Many parts of the investment framework I outlined require it. Though I am technically-minded, I cannot code well directly, and so would need the assistance of a developer or data engineer to develop the types of insights Artemis offers. Moreover, Artemis plugs into all of the tools that traditional financial analysts are used to from their prior firms like Excel and GSheets.

At a high level, I use Artemis to discover assets, to operationally compare them, and to value them. On the discovery-side I built a screener to find new assets, or log them as I hear about them. I also built an “existing” portfolio tracker which helps me keep tabs on our liquid holdings. On the operational benchmark side, I pull metrics to show which asset in a given space is growing the most, and to compare efficiency. For valuation, Artemis pulls relative trading performance of different assets, and plugs data into my intrinsic valuation models.

I couldn't recommend Artemis more. I also look forward to working with Artemis more on standardizing the metrics that I think may matter in the long-run. Analysts benefit from having a standard set of metrics in common, and the space is still fairly collaborative. Crypto needs fundamental metrics, and a well-intentioned and experienced group to help standardize them.