Strategy Series - Activist Crypto Investing
Last week we focused on how Hartmann Capital has been able to identify catalysts that forced the market to change its views of an asset’s fundamentals. However, short-term opportunistic trading around forecasting changes in market sentiment is but one of the many strategies at our disposal.
Constantly seeking new alpha opportunities in crypto, Hartmann Capital regularly takes a page out of the traditional finance playbook, focusing on longer-term partnerships, using what are often labelled “activist” investment strategies.
Reinventing TradFi activism for crypto communities
In the TradFi space, activist investing has a poor reputation with founders, directors and management. ‘Hit and run' activists take a position in an underperforming company and make what the incumbent company generally considers egregious demands in order to make the maximum amount of profit on their investment in the minimum amount of time. The menu of demands made by these activists are intended to produce a short-term gain in the company’s stock price, and include:
Stock buybacks
Special dividends
Divestitures
Mergers and acquisitions
Activists in traditional finance who are seeking some sort of say in the running of the company, with a board seat for example, are no less likely than the short-termists to put companies on the defensive. These investors believe that management has made some value-destroying mistakes, and seek to correct the strategic course. Controversial investor Carl Icahn is the epitome of the hard-charging activist, likening company management to tyrannical despotic dictators with his typical hyperbole:
A lot of people die fighting tyranny. The least I can do is vote against it.
Source: World Top Investors.
Though the most prolific activists are well-known celebrities and activism garners sensationalist headlines, empirically the results are mixed. In any event, confrontational activism is pointless in the community-driven crypto investing ecosystem.
Hartmann Capital prefers to partner with a protocol’s team rather than battle against it, adding our expert opinion, and sometimes our balance sheet, to the many relevant stakeholder voices and user experiences.
While Hartmann Capital maintains a long term oriented approach that aims to resemble a partnership more than a hostile take-over, we are not afraid to push for the uncomfortable but necessary that will ensure the projects long term success:
Clear and effective token models
Treasury transparency
Proper decentralization and governance structures
Focusing product roadmap around the user rather than founder
Helping protocols evolve, in both good and tough markets
That long term crypto investors can support a new protocol, nowadays is taken as given. A wise team who in the good times has a choice on whose money to accept will favor those who can add value to their protocol. VCs can be involved in all aspects of a crypto startup, including marketing, token design and strategy development. Hartmann Capital in these cases can act like a VC, even if our investment is liquid and without lockup.
Current sideways “crab-like” markets after a correction often offer the best opportunities for activism. In such tough times, the fast easy momentum-playing money is gone, and prices that are down significantly provide better entry points than in the past bull run. At the same time, innovators are still innovating, and often need different kinds of support.
Investing in challengers outside of rising markets can be very risky: Can the protocol achieve scale and engagement with users when even the incumbents are suffering? At times like these, “spray and pray” is no panacea. Alpha is needed more than ever. This is when activism can add value to both Hartmann Capital and the teams we invest in.
While many tokenholders are putting pressure on teams on social media, and even counterproductively panic selling, Hartmann Capital exhibits patience with our long-term strategic positions.
We are happy to buy seemingly distressed assets on public markets with no lock up and full liquidity, with a goal to realize an eventual 100x+ multiple. For that to happen, we need our efforts to generate the value we know our investments are capable of.
Hartmann Capital possesses a full quiver of possible strategies for helping our partner investments succeed:
1. Taking Charge: We can add our experienced voice and execution support to a focused yet under-resourced community.
2. An Early Adopter: We can use our fund assets to be an early adopter of a protocol’s product, or provide bootstrapped token liquidity.
3. Token Model Architecture: Strong Tokenomics are key for tokens to accrue value. Many times projects are undervalued because they ineffectively accrue value.
4. Product Design: Including user testing and UX advice
5. Sector Integration: Finding ways to integrate the protocol with the wider ecosystem, both on- and off-chain, from other protocols to exchanges.
Activism in Action
Hartmann Capital has initiated three quintessential activist positions in the past year as follows:
1. Enzyme Finance
Entry: June 2020 - $4
Holding: EoQ1 2021 - $120.74
2. Auctus
Entry: September 2020 - $0.05
Holding: EoQ1 2021 - $0.52
3. Ideamarket
Entry: March 2021 - $8 million valuation
Holding: EoQ1 2021 - $45 million valuation
In this blog we focus on an investment where we applied all of our activist strategies, and take pride in the protocol's recent success.
Enzyme Finance began as Melon Protocol. It was the only on-chain asset management protocol when Hartmann Capital first identified the growth potential for on-chain funds, indexes and automated strategies, offering all of the security and transparency of the Ethereum main chain.
In very short order, potential managers can create on-chain tokenized investment funds, eligible for new investment and able to trade a variety of ERC-20 tokens and engage with much of the DeFi ecosystem on the Ethereum blockchain. Investors can already choose from a wide variety of investment managers, with their holdings and returns fully revealed in the Dapp.
Source: app.enzyme.finance.
The stakes are high. The total addressable market in TradFi for retail asset management investment and custody platforms is enormous. We expect the crypto market to grow exponentially over the coming years, and might even someday overtake TradFi, where $155 trillion in assets are custodied at major banks. Even now, however, the crypto custodian market has been estimated at $239 billion.
Hartmann Capital began accumulating Enzyme's MLN token and approached Enzyme as a partner, with solutions.
Hartmann and the Enzyme team both are highly invested in the protocol’s success. Interests are aligned.
Felix Hartmann was elected to one of the 11 board seats on theEnzyme council, proposing improvements in UX, tokenomics, partnerships and other improvement proposals. In Enzyme’s case, Hartmann’s positioning as a council member gives us nearly 1/10th the decision making power over the entire protocol. In other cases where governance is not structured through an elected council, we can often use our stake in the network (token ownership) to sway votes on the future of the protocol. In cases where protocols are not yet decentralized, Hartmann Capital also makes its views known in the discussion forms, with the goal to achieve consensus before a vote. We were, for example, an active contributor to theMIP7 proposal to improve MLN tokeneconomics
Hartmann also added value through partnerships. For example, Hartmann-owned Crypto Academy hosted a trading competition for Enzyme Finance to attract users and volumes.
Source: Coingecko.
While token performance has been very good to date, our work is just beginning. Assets under management have been steadily accelerating, and recently saw massive spikes as other DeFi players started adopting Enzyme as a key piece of infrastructure..
Source: DeFi Pulse.
With our support and that of other key investors, Enzyme should be able to dominate the on-chain fund administration and custody space. We believe the next generation of “Hartmann Capital”s will be fully on chain.
Activism, Auctus and Ideamarket
Auctus allows any ERC-20 token (Ethereum fungible token standard) to be optionable through fully fungible and transferable tokenized call and put options.
With post-May correction returns falling on most risky crypto assets as well as stablecoins, option-writing strategies could emerge as the most popular yield-enhancement strategy for long term holders. Indeed, Auctus’s competitor Opyn has seen significant increase in open interest (notional of options outstanding), to over $60 million. Hegic, another competitor, is not far behind at just over $40 million.
Source: DeFi Pulse.
We believe, however, that the crypto options market is in its very earliest stages of growth, with everything to play for. With much lower market caps than Hegic ($4 million v $40 million), Auctus’s AUC token could be a major beneficiary of over trend growth.
For Auctus, Hartmann Capital used several strategies from its activist menu to boost the value of the AUC token:
Using our capital to grow the AUM of the protocol, in order to jumpstart the market: Hartmann Ventures and Hartmann Digital Assets provided over $1 million in trading and options liquidity to Auctus.
Felix Hartmann wrote the token model and proposed it as AIP 1.
Hartmann expanded the team and improved its brand, from unifying Auctus diverse set of products, to bringing on new community managers sourced from Hartmann-owned Crypto Academy.
Architected new features for the options market, such private smart pools enabling anyone to provide targeted options liquidity to the AMM with their own set of rules.
Helped establish partnerships with organizations such as Binance for a launch on Binance Smart Chain.
Ideamarket.io was the first player to the market for frictionless and scalable social tokens, enabling anyone with a social media account to become tokenized.
Hartmann Ventures and Hartmann Digital Assets partnered with ideamarket.io, and provided nearly half a million in TVL to Ideamarket for a successful launch.
Furthermore one of the first hurdles ideamarket faced where astronomic gas fees. Hartmann came up with a better way to structure the smart contract flows which saved ideamarket about 40% of its gas fees per transaction. But 40% gas savings were not the end to making the trading of social tokens frictionless as Hartmann helped explore potential layer 2 scaling solutions for the team.
Ideamarket, currently still in its first quarter with us, is still starting its journey, however the firm currently explores next steps for the project, ranging from bringing in more strategic investors, to improving token model, and larger scale marketing strategies to bring traction to the platform.
Activist Strategies
In Conclusion
In strong bull markets, founders often choose their investors based on how much value-add they can bring to the business. Crypto has been no different in the past year. The recent correction, however, underscores founders’ needs for partnerships with investors, who can provide advice, human capital, marketing resources and even protocol liquidity. By providing these for our investments, Hartmann Capital increases the likelihood that our investments will perform, even in sideways markets.
Crypto activism is more partnership and less TradFi boardroom brawl.