Crypto investing is easier said than done these days, but Avichal Garg of Electric Capital has some tips to help aspiring investors. This story is available exclusively to Insider subscribers. Become an Insider and start reading now.
Avichal Garg is the founder of Electric Capital, a crypto-focused venture capital firm.
Garg recently explained why DeFi protocols like Uniswap will face problems in the near future.
Garg believes that NFTs could help crypto go mainstream, and explains his investment process.
Even in the midst of a bear market, there is always an opportunity to capitalize on underpriced investments.
Avichal Garg founded his venture capital firm Electric Capital during the 2018 crypto bear market, and in the years since he has certainly capitalized on the incredible rise of cryptocurrencies. As CEO he has led Electric Capital in early-stage investments of some of the biggest names in crypto, including Magic Eden and the Near Protocol.
During the August 4 episode of Manager Meetings, part of the Capital Allocators podcast network, Garg broke down how Electric Capital views crypto investments, why he thinks that Uniswap may be in trouble, and why he believes that NFTs are the key to mainstream crypto adoption. How to visualize investing in crypto
Garg told Manager Meetings host Maneesh Gandhi that he thinks of crypto companies as existing on a spectrum, or as he puts it, an x-axis and a y-axis. Companies that have high customer loyalty are on the left side of the x-axis, and companies that have capital intensive, strong technical infrastructure lay on the right side of the x-axis.
According to Garg, an example of a company that stands on the far left of the axis would be Apple, with its strong connection to customers, while a company like Intel, which provides computer processors and has less of a direct connection with end customers, would be on the far right.
“I think it applies to crypto and defi as well. What you see on the far left are folks like Coinbase or Binance or FTX. They own the end-user relationship. They own KYC (know your crypto). They own onboarding,” Garg said.
He continued: “All the way on the far right would be Bitcoin and Ethereum layer-1’s. It’s really hard to build a new layer-1 and get it off the ground.”
Garg also explained how he views investments on the y-axis, which represents how much value a company captures — in other words, the higher on the y-axis a company is positioned, the better placed it is to capture value. Garg said that companies that are firmly on one side of the x-axis or the other will capture value more easily, placing them higher on the y-axis, while companies in the middle won’t.
“You can visualize a sort of a U-curve, which is to say that if you’re on the far left and you really own the user relationship, you can capture a ton of value. If you’re on the far right, you have some capex heavy, hard technology problem, you can likely capture a lot of value. If you’re somewhere in the middle, you’re essentially like a systems integrator. You’re piecing these two things together. Over time you’re gonna get squeezed,” Garg said.
Garg said Uniswap stands in the middle of this spectrum. Uniswap, a decentralized crypto exchange (DEX), processes over 100,000 transactions a day and uses ethereum as its coding solution.
But despite its current popularity Garg believes that as time goes on Uniswap will fall out of favor with crypto users, since investors who support a particular crypto project would rather use that project’s native DeFi platform — for example a solana supporter may opt to use the Serum DEX over Uniswap, as it is a solana-native exchange — rather than Uniswap.
“You’re gonna see them try to capture more end-user-facing value and try to own that interface,” Garg said of Uniswap.
He continued: “UniSwap really has to try to move up either the left hand side or the right hand side of the curve, somehow starting with being at the bottom and trying to capture more value.”
With that framework in mind, Garg went on to explain the factors that he specifically looks for when he considers an investment.
“We’ve always thought that investing at the bottom of that U-curve in the long run is not a great place to be,” Garg said. “So there are some exceptions there, but a lot of these protocols, ultimately we think will not capture that much value despite being very useful. It’s just going to […]
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