Host: QuanYu, Co-founder and CIO of RootData

Guest: Arthur Cheong, Founder and CEO of DeFiance Capital

Organizer: Scof, ChainCatcher

Recently, Rootdata held a Space themed "Cold Thoughts Behind the Bull Market Boom: Cyclical Characteristics, New Narratives, and Investment Strategies," inviting Arthur Cheong, Founder and CEO of DeFiance Capital, for this interview.

The conversation focused on the current bull market boom, the cyclical characteristics of the crypto industry, new narratives, and investment strategies. Arthur shared his views on the sustainability of the bull market, pointing out that changes in U.S. policy and macroeconomic factors will have a profound impact on the market. He believes that sectors like DeFi, stablecoins, and public chains hold the most long-term value, while also emphasizing the potential of decentralized science (DeSci). In terms of investment strategies, Arthur stressed the importance of continuous learning, cautious use of leverage, and deepening focus on specific sectors. Additionally, he discussed practical methods for project evaluation and relative valuation using Aave and Hyperliquid as examples, particularly how to uncover potential through on-chain data and user experience in the absence of public information.

Here is the full dialogue:

QUANYU:

I am glad to participate in this exchange with Arthur today. Next, I will ask Arthur some questions on behalf of everyone. After we complete the Q&A session, if anyone has more questions, feel free to continue asking Arthur.

The first question is about the current market sentiment. We see that the market sentiment is generally high, but there are also some concerns. Many people are worried about whether this bull market can sustain and whether it can reach its peak. What are your thoughts on the sustainability of this bull market? What key indicators and events do you think are worth paying attention to?

ARTHUR:

I am happy to participate in this Twitter Space event and discuss with everyone. There have indeed been many significant changes in the cryptocurrency industry.

From a structural perspective, the cryptocurrency market, especially in the U.S., has undergone profound changes in its regulatory framework due to government transitions and policy adjustments following the elections. As the world's largest GDP country, the structural changes driven by the U.S. will have a lasting and far-reaching impact on the industry. These changes will not end in the short term; instead, they will bring long-term benefits to the industry.

Although the market has performed strongly recently, especially with significant gains over the past month and a half, many of the positive impacts from the industry have yet to fully materialize. Such structural changes require time to brew before they can gradually release their true value in the market.

In the short term, the uncertainty surrounding whether Trump can win the election may affect the market to some extent. However, if the Republican Party successfully takes control of the presidency and the majority in both houses of Congress, it is expected to have a very positive impact on the industry. Additionally, the rise in Bitcoin prices is closely related to companies like MicroStrategy increasing their Bitcoin holdings. If the market expects Trump to win, the current price performance is actually predictable.

In summary, whether from a structural perspective or short-term market dynamics, the industry is currently in a very promising development stage, and the future remains hopeful.

QUANYU:

Aside from geopolitical or political events, what key indicators do you think are worth paying attention to from within the industry? These indicators may reflect the development trends or potential risks of the industry, and I would like to hear your insights.

ARTHUR:

In terms of indicators, we typically analyze a large amount of data, especially on-chain data. On-chain data can reflect the growth of the industry to some extent, but it requires further filtering and analysis to draw valuable conclusions.

From a DeFi perspective, TVL (Total Value Locked) is a very key indicator. We can also pay attention to the number of user addresses, although some of these may be false active addresses created for yield farming. However, through in-depth analysis, we can usually distinguish between real growth and anomalous behavior. Additionally, the performance differences between different public chains and their Layer 2 solutions can provide important market insights.

Another aspect worth noting is the stock performance and quarterly reports of publicly listed companies like Coinbase. These reports often reveal more details about industry growth. Furthermore, financing scale and project market capitalization also reflect market confidence in the industry's prospects.

Of course, Bitcoin remains the leader of the industry. Bitcoin's market capitalization largely determines the upper limit of the entire industry. For example, following the recent elections, Bitcoin's market capitalization increased by 40% to 50%, indicating a significant increase in the industry's upper limit and further releasing market potential.

QUANYU:

Over the past decade, the cyclical changes in the crypto market have been quite evident, typically cycling every four to five years. Bitcoin's price peaks are usually two to three times the previous cycle's peak. What new characteristics do you think will emerge in the current bull market?

ARTHUR:

First of all, I personally believe that Bitcoin's four-year cycle may no longer be as dominant as it once was. Of course, this view is not yet mainstream. The four-year cycle in the cryptocurrency industry has primarily been dominated by Bitcoin, which is due to Bitcoin undergoing a halving of block rewards every four years, leading to a reduction in new Bitcoin supply, thus affecting market sentiment and price trends.

However, the situation is different now. The impact of Bitcoin's halving on its overall market capitalization and market liquidity has significantly decreased. Bitcoin's current market capitalization has reached hundreds of billions of dollars, making it a substantial asset even on a global scale. Therefore, I believe that starting from the next halving, we may not have the traditional four-year cycle anymore.

Even if the market still exhibits some form of cyclicality, the driving factors are no longer Bitcoin's halving but rather broader macroeconomic factors. For instance, Bitcoin's current scale and influence make it increasingly susceptible to geopolitical and macroeconomic environments, such as whether the U.S. government will include Bitcoin in its national reserves. If this policy can be realized, it would be a huge boon and could prompt other countries to follow suit. In this scenario, the traditional four-year cycle may be broken, and Bitcoin's market performance would resemble that of traditional assets like gold, becoming more synchronized with global financial cycles.

In summary, I believe that Bitcoin's future cyclical performance will be more closely linked to macroeconomic and financial market cycles rather than solely relying on its internal halving mechanism.

QUANYU:

You just mentioned that some countries' central banks might start purchasing Bitcoin in the future. How likely do you think this will happen next year? If so, which countries do you think might take the lead in this initiative? What are the driving factors behind it?

ARTHUR:

First of all, we already know that some national governments currently hold Bitcoin. This includes countries that mine Bitcoin using their cheap electricity (like hydropower) and those that have acquired Bitcoin through judicial actions. For example, Bhutan has accumulated about one billion dollars' worth of Bitcoin by utilizing its abundant and nearly free hydropower resources for mining. The U.S. government has also accumulated about ten billion dollars' worth of Bitcoin over the past 5 to 10 years through the seizure of criminal assets, although some of it has been auctioned off.

Additionally, there are rumors that some countries' sovereign wealth funds have privately purchased Bitcoin but have not publicly announced it due to the sensitivity of the issue. If the U.S., as a major global economic power, decides to include Bitcoin in its national strategic reserves and legislates accordingly, it could become a milestone event.

However, I believe this situation may not materialize until the second half of next year. The proposal for Bitcoin as a national strategic reserve needs to go through the legislative process, and even if the Republican Party controls both houses of Congress, this process will still take time to advance. Therefore, while discussions on this topic may begin next year, actual implementation may require a longer period of policy preparation and legislative processes.

QUANYU:

We just discussed the driving factors of external events. Now, from within the industry, cryptocurrency markets are often driven by certain trends or concepts, such as past DeFi and NFTs. In the current cycle, we have also seen many emerging trends, such as last year's DePin, RWA, and the currently popular AI.

In your view, which concepts have real product value and long-term development potential? And which might just be short-term fads, similar to past NFTs that only had a fleeting moment?

ARTHUR:

This is a very good topic. My personal view is that the most promising sector remains DeFi. DeFi has always been one of the core application areas in the cryptocurrency industry and is an important narrative supporting the development of the on-chain economy. With the gradual improvement of the regulatory environment in the U.S., I believe the development space for DeFi will be broader and more liberated. In fact, the market performance over the past month has already validated this, with many DeFi projects performing exceptionally well.

Stablecoins are also an important sector highly related to DeFi. Stablecoins themselves are a very profitable business, especially when interest rates decrease, and their profit potential remains significant due to network effects. Additionally, stablecoins have a positive impact on national currency sovereignty. For example, the global digital currency market is almost entirely priced in U.S. dollar stablecoins, which reinforces the dollar's hegemonic position to some extent.

Market recognition is also increasing; for instance, a U.S. startup was recently acquired at a high price for its stablecoin payment solution, demonstrating the potential and value in this field. Therefore, I believe the stablecoin sector will continue to grow in the future. For example, Ethena successfully combines DeFi, stablecoins, and Bitcoin's base interest rates, making it a popular project in the market.

In the public chain space, it is still uncertain who will ultimately become the dominant player. Currently, Ethereum remains the largest smart contract public chain, but other public chains like Solana are approaching or even surpassing Ethereum in terms of on-chain user activity. The public chain narrative began to rise seven or eight years ago but is far from over. Many new projects, such as Sui and Hyperliquid, are continuously trying to break through. This sector has a very high ceiling, as Ethereum's high valuation provides a reference for this field, and it will continue to attract more innovators.

Additionally, Bitcoin, as an independent asset, has already become a trend in itself, requiring no further elaboration.

For other sectors, DePin has been discussed for over a year, but its growth is relatively steady, and the flywheel effect is weaker, still in a phase of steady development. Meanwhile, DeSci, although still very early, has a clear intersection with blockchain and digital currencies, and may become a field worth paying attention to in the future.

Overall, the sectors I am most optimistic about include DeFi, stablecoins, public chains, and AI, while Bitcoin remains the core asset of the entire industry. The performance of other emerging trends will require more time to validate their long-term value.

QUANYU:

Recently, the hottest topics of discussion are undoubtedly Meme and AI. For Meme projects, many believe they are more suitable for short-term trading, primarily relying on market sentiment and community consensus, lacking long-term value support. In the AI field, especially AI agents, there has been widespread attention and controversy. Recently, many venture capital firms have discussed this concept, but there are still differences regarding its long-term potential. What are your thoughts on these two concepts?

ARTHUR:

Regarding Meme and AI, I'll start with Meme. Meme assets will certainly continue to exist, but I personally am not an expert in this field. You may have heard Murad's views on Meme Coins; he is very optimistic about this area and believes it is a sector that cannot be ignored. I generally agree with his perspective, especially regarding leading projects, such as Dogecoin, whose valuation has become a benchmark in this field. However, I remain cautious about whether emerging Meme projects can gain widespread recognition and grow to the heights of Dogecoin.

Of course, emerging Meme projects still have the potential to rapidly rise from market capitalizations of hundreds of thousands or millions to billions or even tens of billions. This "explosive story" will continue to exist. This makes the Meme sector resemble the gambling industry in the crypto space, providing people with a dream of chasing high profits. However, for larger institutions, the risks and uncertainties of such projects are too high, making it difficult to invest significant capital.

Now, talking about AI. I am generally optimistic about this sector, but currently, there are still relatively few projects that can deeply integrate AI and blockchain. Many projects merely forcefully bundle AI with cryptocurrency for fundraising purposes. However, there are some projects that have performed well in this area. For example, Virtuals and Grass are recent projects that we believe have a good combination, capable of leveraging the flywheel effect of cryptocurrency to promote AI development.

QUANYU:

We just discussed more macro narratives, so let's return to specific projects. Everyone is curious about how seasoned investors like you conduct research on a project. What is your research methodology for a new project or new token?

ARTHUR:

When we research new projects or new tokens, we rely on multiple information channels and combine various methods for analysis.

First, we purchase professional research reports and data services, investing considerable resources in this area. These tools provide us with detailed on-chain data, such as trading volume, active user numbers, and on-chain transaction counts. For example, in the case of Solana, the on-chain data from November last year, including DEX trading volume and daily active user numbers, surpassed Ethereum on multiple metrics. By continuously tracking this data, we understand industry growth points and trends, adjusting our focus on sectors and investment directions based on data.

Secondly, we value communication with industry insiders. By talking with entrepreneurs, other venture capital firms, and peers focused on secondary market investments, we can learn which sectors are widely favored and the logic and reasons behind them. This information sharing provides us with a more comprehensive perspective.

Finally, social media is also an important reference channel. For instance, we closely monitor platforms like Twitter to get the latest updates on projects and industry trends. Additionally, we use specialized data analysis platforms like RootData, which significantly enhance our efficiency in analyzing data and tracking market changes.

Through these methods, we can more effectively assess a project's potential and risks, providing solid support for investment decisions.

QUANYU:

Thank you, Arthur, for your support! For our platform, we also hope to provide users with a more efficient information search channel by integrating the latest news, research, team dynamics, funding situations, and other information. This content is also the core information that most investors need during project research.

So, specifically regarding projects, could you share some successful investment cases from this year? How did you evaluate these projects and ultimately choose them?

ARTHUR:

Taking Aave as an example, many people ask us why we were so optimistic about it in August or September. At that time, the market was sluggish, especially between April and September, when almost all cryptocurrencies performed poorly. However, we noticed that DeFi continued to show stable growth in Q2 and Q3. Through on-chain data and fundamental analysis, we observed that Aave's on-chain data was consistently growing and was about to undergo a token economic model update. Based on these factors, we believed it had enormous potential and released a related research report.

Another successful case is Hyperliquid. This project does not have a VC background, but with excellent product and application performance, it has become a leader in the Perp sector. The community has strong faith, and after the airdrop, users generally chose to hold rather than sell. On-chain data also validates its leading position. Hyperliquid's success demonstrates the power of product and data, as well as the strong community support for the project.

QUANYU:

Alright, besides these relatively successful cases, what do you think are some missed opportunities or good tokens this year?

ARTHUR:

Regarding some missed opportunities this year, there are a few impressive cases.

First, the Solana ecosystem projects. Solana itself has achieved significant growth in market performance, and its on-chain data is very active, but some projects within the ecosystem, like Raydium, have performed mediocrely. This is a signal worth noting because if Solana's ecosystem continues to grow, then projects within that ecosystem should theoretically benefit as well; it is unlikely that only Solana itself rises while ecosystem projects do not. Although the liquidity of these projects is relatively low, given Solana's active data and good market performance, the general performance of ecosystem tokens has been underwhelming, indicating that there were indeed investment opportunities during this period, which we unfortunately did not seize well.

Another more obvious missed opportunity is Sui. In fact, Sui's on-chain data has consistently performed well, including user numbers, transaction volumes, and DEX trading data, showing a growth trend from Q1 to Q3. However, at that time, Sui's price did not show significant increases. Although we noticed its data performance, due to insufficient allocation of time and energy, we did not delve deeply into its ecosystem and potential. Additionally, Sui had some issues on Korean exchanges, and we did not take the time to understand the specifics, which may have affected our judgment on its investment opportunities.

Overall, Sui is one of the most obvious missed opportunities for us this year, as its on-chain data has fully reflected a growth trend, but we did not convert its potential into an investment decision early on.

QUANYU:

Indeed, the tokens mentioned earlier mostly belong to the secondary market. I remember that in your early days in the industry, you focused more on primary market investments, but now your focus seems to have completely shifted to the secondary market. Is that correct?

At the same time, there are many discussions in the industry about VCs and the primary market. According to our RootData statistics, although mainstream coins represented by Bitcoin continue to rise in price, the activity level in the primary market has remained low. The latest data shows that the activity level in the primary market in November decreased by about 20% to 30% year-on-year.

So, what has prompted you to shift your focus more towards the secondary market? Do you think this reflects a certain trend or change in the industry?

ARTHUR:

I have been thinking about this question for two years. As early as 2022, I noticed that the scale of VC funding far exceeded the amount of new project tokens that the secondary market could absorb, with a ratio of about 3 to 4 times. This imbalance made it difficult for retail investors to absorb selling pressure during the bear market, leading to insufficient market demand.

This is also one of the reasons I gradually shifted towards the secondary market. Although there are still opportunities in the primary market, such as Eigenlayer and Celestia, the overall investment difficulty has increased. The gap between founders from fundraising to execution, the rapid validation and transition of industry sectors, and other issues have increased the uncertainty of primary investments.

Taking the gaming sector and prediction markets as examples, the timing of the former's explosion is still difficult to determine, while the latter only rose this year due to Polymarket and the U.S. elections. The core difficulty of primary investments lies in the fact that even if a sector is ultimately validated to have potential, it is impossible to predict when it will rise.

In summary, secondary market strategies are more favorable in the current environment and are better suited for flexible adjustments in a rapidly changing industry.

QUANYU:

Indeed, there are widespread concerns about the selling pressure brought by VCs in the current market. So, do you think that projects like Hyperliquid, which have successfully risen based on community consensus and concepts without VC involvement, will become more common in the future?

ARTHUR:

I believe this phenomenon will definitely become more common, but whether it can become mainstream is still hard to say. After all, launching a project usually requires financial support. For example, Hyperliquid's founder is said to be a very successful trader with substantial personal wealth, so they do not need to rely on VC funding. However, for most other projects, especially public chains or Layer 2 projects that need to build ecosystems, significant financial support is still necessary.

However, the trend of "not raising VC funds" is indeed gradually forming. I believe ICOs may return to the market, although it won't be as crazy as in 2017 or 2018. With the changing regulatory environment of the U.S. SEC, more projects may choose to raise funds through ICOs in the future.

QUANYU:

The ongoing discussion in the industry about how to further promote the mainstream adoption of crypto has been a hot topic. Many people are trying to attract more users by developing consumer applications or conducting educational outreach. In your view, what are the key shortcomings that hinder the mainstream adoption of the industry?

ARTHUR:

Regarding the mainstream adoption of the industry, I believe it is closely related to specific sectors. Taking DeFi as an example, the previous shortcomings mainly focused on security issues and user experience. The biggest risk in DeFi lies in the vulnerability of smart contracts to attacks and the loss of funds due to code bugs. However, in the past 3 to 6 months, we can clearly see that this issue is improving. After years of experience accumulation, such as learning from early projects like Aave and Uniswap, current protocols have significantly improved in code security. Additionally, the user experience of wallets has also seen significant optimization, gradually addressing the shortcomings in the DeFi space.

Another key shortcoming lies in the integration of blockchain technology with application scenarios. In the past, we attempted to apply blockchain technology broadly across various industries, but in reality, not all fields are suitable for deep integration with blockchain. I believe blockchain is more suitable for certain specific areas, such as finance, payments, and scenarios that require decentralization and democratized funding. These areas naturally align better with blockchain technology, allowing it to better leverage its advantages.

Through multiple attempts from 2017 to now, we have gained a clearer understanding of the applicable scenarios for blockchain technology. The future direction should focus on these high-congruence areas rather than trying to forcefully apply blockchain technology across all industries.

QUANYU:

Recently, have you discovered any innovative new products or projects? What aspects do they exhibit that are particularly noteworthy?

ARTHUR:

I believe DeSci is a highly innovative field, and it is also one of the topics I have been particularly interested in recently. The core significance of DeSci lies in enabling more people to participate in funding scientific research, providing support for some niche research projects that may be overlooked.

Traditionally, many niche scientific studies struggle to gain attention and funding from large institutions due to difficulties in commercialization or a small potential market. For example, some research may be challenging to directly translate into drugs or products, which is why large pharmaceutical companies typically do not invest resources. However, this does not mean that these studies do not contribute to humanity or that they lack future potential. Even if the market audience for these results seems limited at present—say, only 0.001% of the global population needs related medications—these studies are still worth supporting from a societal perspective.

The innovation of DeSci is that it leverages blockchain technology to allow smaller communities to provide funding for these studies. For instance, even if only 100,000 people might benefit from a particular study, those individuals or their concerned friends can raise funds through the DeSci model to advance related scientific projects. This model not only has the potential to develop new solutions but also helps fill the gaps in traditional scientific funding systems.

Currently, we can see some projects, such as the DeSci concept mentioned by Vitalik, as well as the interest from well-known figures and institutions like CZ, which is precisely because this field can make scientific research more democratic and diverse. I think this is a very interesting and potentially innovative direction.

QUANYU:

Returning to the secondary market, what investment experiences and strategies do you think can be shared with ordinary users and investors? Can these experiences help them better seize market opportunities?

ARTHUR:

I have some insights to share regarding investment experiences and strategies in the secondary market. As someone who has been a full-time investor in this industry for seven years, I deeply understand that investing in cryptocurrencies requires continuously updating one's knowledge system and cognitive structure.

1. Continuous Learning and Cognitive Updating: This industry changes rapidly, requiring not only an understanding of financial knowledge but also a comprehensive awareness of technology, policies, and market trends. For example, this year's U.S. elections had a significant impact on the market, so we spent a lot of time researching Trump's chances of winning and possible policy directions, even becoming something of an "expert" on the U.S. elections to some extent. Additionally, as new sectors continue to emerge (like DeSci and DePINi), we also invest energy in learning and understanding these areas.
2. Cautious Use of Leverage: The risks of leverage need to be repeatedly emphasized in every market cycle. In the past week, we saw non-mainstream coins experience a 20%-30% pullback, and positions with more than three times leverage may have already been liquidated. Even in a bull market, excessive leverage can lead to significant losses. Therefore, I advise investors to always control their leverage ratios, especially in volatile market conditions, and maintain good risk control awareness.
3. Deeply Engaging in Specific Sectors or Ecosystems: A significant investment "alpha" comes from in-depth research on a specific sector or ecosystem. Choose a sector you are interested in, deeply understand its technology, community, and ecosystem development, and even get to know key figures within it. For instance, although our professional institution has more resources, in the case of Sui, we missed the opportunity for its rise because we did not follow its ecosystem development closely. Community members who truly understood Sui may have already recognized its undervalued potential and quickly positioned themselves when the market started.
4. Advantages of Retail Investors: Retail investors have the advantage of flexibility and quick decision-making compared to institutions. For example, Hyperliquid's token launched on Friday and tripled over the weekend. Institutional investors often cannot respond quickly due to lengthy decision-making processes, while retail investors can seize such opportunities using their judgment and agility. This flexibility allows retail investors to sometimes outperform professional investment institutions.

In summary, successful investment strategies include continuous learning, cautious use of leverage, in-depth research on specific sectors, and leveraging the flexible advantages of retail investors to seize market opportunities.

QUANYU:

For projects like Hyperliquid, which indeed lack publicly available team information and funding details in the early stages, how should one assess their potential and position themselves in advance? What key signs or data can help investors uncover these opportunities?

ARTHUR:

Regarding the investment judgment of Hyperliquid, it can be viewed from several aspects. First, as a user, you will find that Hyperliquid's user experience is the best among similar projects. This excellent product design lays a solid foundation for the project and instills confidence in users regarding its development. Additionally, from the performance of on-chain data, even before the token launch, Hyperliquid's TVL (Total Value Locked) and trading volume were already leading in the Perp sector, making it a leader in this field. These data performances significantly enhanced the community's confidence in the project.

Although Hyperliquid's token price performance after launch exceeded most people's expectations, for some users who had strong faith in the project, they had already recognized its potential and positioned themselves before the token launch. This strong community support, combined with the project's excellent foundation, is a key reason for Hyperliquid's success.

QUANYU:

But how do you value such projects?

ARTHUR:

I believe that the valuation of blockchain projects has always lacked a systematic approach. Currently, in most cases, valuations are derived through comparisons. For example, regarding Hyperliquid, people generally start from its market capitalization at launch, believing there is still room for growth. Since Hyperliquid itself is also positioned as a public chain, many people compare it with other successful public chains to derive its valuation potential.

This valuation method is essentially a relative valuation. For instance, Solana's valuation was gradually formed through comparisons with Ethereum. This benchmark-based valuation approach remains the mainstream method in the blockchain industry.

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