Exploring a Web3 OG Venture Capital Firm’s Views of the Current Crypto Market and Decentralized Financial Landscape, with Alex Botte @ Hack VC (Audio)

[00:00:03] Hello, everybody, and welcome to the Crypto Hipster Podcast. This is your host, Jamil Hasan, the Crypto Hipster, where I interview founders, entrepreneurs, executives, thought leaders, amazing people all around the world of crypto and blockchain. And today I have another amazing guest. She is a partner at Hack VC. Her name is Alex Botte. Alex, welcome to the show. Thanks, Jamil. So glad to be here with the Crypto Hipster himself.

[00:00:32] Awesome. Thank you for joining me. And I'll kick things off. I always kick things off with the same question, but again, amazing answers. It's what is your background and is it a logical background for what you're doing now? Yeah, maybe not so. Yeah, maybe a little bit logical. But I'm, yeah, like you said, a partner at Hack VC. I lead our investor relations function. Been here for about a year.

[00:00:57] Before that, I was at a liquid token fund called Runa Digital Assets for two years. And prior to that, I spent eight years in quant investment management in both like research and client facing roles. And that's how I got into crypto. It wasn't through a friend being like, oh, you should buy Bitcoin or read the Bitcoin white paper. It was my boss was like, we got it as a quant firm that's at this intersection of finance and tech. We have to write something about crypto or do some sort of research.

[00:01:25] So I wrote this paper in 2021 for the fund that I was at. And it did really well in terms of like views and likes and engagement. And I was so confident in like the regression analyses I was running. I basically tested Bitcoin's relationship with traditional risk factor markets and market factors. And but I didn't know what Bitcoin was. So I got involved from work, you know, not through, you know, personal or personal interest or anything like that.

[00:01:53] But yeah, very happy to be in the space for the last three or four years now. Awesome. I'm coming up on almost 500 guests and you're the first person to talk about regression analysis. So very cool. Yeah, I forgot how to do it, but I know I know HO and H1 or whatever. Yeah, it's been many years. So I want to find out what HackVC, though, is all about.

[00:02:21] You know, what are you guys what did your company do really well? What you're known for? What is it all about? Yeah, so HackVC, we're a crypto native venture firm. We have offices in New York and Palo Alto. I'm in San Diego, though, for any any Southern California listeners. The firm started in 2021, managed about 600 million in assets. The managing partner and founder, his name is also Alex. His name's Alex Pack.

[00:02:47] He's been investing in crypto since 2014. So he he started the crypto investing practice at Bain Capital, one of the largest PE firms. They were one of the first to have a crypto practice. And then he left there to start Dragonfly, which is like one of the largest crypto VCs in Asia. What are we known for? What do we do well? We're known for being fundamental investors. We're known for being early stage.

[00:03:12] So we focus on like seed and series A deals and we focus on infrastructure. We were Alex really is known for catching categories early, like before they have names and systematically finding the leaders in those categories and backing them early and making sure that they succeed. So we do that by being like we're really technical.

[00:03:34] We're crypto native. We're active on chain and really rigorous about thesis building and building kind of like these ideas of the future and then how we want to attack them. Yeah. So that's a little bit about about us at Hack. Awesome. So I remember being I was an ICO advisor. I remember being in the pre-seed stage and that was just wild. So I'd rather buy things that are all in exchange now.

[00:04:02] Yeah. So, yeah, it's hard because sometimes like it could be a founder with a really good idea, really good background. You can see like you can what's nice about crypto is like a lot of it is open source. You can look at their GitHub. You could look at their previous contributions and and they might not have a tech the tech yet. But, you know, it's so early or like I mean, Alex was talking about when he was investing before like layer twos had a name. It was like we just want to make blockchains like more scalable and cheaper, you know.

[00:04:32] And so he was like backing like the optimisms of the world and the ZK sinks, you know, five, six, seven years ago before they had that name around them. So it can be hard because it's like how do you categorize this thing? And yeah, you have to be, I think, pretty like visionary. And I'm not saying I am. It's more of the investor side of HackVC that has that talent. Awesome. So let's talk about some market trends, right?

[00:05:01] You have you. I'm sure you have some interesting takes and views on what's going on in the market, including like macro macro trends. You know, so I'll find out where they are. OK, yeah, definitely a lot going on in the markets right now. Maybe we'll give one macro, one micro. On the macro side, the biggest catalyst by far this year and perhaps even in the history of crypto is the new administration here in the U.S. We're a month in and Trump had this campaign promise that he was going to make U.S. the crypto capital of the planet.

[00:05:32] And I think a lot of people thought he was exaggerating. But like it's no joke. I mean, it's pretty clear now at this point. So four kind of big things have happened. One is leadership change at the SEC. The former SEC chair, Gary Gensler, to put it nicely, was a thorn in the side of the of the industry. He's left. He's out. Now Trump has tapped Paul Atkins, who's a very pro crypto former SEC chair to come in and lead the SEC again.

[00:06:02] They formed this like dedicated crypto task force, which is led by Hester Peirce. She's an SEC commissioner. She's super supportive of the industry. So much so that that we endearingly call her crypto mom. So that's great. And then there's been this end of regulation by enforcement. I was actually just showing you this before we started. But this is a table that Bloomberg Crypto put out, I think, this morning.

[00:06:27] And it lists all of the lawsuits that the previous administration had brought against different crypto exchanges, decentralized exchanges like Uniswap and other crypto companies. And they've all been basically dropped or paused over the last month. So that's great to see. Now, the second thing is David Sachs was named the crypto and AI and AI czar. And he's charged with helping both industries succeed here in the U.S.

[00:06:56] And if you have any doubts about his goals for this role, he said in a recent interview that he's working to create this golden age in digital assets. So really excited about him. The third is the repeal of Staff Accounting Bulletin 121 or SAAB 121, which was this Biden era SEC guidance that effectively prevented U.S. traditional financial institutions from acting as custodians for crypto. So that's now over.

[00:07:23] And that's going to enable banks to more easily custody crypto. And we expect that they will. And then the fourth. Let me share my screen again. So Trump issued a crypto executive order on January 23rd. And you can see the title here is Strengthening American Leadership in Digital Financial Technology. And really, that title says it all.

[00:07:45] Some of the key points in here is making sure that there's fair access to the banking system for crypto companies, promoting the U.S. dollar through stable coins, basically banning CBDCs or central bank digital currencies. And that's great for stable coins. So those are just like a few of the of kind of the big things from a macro perspective that have been happening, especially here in the U.S. On a micro level, I think we got to talk about meme coins.

[00:08:16] So since since late January, basically after Trump launched his meme coins, meme coins have depreciated meaningfully like they're they're down 49 percent. And so the market's down 11 or so. So meme coins are down four and a half times worse. Solana is has also been impacted because that's where a lot of the meme coin trading happened. So Solana is down 26 percent year to date.

[00:08:46] And so it's underperforming the market as well. So basically, the last SEC administration, they named a lot of tokens in those lawsuits that I showed you, basically everything except Bitcoin and Ethereum. Like they were probably securities. So meme coins were a relatively safe exception. They didn't have any sort of like fundamental value. And like really, the Gensler Biden administration drove a ton of token innovation offshore. They sued a bunch of crypto protocols that tried to have any fundamentals backing them.

[00:09:13] So if you were like revenue generating or tried to distribute profits back to token holders, or even if you had like a central team working on it, they claimed that that was like a security. So so, yeah, now that's kind of unraveling. The whole meme coin trade is unraveling. And in 2025, I think liquid markets are going to, again, be driven by more fundamental technology breakthroughs, being able to pass, you know, some sort of revenues or profits back to token holders. Yeah.

[00:09:41] So I think there's going to there's some short term pain in this market correction we're experiencing right now, but it's ultimately a good thing. And it's going to be good for the industry in the long term to go kind of like back to back to fundamentals. I have a follow up. OK. I saw it this morning. Well, I saw it by David Sachs, right there. The Bitcoin stockpile or the whatever strategic reserve, whatever you want to call it.

[00:10:07] It's being funded by seized assets, by Bitcoin that was seized. All this. Nothing new they're buying. They're just making it some stuff that they they seized. People don't know if that should be bullish or bearish. You know, what is your what are your views on how we should interpret that? OK.

[00:10:28] Yeah, it's such a great point because, OK, Mark, just going back like a week or not even a week, but March 2nd, President Trump says they're going to establish a crypto strategic reserve. And in that announcement that was on Truth Social. He there were five assets in there. Bitcoin, ETH, Solana, Cardano, Ripple. And the market immediately responded in a positive way. Bitcoin was up 10 percent on the announcement. It's now falling. Not not fully back to where it was before, but it has given up some of those gains.

[00:10:56] And a lot of people had questions like, how are you going to implement this? Like, what's the value of this reserve? And then yesterday, this is probably what you like we're mentioning. David Sachs wrote a tweet saying that President Trump signed this executive order to establish two things. One is a strategic Bitcoin reserve and the other is a digital asset stockpile, which is consisting of digital assets other than Bitcoin. Bitcoin. So I think it's a super important point. What you said, like, is the U.S. government actually going out into the open market and buying crypto?

[00:11:25] No, they're they're not. That's probably going to take an act of Congress to do that. And so basically what they're doing is they're taking any sort of assets that have been seized from cyber crimes or criminals or whatever, and they're not forced to liquidate them. They can hold on to them. And that's still like pretty it's it's it's estimated to be pretty sizable, like in the tens of billions of dollars.

[00:11:47] And so you don't have this like sell pressure on the market, you know, like wasn't it last summer that Germany sold a ton of assets and everyone was watching it? So we're probably we're not going to have that, which is good. Why these assets for the digital asset stockpile? I don't know. I feel like they raised kind of some eyebrows. Like, are these things like really do they have fundamental value? Like, are they really have like a lot of traction? I don't know. There's one common thread, though, which is like they're all made in America, digital assets.

[00:12:17] And so even CoinGecko, which is a large data provider, made a new category called made in the USA coins. And those like all did pretty well. But, yeah, I think like my take overall is that this is really good for the industry. Again, it just shows how zealously the Trump administration wants to make sure that this industry succeeds here in the US. And it's kicking off conversations we've heard in other governments with respect to holding and maybe even purchasing digital assets. Got it. Got it. Sounds good.

[00:12:46] Well, sounds it sounds sounds like there's going to be more things coming down the pike that we haven't seen yet, but it's going to be interesting and exciting. Yeah. So cool. So I want to I want to, you know, move away from the macro and the micro trends. I want to look at the venture funding market. Right. Venture VC market. What's the current state of the Web3 venture funding market? Yeah.

[00:13:15] So I was just looking at this data yesterday. If you look at like dollars going into crypto VC deals, it peaked in Q1 of 2022. And if you remember, that is like right before Tara Luna's crash. So VCs were just pumping money into the industry.

[00:13:33] And if you look at where we are today, like in Q4, it reached its highest level in the past two years, but it's still 70 percent below the high in Q1 of 2022. So we're still like really far off. You don't see that type of like exuberance like we did pre Tara Luna. So I think that's that's good. Us at Hack, the reason we study that is because we we do tend to invest counter cyclically.

[00:14:03] Like when the market really starts to heat up, that's when we pull back. Our natural inclination is to slow down. We deployed like 70 percent less quarter over quarter in Q4 for that reason. But yeah, so basically the high level is it's heating up, but it is nowhere near the highs from from last cycle yet. Got it. I think I do the same thing when it's in a bear market. I load up and when it's in a bull market, I pull back a little bit and was watching it fly. Well, it's been flying up and down. So I don't know what to do.

[00:14:32] Yeah, it's hard. It's hard to do, you know, like in a in a in a bull market when everything's going up, it's fun to deploy money. You know, you're like, great. Let's and in a bear market, it's harder. Right. Prices are lower. Like you're probably not exactly timing the bottom. Like things might still go down a little bit. So, yeah, it's hard to do, but it's usually the right thing over the over the long term. Yeah. So that brings us to today. Right. What what themes like are you guys most interested in right now?

[00:15:01] Yeah. So I mentioned like at the beginning of the podcast here that we are really like we're thesis driven and we're focused on infrastructure. So there's three theses right now that we're looking at. One is the intersection of Web3 and AI. And the thesis there is that next gen AI models and agents are going to massively disrupt both Web2 and Web3. And there's a ton to do at that intersection. Some some are investable, some aren't.

[00:15:30] But focused on that. The second is define real world assets. So, again, like next generation of financial markets and fintech, it's going to use blockchain rails. It's going to use DeFi. It's going to use smart contract. It's going to use blockchains to host both real world assets as well as crypto native tokens. So we invest in the infrastructure there. And then finally, like we're pretty geeky and nerdy and we just we love the deep tech.

[00:15:57] So different layer ones, layer twos, middleware, developer tooling. We think that's like the best value accrual sector in the early innings of where we are in digital assets. And over the past like one to two years, a lot of our investments there have been around like modular blockchain infrastructure. So kind of breaking up the core components of a blockchain and by disaggregating those, you can get 10x improvements like each of the different layers.

[00:16:26] So it can result in like a more scalable and performance system overall. So we made, you know, a lot of investments there. Awesome. Awesome. Now, how about AI? Like, how do you view like the AI intersection with crypto and black three, black web three? Sorry. Yeah. Yeah. So, OK. Yeah, I did mention like it's there's like all of these. Well, I think there's just like a lot of questions about what this intersection means.

[00:16:54] I feel like everyone agrees that these are like two of the most disruptive technologies today. But kind of pinpointing where they intersect and where the value is going to grow. It requires, I think, some research and, you know, spending time in the category. So we've mapped it out. We've mapped out this intersection. And oh, here, let me share this because I feel like a visual will be helpful. So this is kind of what we think the kind of tech stack is going to look like.

[00:17:23] And at the top here, you have like the centralized AI that's being built in a more like open source, decentralized way. So you have, you know, shared marketplaces for GPUs and compute, which obviously power a lot of AI models. AI models eat data.

[00:17:44] So like if you can have like a deep end network to access up to date information on the Internet and all the data on the Internet, that would be kind of this layer. And then also open source AI models. Those would kind of all be different layers of the stack and they all feed into each other.

[00:18:03] And then at the bottom of the stack here, you see like agents themselves that are acting autonomously on chain, making payments with each other via stable coins. And then you have like that at the customer level, you have like a consumer fintech application where customers can leverage AI capabilities via like a mobile app or something.

[00:18:28] So it kind of is all the way from these GPUs all the way to, you know, customer applications. We don't really do the app layer. We're more on the back end infrastructure. But yeah, this is kind of our vision and it's pretty like opinionated and I think it could change over time. But on kind of how this is all going to unfold. And then our goal is to like make investments at each of these layers besides the application layer and make sure that they succeed.

[00:18:55] So here are some of them over over on the right, like some examples. Pin AI is an interesting one. I would I would encourage you to check that out. They actually just released a mobile app and they they're using deep seeks model on the back end. So you can like launch a deep seek your own deep seek model or llama powered model. And it's like all about like personal AI. So, yeah, I would check some of these these companies out. They're doing some interesting stuff. Awesome.

[00:19:24] Well, I'm glad that we have we have video because people can pause it and then take a screech out of that. They need to. So you said you said, you know, did you go to did you go to consensus last year? Last year, did I go? I think I might have gone the year before. I don't know if I went last year. Yeah. Oh, that's sure.

[00:19:49] I was watching panels on on VC panels on AI about questions and ask questions and they didn't know how to answer any of the questions. They were looking at each other like, what do you think? Like, you know. Yeah. So I think it's taking some time to like figure out how and I think it's still pretty fluid about how these things are going to come together.

[00:20:09] I think like if you have an agent on chain that's that you're asking to do different tasks for you or even on the Internet, they can do everything except like say you want like to find the best flights from San Diego to Connecticut. Like they can go and look that all up for you and go on Google Flights and compare it to Southwest and whatever. But they can't actually make the transaction. Right. Like and so that's I think where stable coins and DeFi and blockchain rails come in.

[00:20:39] So I think that's one way that they'll come together. But I also think like being able to crowdfund resources that AI needs, whether it's compute or data or models themselves like that's that's like a perfect use case for crypto. Right. Like like right now, the big centralized companies are some of the only ones that have access to up to date Internet data. It's just like it's really expensive to scrape the entire Internet. You know, you need a ton of machines.

[00:21:06] What one of our portfolio companies, Grass, is doing, it's taking a bunch of unused Internet bandwidth on everyone's computers and scraping a little bit of the Internet. And then every day you have a whole up to date database of what the Internet is saying. And then AI models love that. Right. They're like, I want to access that data. So that's what crypto is great for.

[00:21:27] So I think on kind of both ends of the spectrum, agents and then at kind of like the model compute layer, there's some there's great ways for the two technologies to come together. And you mentioned the word that has been pretty, pretty popular on social media. You mentioned DeepSeek. Right. Right. So, you know, I want to find out, you know, the impact of what I saw the impact of DeepSeek.

[00:21:55] I saw as a whole bunch of anonymous trading accounts on X saying that they made a whole bunch of money and anyone could do it. They don't have to know how to code. But then they get into the string and you see you got to code this, you got to code that. Like, you know, what's the real impact of DeepSeek? Yeah, this was a major story. What was like end of January and it rattled all markets, not just crypto, but like DeepSeek comes out of nowhere. It's an open source reasoning model. It's developed in China.

[00:22:23] And reasoning models are like a big step up over last generation AI models. So far, OpenAI was the only one to launch one until DeepSeek. So DeepSeek has come to market before, like Anthropic, Meta, Grok. And it made headlines because one, it was made in China. And two, it was really cheap. Both for inference costs, but also in terms of like the GPUs and compute that was required to develop it.

[00:22:47] Yeah, we think that this is like a pretty major fundamental catalyst for crypto and the intersection of crypto and AI, that slide that I just showed, for a few reasons. One, DeepSeek achieved a huge reduction in inference costs. So around 80% by most estimates. Some people are claiming it's a lot more than that. And high inference costs have been a key barrier for on-chain AI. So that's going to be great to kind of bring those costs down.

[00:23:16] The second is they were able to do this with decreased hardware requirements. And so that's going to be good for like distributed and edge compute. You don't need as high quality of hardware. And then finally, like it's an open source model. Like that's great. That's what Web3 requires. So I think for those three reasons, DeepSeek is actually great for crypto and Web3.

[00:23:40] And it also is like, yeah, it's a great, yeah, great example of an open source project that is now competing with way more centralized peers. So, yeah, it's a good kind of story all around. Okay. And then Grok came out as well. And there's probably going to be a bunch of others that you don't know about yet. So. Yeah. Yeah, exactly. Fast followers. Yeah. Awesome. So I want to switch gears from away from AI a little bit and talk about DeFi, right?

[00:24:09] Actually, this morning, a million podcast listed my podcast as number 15 in the world on DeFi. I'm like, thank you. You know, I didn't know that was going to be considered. I'm like, this is cool. You know, we got to talk about DeFi then, right? I got to talk about DeFi. You know, what are the most exciting, you know, promises and developments this year in DeFi and what are you looking forward to in that space? Okay. My answer is probably going to be pretty boring.

[00:24:35] So, but the biggest news behind the U.S. election in Q4 was Stripe acquiring Bridge. So Bridge is this B2B platform that enables merchants and fintechs to accept stable coins for payments via API. And Stripe is like a Web2, you know, payment SaaS provider that bought Bridge for over a billion dollars.

[00:24:56] And so it's like just a great sign that the PayPals of the world, the Venmos of the world and now Stripe are looking at crypto to be used for real world, you know, payments using stable coins. So, yeah. I mean, if you look at the Bitcoin white paper, the original, the 2008, Satoshi calls Bitcoin a peer-to-peer electronic cash system. And I think their vision, whoever Satoshi was, was that Bitcoin was going to be used for payments.

[00:25:23] I mean, it wasn't one of the first transaction buying, you know, pizza with Bitcoin. Yeah, it's hard to imagine like Bitcoin being used for payments just because it's a really volatile asset. It's, you know, the infrastructure of Bitcoin, it's like, I mean, it's great, but it takes a while for it to settle, right? It's expensive. And, but now like, you know, things are different in terms of infrastructure. We have scalable L1s that are fast and cheap for transfers.

[00:25:52] We have $230 billion of stable coins on chain so you can pay people without taking on huge volatility. We have other real world assets that are coming on chain. And so, yeah, my answer that we're excited about is like stable coin infrastructure, which is kind of boring. But I think stable coins are going from stores of value on chain where like traders, crypto traders go into risk off, right? Like they'll sell out of their crypto.

[00:26:19] They don't want to leave the blockchain itself. So they kind of go into stable coins. Then, you know, now in DeFi, stable coins are being used on exchanges. Like if you look at the most liquid pairs, stable coins are usually both of the assets in the pair or at least one of them. And increasingly stable coins are used for cross-border transactions.

[00:26:41] But when stable coins are going to be used for, you know, paying for things in the real world with merchants, like that's going to be a major, major, major unlock. And so that's, I think, what we're most excited about and all the different infrastructure that's going to make that possible. Don't know when that'll be, but it's going to be a major when it does happen. At a mass scale level. Yeah, exactly. Yeah.

[00:27:09] I can get some people to pay me some tether to be on my show. So that doesn't count. Yeah, yeah, yeah. No, like when non-crypto people are using it, you know, like non-crypto native people are using stable coins via like some app on their phone. Like it's not like a MetaMask or something. It's more similar to like an Apple wallet, you know? Yeah. That makes sense.

[00:27:38] Well, you said stable coins are boring. And then a little while ago, you said two magic words. You said Terraluna. That definitely wasn't boring. So what are the, you know, I'm not going to get into the dangers of what stable coins could possibly do. But, you know, I do want to know what your prediction is for 2025 and 2026 regarding stable coins.

[00:28:02] And also any other areas that you think are decent, good, you know, solid predictions that will probably come true.

[00:28:38] Yeah. So that's all good. But stable coins ultimately are driven by network effects. So like USDT is far in a way like, you know, has the best network effects right now. In terms of other predictions, I think just like institutional DeFi. We've talked a lot about the favorable regulatory landscape we're in right now. New leadership at the SEC. I think there's a potential for interest rates to ease this year. And that's going to be good for crypto and high risk, high duration assets.

[00:29:08] So that'll drive, you know, more DeFi flows, more institutional interest. And hopefully this like convergence of CeFi and DeFi, like that Stripe bridge acquisition. So that's one prediction. The second is just like opportunities for investors and founders here in the U.S. Like I think there's we talked about Terra Luna. Like there's a lot of lessons learned from the last crypto winner, especially on like the more centralized side of things.

[00:29:36] And as we have like more institutional, mature, rational people enter the space that's going to be good for it, it's going to present more compelling opportunities for investors and founders, especially here in the U.S. And so there's going to be more innovation here in the United States, which is going to be great. We have a lot of good, talented founders. So that are going to be encouraged to join the Web3 industry. So I think that'll be a positive catalyst.

[00:30:06] For Web3. Hopefully some of those people who went offshore because of the old SEC regime will come back onshore. Totally. Yeah, I agree. Cool. So I want to thank you very much for your time today. I enjoyed speaking with you. It's a great conversation. So I appreciate it. I liked it very much. I have one last question. How can people find out more information about you and about HackVC? Okay, yeah, two ways. One is our website, hack.vc.

[00:30:34] We post a lot of interesting research on there, including that like AI tech stack, different videos, different investment memos, kind of how we're thinking about both individual projects as well as just broader level theses. And then the second is our Twitter. It's hack underscore VC. It's not dot VC like our website. We like to keep things interesting, you know, with the underscores and the periods. But yeah, we post a lot on there too. And so if you want to work with us, we'd love to hear from you. Please reach out. Awesome.

[00:31:03] Thank you very much for your time today. Thanks, Jamil. All right. See you.