Conversation with the founder of DeFiance Capital: Cold thinking behind the bull market craze

Moderator: QuanYu, co-founder and CIO of RootData

Guest: Arthur Cheong, founder and CEO of DeFiance Capital

Organized by: Scof, ChainCatcher

Recently, Rootdata held a Space with the theme "Cold Thoughts Behind the Bull Market Boom: Cyclical Characteristics, New Narratives and Investment Strategies." This interview invited Arthur Cheong, founder and CEO of DeFiance Capital.

This conversation centered around the current bull market craze, the cyclical characteristics of the crypto industry, new narratives and investment strategies. ARTHUR shares his views on the persistence of the bull market, noting that U.S. policy changes and macroeconomic factors will have a profound impact on the market. He believes that DeFi, stablecoins, public chains and other tracks have the most long-term value, and at the same time emphasized the potential of decentralized science (DeSci). In terms of investment strategies, ARTHUR emphasizes the importance of continuous learning, prudent use of leverage, and deep penetration of specific tracks. In addition, he used Aave and Hyperliquid as examples to discuss practical methods for project evaluation and relative valuation, especially how to tap potential through on-chain data and user experience when there is a lack of public information.

The following is the full text of the conversation:

QUANYU:

It's a great pleasure to be able to participate in this exchange event with Arthur today. Next, I will ask Arthur some questions on behalf of everyone. After we finish the Q&A session, if you still have any questions you are interested in, you can continue to ask Arthur questions.

The first question is about current market sentiment. We see that the current market sentiment is generally high, but it is also accompanied by some hidden worries. Many people are concerned about whether this bull market can continue and whether it can reach its peak. What do you think of the sustainability of this bull market? What key indicators and events do you think are worthy of attention?

ARTHUR:

I am very happy to participate in this Twitter Space event and communicate and discuss with everyone. There are indeed many major changes taking place in the cryptocurrency industry right now.

From a structural perspective, the cryptocurrency market, especially in the United States, has undergone profound changes in the industry's rule structure with the change of governments and policy adjustments after the election. As the country with the largest GDP in the world, the structural changes promoted by the United States have a profound and lasting impact on the industry. These changes will not end in the short term, but will bring long-term benefits to the industry.

Despite the recent strong market performance, especially the significant gains over the past month and a half, the positive impact has yet to be fully felt in many industries. This kind of structural change needs time to brew before it can gradually release its true value in the market.

In the short term, as there is still uncertainty about whether Trump can win the election, the market may be affected by this to a certain extent. However, it can be seen that if the Republican Party successfully controls the presidency and a majority of seats in both houses of Congress, it is expected to have an extremely positive impact on the industry. In addition, the rise in Bitcoin prices is also closely related to the behavior of companies such as MicroStrategy to increase their holdings of Bitcoin assets. If the market expected Trump to win, the current price behavior would actually be predictable.

In short, whether from a structural perspective or short-term market dynamics, the industry is currently at a very potential development stage, and the future is still worth looking forward to.

QUANYU：

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

ARTHUR:

When it comes to metrics, we typically analyze large amounts of data, especially on-chain data. On-chain data can reflect the growth of the industry to a certain extent, but further screening and analysis are needed to draw valuable conclusions.

From a DeFi perspective, TVL (Total Locked Volume) is a very critical indicator. At the same time, you can also pay attention to the number of user addresses. Although there may be some false active addresses generated for the purpose of cashing in, through in-depth analysis, real growth and abnormal behavior can usually be distinguished. In addition, the performance differences between different public chains and their Layer 2 solutions can also provide important market insights.

Another aspect to watch is the stock performance of publicly traded companies like Coinbase and their quarterly reports. These reports can often reveal more details about industry growth. In addition, financing scale, project market value, etc. also reflect the market's confidence in the industry's prospects.

Of course, Bitcoin is still the industry leader. Bitcoin’s market capitalization largely determines the upper limit of the entire industry. Taking the market performance after this election as an example, the market value of Bitcoin has increased by 40% to 50%, which shows that the upper limit of the entire industry has been significantly improved and the market potential has been further released.

QUANYU:

Over the past decade, cyclical changes in the crypto market have been evident, typically occurring on a four- to five-year cycle. Bitcoin price highs are also typically two to three times higher than the previous cycle high. So, what new characteristics do you think will emerge in the current bull market?

ARTHUR:

First, I personally believe that Bitcoin’s four-year cycle may not be as dominant as it used to be . Of course, this view is not yet mainstream. The four-year cycle of the cryptocurrency industry used to be dominated by Bitcoin. It was formed because Bitcoin experienced a block reward halving every four years, resulting in a reduction in the supply of new Bitcoin, thus affecting market sentiment and price trends.

However, things are different now. The impact of the halving of Bitcoin’s output per block on its overall market capitalization and market liquidity has declined significantly. The current market value of Bitcoin has reached hundreds of billions of dollars, which is already a considerable asset even on a global scale. So I think starting with the next halving, we may not have a four-year cycle in the traditional sense.

Even if there is still some form of cyclicality in the market, the driver is no longer Bitcoin’s halving, but broader macroeconomic factors. For example, the current size and influence of Bitcoin make it increasingly affected by the geopolitical and macroeconomic environment, such as whether the U.S. government will include Bitcoin in the national reserve. If this policy can be realized, it will be a huge benefit and may trigger other countries to follow suit. Under this scenario, the traditional four-year cycle may be broken, and the market performance of Bitcoin will be more like traditional assets such as gold, and more in sync with the global financial cycle.

To sum up, I believe that Bitcoin’s future cyclical performance will be more linked to the macroeconomic and financial market cycles, rather than relying solely on its internal halving mechanism.

QUANYU:

You just mentioned that central banks in some countries may start buying Bitcoin in the future. Do you think this is likely to happen next year? If so, which countries do you think might be the first to take this initiative? What are the driving factors behind this?

ARTHUR:

First, we already know that there are indeed national governments that own Bitcoin. This includes not only countries that mine by using their own cheap electricity, such as hydropower, but also governments that have obtained Bitcoin as a result of judicial actions. For example, one country, Bhutan, has used its abundant and nearly free water resources to accumulate approximately one billion US dollars worth of Bitcoin through mining. In the past 5 to 10 years, the U.S. government has accumulated approximately 10 billion U.S. dollars worth of Bitcoins by confiscating Bitcoins obtained from crimes, although some of them have been auctioned off.

In addition, there are also rumors that the sovereign wealth funds of some countries have purchased Bitcoin privately, but have not publicly announced it due to the sensitivity of related issues. If the United States, as a global economic power, decides to include Bitcoin in its national strategic reserve and pass relevant legislation, this may become a landmark event.

However, I think this may not be possible until the second half of next year. Because the proposal to use Bitcoin as a national strategic reserve needs to go through the legislative process, even if the Republicans control both houses of Congress, this process will still take time to advance. So while discussions on the topic may begin next year, actual implementation may require a longer process of policy preparation and legislation.

QUANYU：

We have just discussed the driving factors of external events, so from within the industry, the market for cryptocurrency is often driven by some trends or concepts, such as DeFi, NFT, etc. in the past. In the current cycle, we have also seen many emerging trends, such as DePin and RWA last year, and AI that is attracting much attention today.

In your opinion, which concepts have real product value and long-term development potential? And which ones may be just short-term hot spots, similar to the NFTs of the past, which can only be short-lived?

ARTHUR:

This is a very good topic. My personal opinion is that the most promising track at present is still DeFi. DeFi has always been one of the core application areas in the cryptocurrency industry and an important narrative supporting the development of the on-chain economy. As the regulatory environment in the United States gradually improves, I think the development space of DeFi will be broader and freer . In fact, the market performance in the past month has verified this, with many DeFi projects performing well.

Stablecoins are also an important track highly related to DeFi. Stablecoins themselves are a very profitable business, especially when interest rates are reduced. With their network effects, the profit potential of stablecoins is still huge. In addition, stablecoins also have a positive impact on national monetary sovereignty. For example, the current global digital currency market is almost all priced in US dollar stablecoins, which to a certain extent strengthens the hegemony of the US dollar.

The market’s recognition is also increasing, for example, an American startup was recently acquired at a high price for its stablecoin payment solution, which shows the potential and value of this field. Therefore, I think the stablecoin track will continue to grow in the future. For example, Ethena successfully combines various trends such as DeFi, stablecoins, and Bitcoin base interest rates, making it a popular project in the market.

In the field of public chains, it is still unclear who will eventually become the overlord. At present, Ethereum is still the largest smart contract public chain, but other public chains such as Solana have approached or even surpassed Ethereum in terms of on-chain user activity. The public chain narrative began to rise seven or eight years ago, but it is far from over. Many new projects, such as Sui, Hyperliquid, etc., are constantly trying to break through. The ceiling of this track is extremely high, because the high valuation of Ethereum provides a reference for this field, which will still attract more innovators to join in the future.

In addition, Bitcoin, as an independent asset, has become a trend in itself and needs no further elaboration.

For other tracks, although DePin has been discussed for more than a year, its growth is relatively stable, the flywheel effect is relatively weak, and it is still in the stage of steady development. At the same time, although DeSci is still very early, its integration with blockchain and digital currency is very clear, and it may become an area worthy of attention in the future.

Overall, the tracks I am most optimistic about include DeFi, stablecoins, public chains and AI. At the same time, Bitcoin is still the core asset of the entire industry. The performance of other emerging trends requires more time to verify their long-term value.

QUANYU:

The most discussed topics recently are undoubtedly Meme and AI . For Meme projects, many people believe that it is more suitable for short-term operations, mainly relying on market sentiment and community consensus, and lacking long-term value support. The field of AI, especially AI agents, has attracted widespread attention and controversy. Many venture capital firms have discussed the concept recently, but disagreement remains about its long-term potential. What do you think of these two concepts?

ARTHUR:

I just mentioned Meme and AI, let me talk about Meme first. Meme assets will definitely continue to exist, but I personally am not an expert in this field. You may have heard Murad’s views on Meme Coin. He is very optimistic about this field and believes that this is a track that cannot be ignored. I generally agree with his views, especially on head projects. For example, the valuation of Dogecoin has become a benchmark in this field. However, I have reservations about whether emerging Meme projects can gain widespread recognition and grow to the heights of Dogecoin.

Of course, there may still be opportunities for emerging Meme projects to rapidly rise from hundreds of thousands or millions in market value to hundreds of millions or even billions. This kind of "explosive story" will continue to exist. This makes the Meme track like the gambling industry in the currency circle , providing people with a dream of chasing huge profits. However, for larger institutions, the risks and uncertainties of such projects are too high, making it difficult to invest funds on a large scale.

Let’s talk about AI again. I am generally optimistic about this track, but there are still few projects that can truly deeply combine AI and blockchain. Many projects forcibly bundle AI and cryptocurrency simply for the purpose of financing. However, there are some projects that excel in this area. For example, Virtuals and Grass are recent projects that we believe have a good combination and can leverage the flywheel effect of cryptocurrency to promote the development of AI.

QUANYU:

Having just discussed the larger narrative, let’s return to the specific project level. Everyone is curious, how does a senior investor like you proceed when researching a project? What is your research methodology for a new project or token?

ARTHUR:

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

First, we will purchase professional investment research reports and data services, and invest more resources in this area. These tools provide us with detailed on-chain data, such as transaction volume, number of active users, number of on-chain transactions, etc. For example, taking Solana as an example, on-chain data in November last year, including DEX transaction volume and daily active users, has surpassed Ethereum in multiple indicators. We continue to follow up on these data to understand industry growth points and trends, and adjust the tracks of focus and investment direction guided by the data.

Secondly, we value communication with people in the industry. By communicating with entrepreneurs, other venture capital institutions, and peers who focus on secondary market investment, we can understand which tracks are widely favored, as well as the logic and reasons behind them. This sharing of information gives us a more comprehensive perspective.

Finally, social media is also an important reference channel. For example, we will pay close attention to platforms such as Twitter to obtain the latest updates on projects and industry trends. In addition, we use some specialized data analysis platforms such as RootData. These tools have greatly improved our efficiency in analyzing data and tracking market changes.

Through these methods, we can more effectively assess the potential and risks of projects and provide solid support for investment decisions.

QUANYU：

Thanks to ARTHUR boss for supporting us! For our platform, we also hope to provide users with more efficient information search channels in an all-round way by integrating the latest news, research, team dynamics, financing status and other information. This content is also the core information that most investors need during the project research process.

So, specifically at the project level, can ARTHUR boss share some of your successful investment cases this year? How did you evaluate these projects and ultimately select them?

ARTHUR:

Taking Aave as an example, many people asked us why we were so bullish on it in August or September. At that time, the market was in a downturn, especially from April to September, when almost all currencies performed poorly, but we found that DeFi still showed stable growth in Q2 and Q3. Through on-chain data and fundamental analysis, we have noticed that Aave’s on-chain data continues to grow and that the token economic model will be updated soon. Based on these factors, we believe it has great potential and have issued relevant investment research reports.

Another success story is Hyperliquid. This project has no VC background, but it has become the leader in the Perp track with its excellent products and application performance. The community has strong faith, and users generally choose to hold rather than sell after the airdrop. On-chain data also verifies its leading position. Hyperliquid’s success demonstrates the power of the product and data, as well as the strong community behind the project.

QUANYU:

Okay, apart from these relatively successful ones, do you think there are any that have been missed this year or that are better targets?

ARTHUR:

There are a few impressive examples of missed opportunities this year.

The first is the Solana ecological project . Solana itself has achieved significant growth in market performance, and its on-chain data is also very active. However, some projects in the ecosystem have mediocre performance, such as Raydium. This is a signal worth paying attention to, because if Solana's ecosystem continues to grow, then the projects within its ecosystem should theoretically benefit as well. It is impossible for Solana itself to rise while the ecological projects do not rise at all. Although the liquidity of these projects is relatively low, under the circumstances of active Solana data and good market performance, the performance of ecological tokens is average. There are indeed certain investment opportunities during this period, but it is a pity that we did not grasp them better.

Another glaring missed opportunity is Sui . In fact, Sui's on-chain data has been performing well, including user volume, transaction volume, and DEX transaction data, which have shown a growth trend from Q1 to Q3. However, the price of Sui did not increase significantly at that time. Although we noticed its data performance, we did not delve into its ecology and potential due to insufficient allocation of time and energy. In addition, Sui had some problems on the Korean exchange. We did not take the time to understand the specific situation, which may have also affected the judgment of its investment opportunities.

Overall, Sui is one of the most obvious opportunities we missed this year. Its on-chain data has fully reflected the growth trend, but we did not translate its potential into investment decisions in the early stages.

QUANYU:

Indeed, the tokens just mentioned basically belong to the secondary market. And I remember that when you first entered the industry, you focused more on primary market investments, but now your focus seems to have completely shifted to the secondary market, is that right?

At the same time, there are now many discussions about VC and the primary market in the industry. According to our RootData statistics, although the prices of mainstream currencies represented by Bitcoin continue to rise, the activity of the primary market has always been low. The latest data shows that primary market activity in November fell by about 20% to 30% year-on-year.

So what prompted you to shift your focus more towards the secondary market? Do you think this reflects some 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 funds far exceeded the amount of new project token unlocks that the secondary market could undertake, and the ratio was about 3 to 4 times. This imbalance makes it difficult for retail investors to bear the selling pressure in a bear market and leads to insufficient market demand.

This is one of the reasons why I gradually turned to the secondary market. Although there are still opportunities in the primary market, such as Eigenlayer and Celestia, the overall investment difficulty has increased. Issues such as the gap between founders ' financing and execution, industry track verification, and fast conversion speed have increased the uncertainty of primary investment.

Taking the gaming circuit and the prediction market as an example, it is still difficult to determine when the former will break out, while the latter did not rise until this year due to Polymarket and the US election. The core difficulty of primary investment is that even if the track is ultimately proven to have potential, it is impossible to predict its rise time.

Taken together, the secondary market strategy is more beneficial in the current environment and more suitable for flexible adjustments in a rapidly changing industry.

QUANYU：

Indeed, the market is now generally concerned about the selling pressure brought by VCs. So, do you think there will be more and more projects like Hyperliquid, which do not involve VCs but rely on community consensus and concepts to successfully rise in the future?

ARTHUR:

I think this phenomenon will definitely grow, but whether it will become mainstream is hard to say. After all, projects usually require financial support. Taking Hyperliquid as an example, its founder is said to be a very successful trader with substantial personal wealth, so he does not need to rely on VC funding. But for most other projects, especially public chains or Layer 2 projects that need to build an ecosystem, they still require a large amount of financial support.

However, this trend of "not raising VC funds" is indeed gradually taking shape. I think ICO may return to the market , although it will not be as crazy as in 2017 and 2018. However, with the changes in the US SEC regulatory environment, more projects may choose to raise funds through ICO in the future.

QUANYU：

How to further promote the mainstreaming of Crypto has been a hot topic in the industry. Many people try to attract more users by developing consumer applications or educating people. So, in your opinion, what are the key shortcomings that hinder the mainstreaming of the industry?

ARTHUR:

Regarding the mainstreaming of the industry, I think this is closely related to the specific track. Taking DeFi as an example, previous shortcomings mainly focused on security issues and user experience. The biggest risk in DeFi is that smart contracts are easily attacked and funds are lost due to code vulnerabilities. But in the past 3 to 6 months, we can clearly see that this problem is improving. After years of experience accumulation, such as learning from the lessons of earlier projects such as Aave and Uniswap, the current protocol has improved a lot in terms of code security. In addition, the user experience of the wallet has also been significantly optimized, which is gradually making up for the shortcomings in the DeFi field.

Another key shortcoming lies in the combination of blockchain technology and application scenarios. In the past, we have tried to widely apply blockchain technology to various industries, but in fact not all fields are suitable for deep integration with blockchain. I think blockchain is more suitable for certain specific areas, such as finance, payment, and scenarios that require decentralized and popular financing. These fields are naturally more compatible with blockchain technology and can better leverage its advantages.

After many attempts from 2017 to now, we have a clearer understanding of the applicable scenarios of blockchain technology. Future directions should focus on these areas of high fit, rather than trying to forcefully apply blockchain technology in all industries.

QUANYU：

Have you discovered any innovative new products or projects recently? In what ways do they show highlights that deserve special attention?

ARTHUR:

I think DeSci **** It is a very innovative field, and it is also one of the topics that I am personally interested in recently. The core significance of DeSci is to enable more people to participate in the funding of scientific research and to provide support for some niche scientific research projects that may have been overlooked.

Traditionally, many niche scientific researches are often unable to obtain the attention and financial support of large institutions because they are difficult to commercialize or the potential market is small. For example, some research may be difficult to translate directly into drugs or commercial products, so large pharmaceutical companies often do not devote resources to it. But this does not mean that these studies have no contribution to mankind, nor does it mean that they have no potential in the future. Even if the market audience of these results is currently limited, for example, only 0.001% of the world's people need related drugs, from the perspective of society as a whole, these studies are still worthy of support.

DeSci's innovation is that it uses blockchain technology to enable smaller communities to fund these studies. For example, even if only 100,000 people may benefit from a certain research, these people or those who care about them can raise funds through DeSci's model to promote the progress of related scientific projects. Not only does such a model have the potential to develop new solutions, it can also help fill gaps in the traditional research funding system.

Currently, we can see projects such as the DeSci concept mentioned by Vitalik, as well as interest from well-known people and institutions such as CZ, precisely because this field can make scientific research more democratized 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 grasp market opportunities?

ARTHUR:

I have some insights to share regarding investment experience and strategies in the secondary market. As a full-time investor in this industry for seven years, I deeply understand that investing in cryptocurrency requires constantly updating one’s knowledge system and cognitive structure.

1. Continuous learning and cognitive updating **
   ** This industry changes so fast that it requires not only financial knowledge, but also a comprehensive understanding of technology, policies, and market hot spots. For example, this year's US election has a very significant impact on the market, so we have spent a lot of time studying Trump's victory rate and possible policy directions, and have even become "experts" on the US election to a certain extent. In addition, as new tracks continue to emerge (such as DeSci and DePINi), we continue to invest in learning and understanding these areas.

2. Use leverage with caution **
   ** The risks of leverage need to be emphasized repeatedly in every market cycle. In the past week, we have seen a 20%-30% correction in non-mainstream currencies, and positions with more than three times leverage may have been blown up. Even in a bull market, excessive leverage can lead to huge losses. Therefore, I recommend that investors always control the leverage ratio, especially when the market is volatile, and maintain a good sense of risk control.

3. Deeply cultivate a specific track or ecology **
   ** A big investment "Alpha" comes from in-depth research on a specific track or ecology. Choose a track that interests you, learn more about its technology, community and ecological development, and even get to know its key figures. For example, although our professional organization has more resources, in the case of Sui, we missed its opportunity to rise because we did not follow its ecological development well. Community members who really understand Sui may have already discovered that its value is underestimated and quickly deployed when the market launched.

4. Advantages of retail investors **
   ** Compared with institutions, retail investors have the advantages of flexibility and quick decision-making. For example, Hyperliquid’s token went live on Friday and tripled over the weekend. Institutional investors often cannot respond quickly due to their long decision-making process, but retail investors can use their own judgment and action to seize such opportunities. This flexibility allows retail investors to outperform professional investment institutions in some situations.

In summary, successful investment strategies include continuous learning, careful use of leverage, in-depth research on specific tracks, and taking advantage of the flexibility of retail investors to seize market opportunities.

QUANYU:

Projects like Hyperliquid do lack public team information and financing information in the early stages. So for such a project, how should we judge its potential and plan ahead? What key signs or data can help investors tap into these opportunities?

ARTHUR:

The investment judgment on Hyperliquid can be viewed from several aspects. First of all, as a user, you will find that Hyperliquid's user experience is the best among similar projects. This excellent product design lays a good foundation for the project and gives users confidence in its development. In addition, judging from the performance of on-chain data, even before the currency is issued, Hyperliquid's TVL (total locked volume) and transaction volume are already in the leading position on the Perp track, becoming the leader in this field. These data performances significantly enhance community confidence in the project.

Although Hyperliquid's token price performance after the opening of the market exceeded most people's expectations, for some users who have strong faith in the project, they have identified the potential of the project and made arrangements in advance before issuing the currency. This strong community support, combined with the excellent foundation of the project itself, is an important reason for Hyperliquid's success.

QUANYU：

But how to value this kind of project?

ARTHUR:

I think the valuation of blockchain projects has always lacked a systematic approach. Currently, in most cases, valuations are derived through comparison. For example, for Hyperliquid, everyone generally believes that there is still room for growth based on its market value at the time of issuance. Since Hyperliquid itself is positioned as a public chain, many people compare it with other successful public chains to deduce its valuation potential.

This valuation method is actually a relative valuation . For example, Solana’s valuation was gradually formed by comparing it to Ethereum. This benchmark-based valuation method is still the mainstream method in the blockchain industry.