4Jun 2019

Investment Thesis Refresh

by Henrik Andersson

In a fast moving field like crypto assets we believe in the merit of having an investment thesis that is not set in stone but is updated as the market evolves. Crypto assets are based on a breakthrough technology. Far from all applications have been explored yet and some known applications have unknown market potential.

Irrespective of our final destination, Apollo Capital’s mission is clear:


Let’s unpack this sentence. We are:

1. “Investing in the crypto assets that are powering the next generation of computing infrastructure”

This is a new generation of computing. Specifically this new type of computing is replacing trusted third-parties with software. We can now do ownership and transfer of value (money, collectibles), participation and execution of smart contracts solely based on open source software not associated with a company or organisation. Software is both replacing rent seeking middlemen and enabling completely new use cases.

2. “Investing in the crypto assets that are powering the next generation of computing infrastructure

We think it makes sense as investors to focus on infrastructure investments when the potential applications are not yet clear. By investing in infrastructure we are exposed to any possible application being built on top of that ecosystem’s critical infrastructure.

Not only do we believe infrastructure is a good starting point at the beginning of a new paradigm, our thesis is that most of the value will be captured in the lower parts of this new technology stack, specifically in what is known as base layer 1 Blockchains and Middleware:

Source: Apollo Capital

Source: Apollo Capital

Base layer 1 blockchains are their own chains like Bitcoin or Ethereum while middleware typically are smart contract protocols being built on top of one or multiple blockchains.

Our portfolio is balanced between layer 1 and middleware.

3. “Investing in the crypto assets that are powering the next generation of computing infrastructure”

Our investment thesis is that Blockchains and certain Middleware are enabled by crypto assets, these are critical for this new software system. These crypto assets are where the majority of value is captured in this new paradigm. Another way of putting it — crypto assets are the fuel for this new type of software.


We believe that there are two broad categories of applications for open blockchains: financial applications and non-financial applications. As we map out the Potential Value Capture vs. the Maturity of certain applications we end up with this picture:

Source: Apollo Capital

Source: Apollo Capital

We are convinced that the biggest potential value capture by crypto assets on open blockchains are related to financial applications. One reason why this is the case is that blockchains are only able to secure native blockchain assets and smart contracts related to those assets. Non-native blockchain assets like identity will be hard to secure using open blockchains. Furthermore, anchoring non-native blockchain assets like identity doesn’t necessary capture a lot of value in crypto assets. In many cases non financial use cases end up anchoring information (e.g. through a hash) to a secure blockchain like Bitcoin. This can be done relatively cheaply using only a nominal amount of bitcoin.

For these reasons, financial related verticals and the crypto assets underpinning these verticals are our investment focus at Apollo Capital, specifically:

  • Store of Value

  • Privacy Coins

  • Stablecoins

  • Open Financial System

These financial verticals will create an infrastructure layer for financial primitives that are:

1. Permissionless — accessible to anyone. Just like the Internet made the world’s information accessible to everyone with a smartphone, open blockchains will make financial infrastructure available to everyone with a smartphone and an Internet connection. And just like the Internet broke down the barrier for publishing information on the Internet, anyone will be able to create financial instruments by interacting with smart contracts.

2. Trustless — not dependent on a third-party but on auditable software. Just like the information on Wikipedia is not dependent on one third-party actor but a network of contributors, the financial infrastructure of the future will not be dependent on a single vulnerable actor like a bank, state or financial institution.

3. Censorship resistant — financial freedom. The Internet is hard to censor, in the future our financial system will be hard to censor as the Open Financial System is borderless in nature and not tethered to geographical jurisdictions.

Once the basic layer is built, composability of these building blocks will lead to more advanced financial primitives to emerge and finally to user interfaces through web and mobile applications.

Store of Value

Bitcoin as a potential store of value and unseizable asset not relying on a government is material. Gold and offshore accounts today account for tens of trillions in value. Properties of crypto assets such as Bitcoin are on many accounts better than our current versions. In addition crypto assets are programmable which opens up new avenues for innovation not possible with a physical commodity such as gold. Store of value doesn’t exclude other use cases such as payments, but in our view volatility needs to decrease before a store of value enters the real competition for other properties of money such as medium of exchange and unit of account.

Medium of Exchange

In this category we mainly have stablecoins and privacy coins. Stablecoins suffer from a trilemma trying to optimise on scalability, stability and decentralisation. This is a hard problem to solve but where we see a lot of innovation. There is massive potential in the coming decade for stablecoins that can get this equation right. It is likely that in the very long term stablecoins will find competition from more pure crypto assets not tied to a peg once the volatility of those assets starts declining.

Privacy coins enable private transactions to take place and is an interesting and fast evolving vertical besides cryptocurrencies running an open transaction graph. As privacy coins tend to be innovative using newly developed cryptography, there is generally a higher technology risk in this vertical versus non privacy enabled coins.

Open Financial System

This is a general term referring to a new financial system being built on top of open blockchains. The first financial primitives being built include:

  • Lending — being able to earn an interest rate on assets that you already hold.

  • Credit markets — borrow against assets that you hold in your portfolio.

  • Prediction and oracles — create a trustless source of truth for events outside blockchains.

  • Derivatives — a leverage bet on an underlying asset.

  • Decentralised exchanges —blockchain based trading without giving up custody of your assets.

  • Synthetic assets — blockchain assets that can trustlessly replicate non-blockchain assets.

While many of the above primitives are still experimental in nature, it is easy to see them in the future vastly outcompete traditional solutions at least in certain categories and circumstances. As an example, taking out a loan on a blockchain can be as easy as a few clicks on a web 3 enabled browser.

Running financial services on software instead of relying on trusted financial institutions not only opens up access but could lead to substantial gains in productivity as the financial sector in many countries makes up a very substantial part of the GDP.

Core to our thesis is that the financial infrastructure being built on open blockchains will become a common utility not unlike the Internet itself.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.