Chain Venturer: Phil Bonello of Plaintext Capital

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. For this week’s issue, we have Phil Bonello from Plaintext Capital.

Phil is an experienced crypto researcher and investor — having previously taken on roles at Messari, Ikigai, and Grayscale.

If you would like to participate in a future episode, DM me here.

-Marco

In the past week, we’re seeing a bunch of onchain activities.

• Rollbit and Unibot prices continue to soar as both protocols generate revenue and try to accrue value toward their tokens. Both are still not listed on major CEXs.

• Coinbase’s Base L2 network launched this week. A consumer app called Friend.Tech that enables the trading of “shares” tied to Twitter profiles took the market

To me, this shows that the remaining actors in the crypto markets are much more sophisticated power users of the space.

Normies won’t set up multiple wallets, bridge some funds over to Base, and try to farm a potential airdrop from a buggy app that’s still in beta.

Enjoy this precious crypto-native PvP moment; because if the god of ETFs is on our side, then we might be seeing new money flowing in mid-October.

Anyway, enjoy your weekend!

Phil Bonello, Co-Founder of Plaintext Capital

Phil Bonello is the Co-Founder, CIO, and Managing Partner of Plaintext Capital, a New York-based crypto investment firm.

Having previously taken on various roles as a Consultant in IBM and Narrative Science, Phil eventually jumped into crypto professionally in early 2018. Since then, he has led the research efforts at Ikigai Asset Management and Grayscale, two extremely notable companies in the space.

Now, he’s venturing out on his own with Plaintext Capital, a firm he started to focus his entire time on investing in crypto and the future of web3.

Here’s my conversation with Phil Bonello.

Quick takeaways:

• The most important thing in crypto investing is survival.

• ETH will underperform when the bull market is fully back.

• Having a flexible mandate as a fund that allows you to do both VC and liquid investments is key.

• The potential impact of crypto ETF developments is enormous. It will open up doors for capital in the RIA space to enter the market, which collectively holds more than $110 trillion.

• There are a lot of opportunities for smaller projects building on L2 networks to take market share away from established DeFi players.

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What’s one defining moment that made you decide to jump into crypto?

There wasn't a specific moment that prompted the decision. Rather, it was a gradual process that began by first being exposed towards crypto via a message board.

In 2016, when Phil was working for IBM doing Internet-of-Things (IoT). He stumbled upon a message board discussing the interconnectivity of IoT. One topic in that message board was this new revolutionary network poised to define digital communication for Autonomous Machines. That network is none other than Ethereum.

During that period, Phil began to research Ethereum more extensively. He noticed that many smart individuals were showing interest in it. Intrigued by its potential, he decided to invest some of his money and stayed updated on the developments of the crypto space.

Eventually, his growing interest in crypto led him to quit his job and become fully engaged with the space in 2018. Phil joined Messari as a community analyst in 2018 to start his crypto career.

How did you end up as a crypto investor?

Post his work as a Messary community analyst, Phil joined Ikigai, a crypto asset management firm, in mid-2018. He became the first employee of the firm. His time there taught him valuable lessons about portfolio management, valuation, and project evaluation. One of the most important takeaways from his Ikigai experience was maintaining optimism during bear markets.

During his tenure, Phil dedicated significant effort to assessing the top 200 tokens by market cap, aiming to develop a quantified system for assessment. He discovered a considerable number of tokens at that time were on the verge of being considered scams and unsuitable for investment. This led him to realize the significance of early asset filtering.

Between 2018 and 2019, numerous altcoins struggled with low performance, limited liquidity, and a lack of clear narratives. Phil admitted that during this period, he shifted slightly towards becoming a Bitcoin Maximalist perspective due to his uncertainty about Ethereum's functionality at the time, as it lacked significant use cases and Bitcoin was consistently outperforming other assets.

What is Plaintext Capital?

Plaintext was the brainchild of four people. Two individuals from JPMorgan, one guy from ConsenSys, and myself. What Plaintext aims to become is a place for investors to park their capital and navigate the liquid crypto markets with proper risk management.

Crypto liquid markets are incredibly lucrative because you can have venture-like returns; but in the short-term, momentum can take over and you can see 90-95% drawdown.

By far, the most important thing in crypto investing is survival. A lot of notable characters generated massive profits during the bull market, but then they blow up during the bear market.

What are your thoughts about fund structures in crypto?

It is surprising how few liquid funds there are. Frankly, it might be because in the past, it was easier to raise for venture funds because you can raise capital for something that doesn’t exist yet, creating some sort of an allure.

The best structure for General Partners (GPs) is closed-end hybrid liquid VC funds as it gives you the most amount of flexibility. Closed-end funds make it easier and cheaper from an operational perspective. You have your capital and you just have to figure out what to do with it. You don't have to side pocket your illiquid investments versus your liquid portfolio.

As far as VC versus the liquid model, keeping that mandate open is key because you should just be evaluating all of your investments just as investments, whether its liquid or not.

Even though its illiquid, the thesis should be compared to all the liquid assets. Hence why its important to have a good understanding of both, and have the flexibility to capture all the opportunities.

What is your current investment thesis?

We’re excited about a group of theses where the prices, technicals (on the chart), and fundamentals align.

Specifically, the emergence of numerous Layer 2 networks opens up opportunities for new projects to conduct vampire attacks and suck liquidity from existing players. With higher transaction efficiency/performance, the playing field is ripe for smaller projects to use novel tactics and attract liquidity away from larger protocols.

Some of these protocols are valued at $10-20M, still babies in comparison to the likes of Aave and Uniswap. We think that there’s a trade that makes sense there.

What is your opinion on the ETF progression as a fund manager?

Phil perceives the entire ETF scenario as a monumental development, one that has yet to be fully perceived by the market. Looking through the lens of retail accessibility, the progression of crypto ETFs holds the potential to significantly reduce trading and custody costs, possibly by an order of magnitude.

The biggest things possibly lies on the advisory side, particularly within the domain of wealth managers/financial advisors. Collectively, they control $110 trillion. Thus far, there has been a lack of crypto products when these advisors want to allocate their AUMs.

By no faults of their own, presently, the Bitwise and Grayscale products fall short in terms of distribution viability due to their price misalignment with net asset value (NAV). This misalignment complicates an advisor's recommendation when they’re advising clients’ to allocate capital towards such products.

However, the advent of an ETF changes the game. It can become an integral part of these advisors portfolio, and they can also receive fees on it — which is a huge deal. On top of that, the involvement of BlackRock in pushing the narrative Bitcoin/crypto narratives carries immense weight. From a reputational standpoint, it reduces the career risk for financial advisors and wealth managers.

You wrote an old blog post on governance tokens — are you still bullish on governance tokens?

The blog post: https://medium.com/hackernoon/a-framework-for-valuing-governance-tokens-0x-49d2cf2ef5bc

Governance token still has a place in the space.

In the old medium post, the framework was to evaluate the cost of fork or the cost of copy, assessing how big the moat the the product has, and calculating back into the marginal value of each percentage of voting power.

Now, that there are treasuries that governance tokens can govern, the considerations are different. Having said that, these governance tokens are very tightly held so distributions are not going to actually matter.

At the same time, profitability of protocols and deciding when to distribute value (fee switch) to token holders depend strongly on the maturity of the protocols. It makes sense for more established projects with product-market fit, but not really the case for early stage projects.

It’s likely that we’ll see another cycle of treasury funds misuse, but we’re getting closer and closer to a token model that works.

Rapid Fire Questions

1. What’s one book that any aspiring investment professional should read?

   • Devil Take the Hindmost

2. What’s your biggest investment mistake?

   • FTX, underestimating counterparty risks

3. What’s the most underrated use case of crypto?

   • A potential to elevate brands (and people) like the social token idea

4. What’s your most contrarian view in crypto right now?

   • More bearish on ETH than consensus when the bull market is back, ETH will most likely underperform

5. What’s the biggest risk that the crypto space is facing?

   • Short-term, Binance’s situation

   • Long-term, the lack of consumer adoption

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.