John Pfeffer - Adapt and Evolve

Key Takeaways

1. Adaptability as a Key to Success in Investing: He emphasizes the need to update one's views faster, especially in the tech sector. The best investors will always outpace others by a significant margin due to their adaptability. Additionally, the significant representation of immigrants in successful startups in his portfolio highlights the adaptability trait, suggesting that those who have experienced profound personal adaptation are likely better suited for today's fast-paced environment.
2. Technology-Driven Investments Dominate, but with Caution: John believes that the declining cost of production, as illustrated by Wright's Law, and the benefits of software (with its near-zero marginal cost) make technology a compelling investment. However, while technology presents massive opportunities, there's an inherent risk of disruption. Good businesses typically aren't exposed to frequent technological disruptions, have sustainable barriers to entry, pricing power, and are not capital intensive.
3. The Value Capture Dilemma in Utility Tokens: John notes that while open-source software like crypto protocols fosters innovation, it doesn't necessarily ensure significant value capture. He draws parallels to Linux, where despite its ubiquitous use in the world's software, the most prominent value capture was Red Hat's $5 billion deal. He asserts that many circulating tokens, like ETH, are treated more like working capital rather than store value. John emphasizes the role of Fisher's equation of exchange, where high velocity of a currency, especially if not held as a store of value, can lead to hyperinflation. Using ETH as an example, he predicts that a successful protocol might still have poor value capture through its native crypto asset, as illustrated by Ethereum's challenges like vampire forks, competition from alternative L1s, and interoperability issues.
4. Bitcoin's Distinctive Value as a Store of Value: Contrasting utility tokens, John champions the potential of assets that serve primarily as a store of value, like Bitcoin. He believes that while platforms like Ethereum are technologically promising, their tokens might not be the best investments. In contrast, Bitcoin's primary function as a store of value positions it as a more stable and less tech-risky investment, underpinned by a broad consensus around its value proposition.
5. Bitcoin's Dominance in Stored Value: Bitcoin has carved its niche as a dominant stored value asset. Shift in perception from 2017, where the primary question was about the riskiness of owning Bitcoin, has now pivoted to the riskiness of not owning it.
6. Capital Efficiency in Traditional Finance Systems: Using capital more efficiently means a higher velocity of value creation. Traditional finance systems have inefficiencies, such as settlement periods, margin calls, and loan-to-value ratios. An increase in efficiency, even from 98% to 99%, can result in exponential value gains.
7. Tech's Value Creation Potential is Massive: While creating more value might be easier now, capturing this value might be more challenging. For instance, the creation of Uniswap required significantly fewer developer hours than some major Web 2 platforms, as it built upon numerous open-source components.
8. Crypto Moving to the Background: Drawing an analogy with the dot-com era where ".com" was at the forefront, John highlights that over time, as technologies become embedded, they tend to move into the background. Using the internet as an example, it has become a ubiquitous part of every business and is no longer highlighted as something special.
9. Layer-1 Crypto Assets – A Glimpse into the Future: John points out that Layer-1 crypto assets have seen significant appreciation recently. However, drawing another analogy, he compares the current enthusiasm around Layer-1 assets to the telecom stocks of the late 1990s. Telecom stocks were once considered invaluable due to their ownership of "pipes" needed for increasing internet traffic. Despite this intuitive thesis, many of these companies suffered due to factors like high capital intensity and technological advances, which made them less valuable in the long run. Similarly, while Layer-1 assets currently enjoy a dominant narrative, their true value proposition could be questioned in the future, especially considering the ease with which they can be forked, copied, and the relatively shallow moats surrounding them.

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