I recently watched a video featuring Peter Lynch from the mid-1990s. Peter was a well-regarded equity investor who managed the Magellan Fund at Fidelity until 1990. In the one-minute video, he shares insightful statistics on market corrections, noting that over a period of 93 years, the market was down 10% or more on 50 occasions — essentially once every two years. On fifteen occasions, the market declined 25% or more (known as a bear market), or roughly once every six years.
This serves as a reminder that markets will go down. Cyclicality is an inherent part of investing. If history holds, we'll likely experience several significant declines over the course of our firm's life. We accept this reality, and understand we have little control over the collective emotions that ultimately shape the market. We'll experience — and have to endure — both "good" and "bad" markets.
On our annual call, we tried to articulate one of the lessons we’ve learned since founding the firm five years ago — that we will encounter ebullient markets, and will need to be ready to act (i.e., recognizing market hubris and taking chips off the table). Opportunistic sales, however, needs to be balanced with our core belief #1 that value creation takes time, and that the vast majority of equity value emerges from the tenth year onward. Achieving this balance is the art of early-stage investing.
Regarding patient capital, the tweet below is sobering.
It’s messy, and not obvious…
The human mind is organized to make sense of linear growth; it's hard to fully grasp exponential phenomena. I don't believe many investors imagined businesses reaching trillion-dollar market caps, and it's probably hard to imagine that in the next ten years we will have companies with market caps in excess of ten trillion. The market caps of today's $3+ trillion companies (Apple, Microsoft, Nvidia) would need to compound by about 13% per annum to reach $10T. Doesn't seem that far-fetched. NVIDIA added more in market cap over the last 30 days ($300B+) than Amazon’s entire market cap in Q1 2016 ($290B). Let that sink in.
In emerging markets, MercadoLibre — the e-commerce leader in Latin America — recently passed $100 billion in market cap and became among the most valuable companies in the region. As a reference point, Amazon was last valued at $100B in 2009; today it's market cap is over $2 trillion. Just two years prior ('07), MercadoLibre IPOed at a $700M market cap. Almost a decade earlier, the company was born as an idea shared at the Stanford Graduate School of Business. Below is a quote from Marcos Galperin, co-founder and CEO of MercadoLibre, recalling when he shared the idea for an e-commerce business with his classmates:
Our core belief #2: It's messy. As you can see below, the path to $100B wasn't a straight line...
I learned a good bit about MercadoLibre over the years as my colleagues were close to the founders while at Stanford and during the formative years of building MercadoLibre, and it provided context that informed my views on what is possible in less obvious markets. The key point is MercadoLibre wasn't obvious, and it was messy. I suspect we'll replicate that path many times in our journey.
Stablecoins: Powering the Practical Side of Cryptocurrency
Founders and investors are increasingly drawn to crypto, and specifically stablecoins. Stablecoin technology is important to understand, as it is the worker bee of the crypto world, executing important tasks and doing its work behind the scenes. Crypto has bifurcated into two worlds. The first is the speculative world, where people take a directional view and “invest” in different alt “coins” — like Dogecoin, Pepe, ApeCoin, Catsinaworld Coin … just to name a few. We have little interest in this segment of crypto.
The second is utility-driven, and far more interesting to us. As an example, a freelancer in Nigeria does not want to hold her local currency, the Naira, but is unable to open a local bank account to hold US dollars, or the process is so burdensome that she prefers to opt out of the system altogether. She can now hold a proxy US dollar in the form of a stablecoin like USDC, which is backed by short-term U.S. Treasury bills. At its core, the idea is you hold a digital “dollar.” If you live in the US, you don’t need to think about “digital dollars” because you earn, save and spend in actual dollars. But if you live in Turkey or Nigeria and earn and save in local currency, you would have experienced severe depreciation of your currency relative to the dollar. In real terms, imagine your daughter is accepted to Stanford (congratulations!), and you are sent your first year’s tuition and housing bill — for Stanford, the annual bill is $87,225. To make that payment today, you’d have to convert nearly 3 million Turkish lira. Three years ago, the bill would have been 838K lira. With hindsight, you would have benefited from holding digital “dollars.” Fintech companies offering access to digital “dollars” are proliferating across countries with depreciating currencies, particularly in Africa and Latin America. We’ve spoken to many of the founders building these businesses — and invested in a few — and many have found exceptionally strong product-market fit.
The other use case is moving money where we have invested significant capital and time. Stablecoin technology contributes to improved settlement speed, cost and reliability. Stablecoins are global, 24/7 and instant. Customers want quality delivered faster and at lower cost, a principle that is true today and will remain true 10 years from now. No other payment type can offer instant 24/7 access on cross border transactions. The result? Take a look at stablecoin volumes below (the chart is adjusted to exclude high-frequency and high-volume trading-type flows and bots that can distort volumes). Monthly transaction volumes are exceeding $500 billion, a result of the compounding nature of systems and tools as crypto has evolved over the last 14 years. Like most technology, there have been fits and starts, but progress continues.
In mid-October, it was announced that Stripe will acquire Bridge, a Series A stablecoin payments company, for $1.1 billion. Historically, Stripe had crypto ambitions that were paused, likely due to regulation. Acquiring Bridge is evidence that Stripe views the crypto sphere of financial services moving into a more mature phase. In our view, regulation is catching up, and the acquisition of Bridge could be Stripe’s growth act to access international cross border markets.
You may be wondering why large, well funded companies don't just build their own crypto teams. There is significant complexity here, with interlocking networks of different stablecoins, blockchains and wallets that demand interoperability. For example, there are a number of blockchains to select from (Tron, Ethereum, Solana, and other L2 chains like Base), each with trade-offs between speed, cost and security. Think of each of these blockchains as distributed databases with different mechanisms to validate, secure and process transactions. And ultimately those networks need to connect to fiat on and off ramps that flow back to the existing financial services world (this "last mile" in fintech is generally the hardest to solve). Building this network takes time and requires significant engineering and regulatory resources to get right. The intersection of pioneering software and access to the existing financial grid is where the opportunity is. It's now being supercharged in certain regions with regulations.
Why does all of this matter?
Many financial services products start with fringe use cases. When those products become too big to ignore, regulators step in and regulate. This is ultimately a good sign because it sets up rules of engagement and protections, and provides clarity on how businesses can leverage, for example, new payment rails.
So what's happening on the regulatory front?
Europe is launching MiCA, which stands for "Markets in Crypto-Assets Regulation." It is a comprehensive framework for crypto-assets and specifically spells out regulations for stablecoins (with rules that govern across all EU member states), including requirements for stablecoins. The primary regulations are reserve requirements, redemption mechanisms, disclosures, and governance/risk management frameworks. You can learn more about MiCA
here. This regulation is just being introduced in Europe, and will likely serve as a template for other regions.
What's happening in the US?
Whatever your politics are, it appears both Republicans and Democrats have warmed to crypto. Earlier this year, an important piece of legislation was introduced in the House — the FIT 21 bill, which stands for Financial Innovation and Technology for the 21st Century Act. It still requires Senate approval. You can learn more and track the bill's progress
here. Like MiCA in Europe, these regulations pave the way for transformative financial infrastructure. The slide below from a16z crypto shows the level of bipartisan support.
These regulations will drive frameworks in the US and Europe, but what about South Africa, Turkey and Nigeria? Will the central bank and local banks in countries with capital controls welcome easy access to US “digital dollars,” especially in periods of capital flight? Definitely not, and this is a risk to companies offering easy access to digital dollar equivalents.
As for investors, it’s a world divided.
Some of our smartest investor friends profess that crypto and/or decentralized finance is the future of finance. Others at the opposite side of the spectrum believe it's mainly used for speculation, fraud and money laundering, and is largely a KYC (know your customer) avoidance mechanism. There’s a case to be made for both points of view. But there is undeniable utility in using stablecoins as a store of value for and as a cross border payment rail, and the serious companies and founders building in this domain understand that compliance is the bedrock of all financial services. There will be bad actors who will take advantage of nascent regulatory/legal frameworks and break the law — and we will likely see cases of fraud and failed enterprises. But the ecosystem is robust, and will continue to move forward.
We believe that a digital representation of the dollar (backed by Treasury bills), with transactions recorded in a common global ledger that provides “instant” transactions and reconciliation, is a logical way for cross-border payment rails to function. It is faster and more reliable than the system we use today, which relies on time-consuming clearing, messaging and settlement systems. To understand the demand drivers, it is useful to study history — the use of digital “dollars” that exist outside the U.S. banking system has a historical parallel to the 1950s invention of the Eurodollar which gained prominence in the 1950s — a Eurodollar is a US dollar that was deposited and used outside the U.S. banking system. The Eurodollar account originated when Russia, earning dollars from selling commodities, sought a way to hold deposits outside the U.S. banking system (to avoid having funds frozen if sanctioned). Eurodollars have gained prominence over the years and are used globally for international trade, bank liquidity, and cross border transactions.
Stablecoins, like Eurodollars before them, expand access to dollar liquidity (outside of the US banking sector), but introduce new regulatory and monetary challenges. The dollar's role will continue to evolve over the decade to come. By creating more regulatory clarity around USD stablecoins, US regulators can help reinforce the dollar's central position in the global economy — see below.
