Dear Friends, 

Are crypto exchanges a global or local phenomenon? And how should investors evaluate them? I decided to pursue this question because crypto exchanges are bending the usual conventions around venture capital investing.

First, it is very difficult to draw a comparison with traditional exchanges and brokerages. These are mostly local. Of course in recent times, bourses have collaborated, thanks to technology. But the concept of the physical border still exists. We may buy shares of a company on NASDAQ, but we ARE very conscious that NASDAQ is elsewhere. Second, an exchange still opens and closes at specific times in a day-and a weekday at that. Third, most leading exchanges function relatively smoothly. There are circuit breakers to stop trading. FINRA(Financial Industry Regulatory Authority)can call for a halt to trading. Fourth, crypto trading remains edgy with real and other fears stalking trades. This is not yet at the stage where I can fill in a request online with my broker and off we go. Fifth, I mostly don't need a broker to buy or sell crypto on an exchange-not today, at any rate. Last, and very important, there is mostly no phone number to call. We are at the outer edge of what is possible today and what might happen tommorow. This is a new threshold, a completely new age. To give credit where it is due in fistfuls or more, there are investors into crypto exchanges. Coinbase and Bakkt, among others, have benefited reasonably. 

I would argue that the evaluation should be less around the conventional tech. That is mostly known in principle. The initial turmoil around blockchain protocols has settled down. In those days, it was like horse owners discovering the steam car. That is over. Make no mistake, though-that technical due diligence is still needed. Codebases are important and can throw up surprises. I say this from bitter experience. We do not like to admit it, but code is difficult to master from an end-outcome perspective.

However, special attention should be paid to anticipatory design. Let's pull out the roadmap out and look at it. No vague objectives and nice pictures but the hard drawings and scribblings. Any prototyping would be good to take a look as well. Regulatory forecast needs to be seen in the plan. So does any possible move into local markets in a big way. So  does meeting conventional best practices such as helpdesks and business continuity plans. Planning should demonstrate an appreciable move away from opacity. 

The investor will still need to grapple with this issue-how big is the game to be invested in? There are and will be many "local" exchanges. The issue of customer loyalty cannot be underestimated in this case. Like community banks and local stores, local exchanges if run well with warmth and ethical behaviour, can lead to a good outcome. I would suggest these not be dismissed as sentiments. In our changing world, with the uncovering of more insights through data science, it is becoming evident that sentiment is central to a lot of decision-making. A well-run local exchange may also provide outsized returns, if it is successfully absorbed by a larger player over time. But investors may also want to consider that in the crypto world, investing on the basis of borders may not make sense anymore. The concept of time and space that exists in conventional finance does not, in this case. That is key to the future. 

Best

Kaustuv