- VC firm Youbi Capital has been investing in crypto since 2017.
- Chen Li, a managing partner at Youbi explains why investing in blockchain games has become so popular amongst VCs.
- He shares his tips on spotting early gaming winners, including 2 potential contenders.
Bitcoin and ether currently have a liquidity problem, according to Chen Li, managing partner of crypto VC firm, Youbi Capital.
Bitcoin, the world’s most widely traded cryptocurrency, has encountered near-relentless selling pressure since hitting a record of around $69,000 in mid-November. It’s crawled higher over the last couple of days, but is still about 36% below that all-time peak. Ether, meanwhile, has lost around 31% since touching a high of nearly $4,770 in November.
The recent downward price action isn’t surprising when investors take into consideration the liquidity challenge, alongside the pressures of upcoming interest rate hikes by the Federal Reserve , he said.
Last year, more institutional and traditional finance investors made the leap into crypto. But under the weight of interest rate pressures, both crypto assets will need a lot more buyers to increase the price, Li said.
“The market capitalization is already huge for bitcoin and ethereum,” Li said. “We need some major liquidity.”
Achieving this means reaching a wider audience, who might not be tapped into financial markets or the crypto ecosystem.
Crypto venture capitalists are betting that gaming could be a key entry point for reaching a mainstream audience, in the same way that so-called massively multiplayer online games (MMOG) such as World of Warcraft or even The Sims, initially drew people to the web.
“We see [gaming] as an entry point for mainstream adoption, because as we saw in web 2.0 in early 2000s, the internet, the MMORPG games, were the entry point for people to use the internet,” Li said. “But I think this time, it’s a similar story.”
Blockchain gaming has become a core focus for Li’s venture fund, which has been around since 2017 and is predominantly invested in crypto infrastructure and decentralized finance.
“DeFi and games are very similar,” Li said. “A lot of games are just DeFi wrapped in a game package.”
When focusing on those two areas of crypto, Li puts significant weight on the team and their ability to build out a community and create a product that’s easy to use.
Spotting gaming winners
He also uses on-chain data to find opportunities in the space. It helped him stumble across a game that turned out to be a bigger winner in recent weeks.
Defi Kingdoms is a little-known DeFi game that’s overtaken Axie Infinity in popularity based on volume trends, according to Footprint Analytics.
In December, Li started monitoring this metric and as it started to increase significantly, he accumulated a position in the game’s native token, Jewel.
“I think it was before Christmas, the volume just surpassed Axie and we were so impressed,” Li said. “And that was a big reason that we invested in it.”
Defi Kingdom’s Jewel token has surged 191% in the last month going from $7.16 to $20.81. Over the same time period, Axie Infinity’s AXS token has declined 25% from $104.26 to $78.15.
The platform he uses to access the on-chain data is Footprint Analytics, which offers both free and premium services. He uses the GameFi Dashboard to drill into game analytics.
By looking at the “Top 10 Games Ranking (Last 10 Days)” chart, Li saw the traction that Defi Kingdoms was garnering versus Axie Infinity. Coming a close third in recent days is the game Bombcrypto, which could also be a potential threat to Axie’s leadership.
Li is not invested in Bombcrypto, but highlights it could be a potential opportunity for investors, based on a chart that reflects the number of GameFi users per blockchain. For Binance Smart Chain, Bombcrypto is suddenly taking a lot of market share, overtaking the likes of metaverse gaming platform MOBOX.
“A week ago MOBOX was 90% or over 90% of these card PvP type of game,” Li said. “But now Bombcrypto just took almost half of the market share.”
When looking at the charts, the most important factors are volume and liquidity, Li said.
Volume is converted to the revenue of the treasury, which can then be used to develop the game further and scale the community, he added.
“That is the number one success factor that we use to evaluate the games,” Li said.
Liquidity is also important, as this makes it easier to get in, and out, of the game, which is important when attracting lots of new players, Li said.
Looking more at fundamentals, Li sees opportunities for “Cradles: Origins of Species”, a company in the portfolio that is offering MMORPG – massively multiplayer online role-playing games.
The game is focused on interaction and content flow, while most other popular blockchain games are very modular, Li said.
“Cradles” allows the community to provide feedback and participate in development. The developers are also rewarded for their creations in the game with a significant cut of the income of new content created going back to them, Li said.
“It’s similar to the Roblox and Minecraft business model, where they also allow third-party developers to create new games,” Li said. “They are saying they give about 30 to 40% to developers, but nobody knows because, you don’t know the transactions, they keep their own book. There’s no transparency.”
Investing in blockchain gaming, however, does involve a mindset shift, Li said.
The cost of acquiring users is very high, Li said. Initially, the founding team has to build out the liquidity pool and pay their market makers as well as the people selling their tokens.
But then early adopters essentially become market makers and investors in the game, which creates a more significant stake in the success and development of the game and community.
“Instead of involving VCs, they basically just opened this liquidity pool to involve these community players, early adopters, as investors,” Li said. “This really embodies the spirit of web 3.0, which means the network is owned by its users. For games, the network is always invested and owned by the players.”