Arthur Cheong, who worked in oil trading before reinventing himself as a crypto fund manager, put money into a blockchain-based game called Axie Infinity last year.
The so-called play-to-earn game, where users can earn digital currency by taking part, was raising $864,000 through a private sale of its tokens. They cost 8 cents each at the time. They were worth about $124 as of Friday in Asia, according to CoinMarketCap.com, which translates into a gain of more than 150,000%.
Cheong said his fund invested more than $100,000, and declined to comment on how difficult it would be to exit. It’s an example of the kind of returns that are possible in his new area.
“We were actually one of the first few investors that saw the potential” in Axie Infinity, Cheong, 29, said in a video interview. Seeing “how fast it has grown definitely surprises us.”
But this is still early days in an uncharted and unregulated territory, one that’s exposed to many risks that could lead to big losses on investments. The returns are also far from the norm: The Bloomberg Galaxy Crypto Index was up about 185% this year as of Friday in Asia.
Cheong made the investment through his Singapore-based cryptoasset fund DeFiance Capital, which he set up last year after working in the trading department of the oil giant BP Plc. He says China’s crypto crackdown may actually help the decentralized finance that his fund invests in.
DeFiance Capital oversees money for wealthy individuals, according to Cheong. Other major investors are Cheong himself and Three Arrows Capital, the crypto investment firm started by former traders at Credit Suisse Group AG. Cheong declined to give DeFiance’s assets under management, but said it was a nine-digit number. He also declined to give details on the fund’s returns.
Like many in the crypto realm, Cheong is evangelical about its future. The fund invests in “DeFi eating traditional finance,” DeFiance Capital says on its website.
In DeFi, or decentralized finance, people can lend, borrow, invest and perform other financial functions on apps that use blockchain technology, cutting out the middle men like banks and brokers needed in conventional finance.
DeFi is more responsive to users’ needs and can innovate at a much faster pace than conventional finance, according to Cheong. But it’s also subject to political, regulatory and infrastructural risks.
“In the next five to ten years, the market share of traditional financial services will be taken away by DeFi,” he said.
The rapid growth of crypto has prompted pushback from governments, with China going as far as to ban cryptocurrency transactions last month and vow to root out crypto miners.
While China’s move adds to questions about the sustainability of the industry, Cheong argues that it could even work in DeFi’s favor.
“Centralized cryptocurrency companies are currently getting curtailed and restricted,” he said, referring to players such as exchanges. “Investors will look for decentralized alternatives, which would benefit the entire DeFi ecosystem.”
DeFi also faces regulatory risk. In the U.S., Securities and Exchange Commission Chair Gary Gensler has repeatedly stressed the need for greater oversight of crypto markets, while increasingly warning about DeFi. He said in May that DeFi platforms raise “a number of challenges” for investors and regulators.
“Attempts to bring DeFi into the regulatory fold are inevitable,” said Lewis Cohen, co-founder of DLx Law, a U.S. law firm focused on blockchain and cryptocurrency. “The challenge will be how that effort will be implemented.”
The DeFi world comes with plenty of internal risks, as well. It sees regular glitches, from lending platform Compound’s mistaken token giveaway to continued trouble with the Pyth Network, a price feed backed by some of the world’s best-known trading and exchange companies. And then there are the rug pulls, where developers abandon a project and abscond with the funds.
Cheong’s fund has also invested in the DeFi lending platform Aave, and Synthetix, a derivatives trading platform for cryptoassets.
The cryptocurrency market remains small in Singapore compared to stocks and bonds, Tharman Shanmugaratnam, senior minister and chairman of the Monetary Authority of Singapore, said in response to a parliamentary question on April 5.
Of the 150 to 200 active crypto hedge funds globally as of the first quarter of this year, less than 5% of hedge fund managers were in Singapore, PwC said in its 3rd Annual Global Crypto Hedge Fund Report 2021.