BWEB: There Are Better Web3 Investments (BWEB)

Bitwise Investments now has a third publicly traded crypto fund after launching its Bitwise Web3 ETF (BWEB) this week. The point of the fund is to track publicly traded companies that will benefit from the buildout of Web3. The ETF currently has $1.7 million in AUM, 33 total holdings, and an expense ratio of 0.85%. Before we get into the specifics of some of the fund’s holdings, let’s first describe what Web3 even is and why many believe it is an improvement over what we currently recognize as Web2.

Web1 vs. Web2 vs. Web3

There is actually a bit of an argument over what Web3 really even is as evidenced by Twitter (TWTR) founder Jack Dorsey’s somewhat cavalier call for Web5 a few months ago. Despite some of the infighting from potential innovators, I believe most interpretations of Web3 center around decentralization as a core theme. To better understand what that means, it’s important to comprehend the transformation of the internet from Web1 to Web2 as well.

• Web 1: pre-dot com bubble internet pages. Mostly static, very little user interaction with web-based applications.
• Web 2: the rise of UGC, or user-generated content. Example: social media. Users create and engage with content through a centralized entity that they don’t own or control.
• Web 3: internet-based exchange without the need for centrally controlled entities or walled gardens. Community ownership of the platforms or protocols.

The term Web3 is credited to Dr. Gavin Wood back in 2014. Wood is one of the original co-founders of Ethereum (ETH-USD) and is currently developing Polkadot (DOT-USD). In an interview with Wired from last November, Wood was asked if Web3 means the disruption of platform monopolies like Facebook (META) and Twitter:

I think it’s a logical improvement. And I think in the grander scheme, it’s inevitable. Either it’s inevitable or society’s going down the pan.

I personally share this view and believe companies like Meta Platforms and Twitter could actually have the most to lose if Web3 ever manifests as it is currently envisioned. This is an idea that Bitwise seems to understand judging from the company’s own description of Web3 from its summary prospectus:

“Web3” imagines a future era of internet decentralization that replaces the system where a small number of companies can exert such a strong influence over internet users. Web3 refers to an evolution in the core architecture of the internet that leverages blockchain technology to make the internet more decentralized, secure and open. By providing all users the opportunity to own data and property in the digital world without relying on centralized intermediaries, Web3 provides an internet experience in which data privacy, decentralized ownership and community consensus act as key pillars of the ecosystem.

Given this, lets see if the fund’s holdings are aligned with what Web3 advocates would theoretically like to see.

BWEB Top 10 Holdings

The top 10 holdings of the fund include companies linked to payments, crypto, software, gaming, VR and social media:

NAME	MARKET VALUE	WEIGHT
COINBASE GLOBAL (COIN)	$157,716.50	9.20%
ROBLOX CORP (RBLX)	$140,911.24	8.22%
EQUINIX (EQIX)	$128,734.77	7.51%
UNITY SOFTWARE (U)	$123,052.16	7.18%
META PLATFORMS	$120,921.36	7.05%
TWITTER	$104,624.00	6.10%
SHOPIFY (SHOP)	$81,410.46	4.75%
CLOUDFLARE (NET)	$80,128.48	4.67%
ELECTRONIC ARTS (EA)	$76,384.00	4.46%
TAKE-TWO INTERACTIVE SOFTWARE (TTWO)	$76,366.45	4.45%

Click to enlarge

Source: Bitwise

I have no real quarrels with some of these selections but I do find such a large allocation to Meta Platforms to be a bit perplexing. Meta Platforms is really more of a VR play than an open Metaverse play in my mind. I’ve detailed more of that thesis in a previous article that you can read here. I’d argue Roblox also skews a bit too much to a walled garden as well. Cloudflare and Equinix are theoretically Web3 winners as infrastructure plays but they have poor valuation grades and high debt to equity positions. Then there’s Twitter.

Twitter Is The Poster child for Web2

How would Twitter navigate a change from Web2 to Web3? Maybe the better question is who wins if Twitter does change? If Twitter’s monetization model needs to be tweaked in a way that better protects user privacy and data, that might not be a tailwind for Twitter’s revenue. While I think there is enormous potential for Twitter and the platform does offer quite a bit of value to the user, how the company can extract that value as a business and maintain a philosophical alignment with Web3 ethos is going to be a very difficult change to navigate.

The current chaos that is Twitter’s ownership situation is a direct result of Twitter’s centrally controlled model. This is the antithesis of the Web3 ethos. While the latest reports indicate Elon Musk does plan to honor the original agreement to buy the company for $44 billion, in recent leaks of an interaction between Musk and Jack Dorsey, Dorsey seems to take the view that building something new is the correct approach:

I believe it must be an open source protocol, funded by a foundation of sorts that doesn’t own the protocol, only advances it. A bit like what Signal has done. It can’t have an advertising model.

This might explain Dorsey’s recent exit from the company entirely. Musk does seem to challenge Dorsey’s view, however:

I think it’s worth both trying to move Twitter in a better direction and doing something new that’s decentralized.

Taking each of these comments together, I think they’re making a really strong case for platform decentralization over centralized control. I believe there might be better bets if one wants to decentralize social media platforms. One of which was shared with BlockChain Reaction subscribers in August. That idea is now up about 100% since posting.

Summary

If Web3 is the transformation of the internet, then it stands to reason that many of the current internet application giants will be losers from decentralization rather than winners. From where I sit, Web3 wagers in 2022 should be viewed a bit more like the gold rush; you might be able to score some value as an individual by digging but the best way to win when everyone wants gold might be to sell the shovels.

This is why I think there are better returns ahead by betting on the Web3 rails rather than on the Web2 platforms. Those Web2 platforms need to successfully navigate a transition to Web3 and then maintain an economic model that produces returns for investors. Fundamentally, the economics of creating a successful Web3 company are very challenging. We saw this just play out recently with music NFT company Mint Songs ceasing operations. One of the co-founders later noted the economic model wasn’t sustainable.

I absolutely believe Web3 has a future. I just think it makes more sense to bet on the networks where Web3 protocols will be developed like Ethereum, Solana (SOL-USD), and Polygon (MATIC-USD). If Web3 does become a legitimate reality, the native assets of the network rails likely have far more upside as potential Web3 winners than the centralized platforms that need to adapt or die. There are probably some Web3 winners in the Bitwise Web3 ETF, but investors will likely do better making more selective bets on their own.