Hi everyone!
Well, last week had a few surprises, to put it mildly.
And this week has started off in a similar vein, with the EOS-SEC settlement, bitcoin price swings and general confusion about derivatives.
Speaking of which, we have a report on the subject coming out soon. Meanwhile, you can check out our other research reports on custody, crypto valuation methods and more.
Below you’ll find a ton of links to interesting articles on macro influences, market progress and asset insight. Also, in THE BRIEFING, Jeff Dorman of Arca Funds gives us an inspiring window into what it’s like to be CIO of a crypto fund.
Read on…
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Jeff Dorman, partner at crypto asset management firm Arca Funds, spent 18 years on Wall Street and in fintech before turning his focus to developing crypto asset strategies and products.
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An Honest Reflection of My Year as CIO of a Crypto Fund
After 365 days running a crypto fund, one thing is certain: it’s exhausting. And yet, at the same time, I’m more energized than ever.
Arca just completed its first full year managing LP capital in its flagship Digital Assets Fund. As chief investment officer, I experienced first-hand the trials and tribulations of building, launching and managing capital in the newest, most misunderstood and potentially most lucrative asset class available to institutional investors today.
Let’s take stock of the last year, reflect and see where we go from here.
Building a Team and a Strategy
Starting a crypto fund is a lot like trying to build Uber while the car is being invented. We’re working with an incomplete deck and everything is brand new, from the service providers and the systems/tools, to even the valuation techniques. This past year was just as much about business development as it was investment process. Running a crypto fund is an all-encompassing 24/7 job, and there are no shortcuts when trying to build long-lasting client trust.
In the traditional world, you wouldn’t even try to start a fund with less than $150 million in assets. At 1.5% management fee, that’s $2.25 million/year to spend on salaries and infrastructure needed to employ top talent and ensure operationally sound practices. So how do you build the same caliber team when the median AUM for crypto funds is under $5 million?
For starters, there is no waste. Everyone wears multiple hats. The qualities we look for include flexibility as much as niche specialization. Perhaps, more importantly, passion is a must, as employee motivation has to come from more than just expected compensation.
The investing strategy is just as important as the team, because employees and investors understand that our investment process and capabilities will remain consistent and be scalable. Even in a constantly changing industry, the processes and procedures in place have to be enforced consistently to ensure repeatability as the sector and our fund grow. To do this correctly, we need help from the service providers.
Operational Hurdles
Perhaps the most startling and time-consuming aspect is managing the sheer volume of service providers, which dwarfs the number of funds in crypto. In traditional asset management, incumbents reign supreme, and you’d only evaluate new service providers 3x per year. In crypto, we’re evaluating new service providers 3x per week. As there is no regulation, no incumbents that dominate and an unlimited amount of VC funding, the barriers to entry as a service provider are near zero. On one hand, this is refreshing because we get to start from scratch without relying on inefficient legacy tools; but, on the other hand, many of the service providers don’t have much experience servicing asset management clients.
In 2011, after 10 years working on the sell-side at traditional investment banks, I moved to the buy-side for the first time. It was immediately clear how little I understood about how my old clients performed their jobs until I was in their shoes myself. I used to joke that everyone on the sell-side should be forced to have a three-month internship on the buy-side, and vice versa, to understand how the other side operates. This advice applies equally to crypto. Many of the service providers are building tools they think funds and investors should need, instead of working with their clients to try to understand what our needs actually are. For example, there are at least 50 new exchanges who want me to trade bitcoin with them, but very few have been able to articulate in three sentences why I should.
That said, it’s impossible to dismiss any firm until doing proper due diligence, because getting these solutions right is essential towards building long-lasting institutional investor trust. And we have slowly moved forward with some of the best new startups in crypto. My job as CIO is to help these firms build the best solution, but also to wait until they solve a need for my fund and my investors before moving forward.
Managing 24/7 Risk
Once we’ve established the team and systems, we have to actually make money on our investments. As everyone in this industry knows, the crypto markets never sleep. Even while writing this, I’ve taken six breaks to check our risk and the price movements of our investments. However, contrary to popular belief, this space doesn’t require ‘round the clock’ trading. It requires disciplined risk management procedures, constant communication between team members with trading authority, and the willingness to step away from the screens to allow you to think clearly enough to see the forest for the trees.
While 24/7 trading is a feature and not a bug of crypto investing, there are some benefits to the legacy financial system’s trading hours. Even the worst weeks come to an end, allowing the market to collectively reset. In crypto, there is no reset (unless forced upon participants manually), so momentum has no natural off switch.
Managing volatility is hard enough during work hours. Doing it from home while cooking dinner for two starving toddlers is nearly impossible. As such, process and planning trumps even the best traders and algorithms. While we always have someone available to trade if needed, it has benefited us tremendously not forcing investments just because the market is open.
Fundraising
Of course, having a strong team and a scalable strategy doesn’t mean investors will throw money at you. As new as this industry is for all of the asset managers, it’s even more foreign for investors looking to allocate to this space. Traditional hedge funds often pretend it’s still 1982, when it was important to be secretive so the other nine hedge funds didn’t steal their best ideas. Yet in today’s world of constant communication and interconnectivity, not to mention high competition amongst funds, transparency is the key to earning investor trust.
We spend an enormous amount of time educating our investors and our prospects. This is necessary for this asset class, especially when your investor base is sophisticated and has a different level of risk tolerance than the current set of crypto investors. While potentially a longer process than more established areas of finance, you have a chance to forge lasting relationships built on education and not a transactional commoditized sale.
Comparing Crypto to Traditional Fund Management
While many crypto investors come from tech backgrounds and are now trying to learn how to manage outside capital for the first time, we take the opposite approach. We believe understanding how to manage risk is the critical skill, and everything else can be learned. Would you look to your mechanic to manage your automobile stocks? Does your doctor manage your healthcare stocks? In the same vein, your developer shouldn’t manage your crypto assets. In my 20-year finance career, it took me two months to learn how to analyze companies, two years to learn how to trade, and two decades (and counting) to learn how to manage risk. There is no short-cut.
Our backgrounds in traditional finance come in handy every day, from modeling to risk management to marketing. While I wish I had learned to program at age 12 because it would have made my adult life easier, at the same time, I don’t believe it would make me a better crypto fund manager. There is a reason “two guys and a Bloomberg” hasn’t been a very successful hedge fund strategy in the traditional world, as it has become impossible for one or two people to do everything well. The roles of CIO, PM, Research Analyst, Trader and back-office are very different, and require specialized skill sets to do the job properly. Having a balanced approach and different viewpoints across the portfolio team allows us to think more objectively about the real risks and opportunities in this asset class.
The reality is, crypto is both a technology and a financial product, and having collective knowledge in both creates a winning formula. Once those roles and differentiations are established, managing a crypto fund is no different than managing an equity, fixed income or managed futures fund. Portfolio managers manage risk, analysts analyze, traders trade, and the CIO pulls it all together.
Concluding Thoughts
I started this by saying I’m both exhausted and energized. While these may seem mutually exclusive, in crypto it makes sense. The speed, growth and promise of this industry light a fire under me and my team every minute of every day. There is so much to learn, read and talk about, but that also means there is little time to do anything else. The risk of burning out is real.
Recently, we instituted mandatory days off, and often turn the screens off in the middle of the day for short periods of time just so we can think without price factoring into the thought process. We’ve begun to realize that any small short-term moves in price that we don’t capture in real-time are often offset by our ability to think clearly enough to capture the larger, more sustainable ones.
I’ve spent my entire career investing or building businesses. Now I get to do both at the same time. The most rewarding part of being CIO is knowing that we’re at the dawn of the next big global technological advancement. We have a global platform where we can recruit new people to this industry, and shepherd others into this asset class as investors. We write and speak constantly, which is as much a part of our internal investment process as it is our external education process. As this space evolves further, my job will inevitably morph as well. And that excites me, enough to fight through the exhaustion.
– Jeff Dorman
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* = these are the six I especially recommend if you can only read six, but why only read six?
BIG IDEAS
*The Real Story Of The Repo Market Meltdown, And What It Means For Bitcoin (Forbes) – Caitlin Long explains (I was going to say “breaks down” but that already happened) the inner workings of the Fed repo system, and highlights the potential of an anti-fragile alternative system.
*Is Bitcoin Beta? (Vision Hill) – What do you measure crypto asset beta against?
Global Macro is on Fire- Is Now the Time for Digital Assets? (Arca Funds, webinar) – A recording of a webinar with Raoul Pal, CEO of RealVision and a former global macro fund manager, on macro warning signals and the impact on digital assets.
*How Negative Real Rates Should Impact Gold (and Possibly Bitcoin) (Digital Asset Research) – Negative real interest rates, increasingly becoming the norm around the world, are a better driver for non-productive assets such as gold and bitcoin, than negative nominal rates.
Privacy Is a Feature Not a Product (Multicoin Capital) – Privacy is essential for a censorship-resistant system, and bitcoin and ethereum offer “good enough” privacy for most users.
Understanding Bitcoin’s Price Volatility (Nik Bhatia) – The four stages of a price cycle.
Digital Securities and Blockchain: Custody and Fund Administration (ConsenSys) – A detailed look at how blockchain technology can how capital markets work.
Bitcoin Equals Freedom (Ross Ulbricht) – Bitcoin is not about really expensive pizzas or high electric bills – it’s about financial freedom.
Five Real Machine Learning Use Cases in Cryptocurrencies (IntoTheBlock) – A breakdown of how machine learning can improve the quality of crypto asset market data, and what type of machine learning techniques are best suited for each use case.
Ex-Fed Official Takes Aim at Bank of England’s Crypto Proposal (Bloomberg, paywall) – Former senior Federal Reserve official Simon Potter disagrees that the global system would benefit from an alternative to the dollar, and stresses the role the currency plays in unifying global debt and trade.
Asian Institutions Are Finally Warming to Crypto Hedge Funds (CoinDesk) – Fueled by macroeconomic tension and the headlines generated by Libra and the PBoC digital currency, the interest will have to overcome structural hurdles such as licensing and banking.
Insights From Shanghai Blockchain Week (Global Coin Research) – Paul Veradittakit of Pantera Capital shares his perspective on Asian institutional involvement in crypto markets.
MARKETS
Delphi Digital’s weekly report (paywall) covers the return of bitcoin volatility, the macro outlook and the Bakkt launch, among other topics.
JPMorgan Says ICE Debut, Position Shakeout Likely Tanked Bitcoin (Bloomberg, paywall) – The search for convincing explanations of the price drop intensifies.
How Leverage Can Help With Bitcoin’s Price Discovery (CoinDesk) – It’s the additional trading power and the possibility of shorting.
*Explaining the Flash Crash in Crypto (Arca Funds) – The impact that the lack of “traditional pipes” in the crypto market has on price slides.
Cryptocurrency Futures Exchange Industry Research Report Shows: Futures trading surged since May (TokenInsight) – A detailed overview of the crypto derivatives markets.
Bakkt still looking to sign up key core clients after first week of futures trading (The Block, paywall) – Derivatives markets can take a while to spin up.
Bakkt’s Slow Start Doesn’t Mean Bitcoin Futures Have Flopped (CoinDesk) – Galen Moore shows that crypto derivatives markets evolve slowly, and that doesn’t mean that institutions aren’t interested.
*A Cushing, Oklahoma effect for bitcoin futures? (FT Alphaville) – Possible constraints to the role of Bakkt futures in bitcoin price discovery.
The recording of last week’s Digital Asset Research webinar on privacy assets.
Crypto Exchanges Step Up Customer Bounties as Volume Falls (Bloomberg, paywall) – Growth hacking (not the other kind) on crypto exchanges through the promotion of referral bonuses.
Energy Commodities Trading Software Launches on Hyperledger Fabric (CoinDesk) – A step towards a new type of capital markets.
Doublejump (@2xjump) explained why API response time as a measure of API quality is relatively meaningless.
Coinbase-Led Group Aims to Help Crypto Firms Avoid Securities Violations (CoinDesk) – Eight crypto firms (Coinbase, Anchorage, Bittrex, Circle, DRW Cumberland, Genesis, Grayscale Investments and Kraken) have formed the Crypto Rating Council, which aims to determine whether a token complies with current U.S. securities law.
Some reacted with scorn, others with incredulity, and a few pointed out that the initiative exposes the inefficient “facts and circumstances” approach to securities regulation.
CRUNCHING NUMBERS
Understanding Sep 25th’s BTC Price Volatility with On-Chain Data (Crypto Quant) – What on-chain data can tell us about BitMEX margining policy and its impact on the bitcoin price.
*Derivatives data firm Skew (@skew_markets) tweeted out a series of charts and tables that summarize some of the major developments in the sector over the past quarter.
Why Ethereum Briefly Overtook Bitcoin in Daily Transaction Fees (CoinDesk) – Apparently it’s largely to do with a surge in trading activity due to demand for stablecoin tether, which recently migrated from the Omni blockchain to ethereum.
HansHODL (@hansthered) posted some charts that shows that bitcoin’s fundamentals are still strong.
Messari (@MessariCrypto) had a good visual reminder that bitcoin is volatile.
Crypto sentiment data startup The TIE (@TheTIEIO) launched a suite of data services for institutional managers, which will let clients know when any significant token event occurs, and which includes four sentiment APIs.
PROFILES
Last Bitcoin ETF Hope Standing (Etf.com) – An interview with Matt Hougan, managing director and head of research for crypto asset manager Bitwise, about the battle to get the first bitcoin ETF approved.
REGULATORS AT WORK
My colleague Nik De (@nikhileshde) live-tweeted from the SEC Congressional hearings, which included some soul-searching and a brief tease of the debate on whether Libra is or is not a security.
EOS Maker Block.One Settles With SEC Over Unregistered Securities Sale (CoinDesk) – This is a big deal, in that the settlement was only $24 million, while the disputed initial raise was over $4 billion.
Reactions were swift and mixed. Marco Santori saw the solution as elegant and broke down why the SEC believes the tokens qualified as securities at the time of the sale. Larry Cermak at The Block pointed out that the settlement “punishes” those who are trying to be compliant. Katherine Wu helpfully annotated the legal documents for us, with her usual color and flair.
California BitLicense Exposes Fault Lines Among Cryptocurrency Advocates (Forbes) – Andrea Tinianow talks about the upcoming crypto legislation in California, and how not everyone is on board.
SECURITY TOKENS
Harbor’s Regulatory Wait Ends as FINRA Awards Crypto Broker-Dealer License (CoinDesk) – Harbor Square Investments, a subsidiary of tokenized securities platform Harbor, has received FINRA authorization to buy and sell digital securities, ending a l, company executives told CoinDesk on Friday.
Swiss Stock Exchange SIX Lines up Buyers for ‘Initial Digital Offering’ (CoinDesk) – Its digital asset unit SDX has switched its focus to post-trade processing and custody, and will issue a security token to a consortium of financial institutions by the middle of next year.
STABLECOINS
Why building a new protocol for money is the only way to truly change the game for people (David Marcus) – The head of Facebook’s Libra project explains the decision to build an entirely new financial network, rather than just use what already exists.
Eric Wall (@ercwl) and Angus de Crespigny (@anguschampion) got into a Twitter debate about the potential utility of Libra.
Libra Crypto Is ‘Undoubtedly’ a Wakeup Call for Central Banks, Says ECB Exec (CoinDesk) – Benoit Coeure, member of the executive board of the European Central Bank, said in comments to the Bundestag that stablecoins, in particular Libra, could be a boon to online and cross-border payments, but they also raise a number of issues regarding potential criminal activity.
Facebook-Led Libra Could Be Boon to UN, Says Crypto Project’s Chief (CoinDesk) – The public pronouncements keep on comin’.
Facebook’s Zuckerberg Appears to Put Libra Launch Date in Doubt (CoinDesk) – Not quite as convinced of the target timeline as some of his colleagues.
ING’s Chief Economist Predicts Central Bank Digital Currencies in 2-3 Years (CoinDesk) – That’s, like, very soon.
PODCASTS
FYI BY ARK INVEST: Brett Winton, Ark Invest’s director of research, discussed his recent report on innovation, covering how blockchain technology is just one of five major innovation platforms affecting investments and the economy (an extremely rare confluence), but it is potentially the most powerful.
OFF THE CHAIN: Anthony Pompliano spoke to Parker Lewis, head of business development at Unchained Capital, about the idea that money doesn’t grow on trees, how volatility is part of the journey, bitcoin’s inherent monetary properties and the reason it’s energy consumption is not the problem people think.
THE SCOOP: Frank Chaparro chatted with Nick Grossman, partner at Union Square Ventures, about their investment philosophy, the obstacles in front of ethereum and where open finance value will accrue.
WHAT BITCOIN DID: Peter McCormack brought together Caitlin Long, Tyler Windhom and Trace Mayer for a superbly stirring conversation about the strange legal structure of the United States, the interaction of the first and second amendments, the power of a hard digital asset, the meaning of digital rights, and more.
UNCONFIRMED: Laura Shin interviewed Nik Tomaino, general partner of 1confirmation, about his take on Libra, trends in defi, the outlook for ethereum and the importance of incentive alignment.
UNCHAINED: Laura also asked Spencer Bogart of Blockchain Capital about Security tokens, bitcoin as a store of value and use cases to keep an eye on.
BASE LAYER: David Nage and Jordan Clifford, partner at Scalar Capital chatted about long investing, ethereum’s outlook and how both institutional involvement and bitcoin development are slow, and that’s ok
THE ECB PODCAST: Yes, the European Central Bank now has a podcast, and the first episode is about – you guessed it – crypto assets.
A-HA!
From Stablecoins to Central Bank Digital Currencies (IMF) – The advantages of synthetic central bank digital currencies: private issuers, backed by central bank holdings.
Goldman Shows Bright Future for Banks, If Not for Bankers (Bloomberg, paywall) – Pay, headcounts and revenues are declining, but margins seem to be up.
The Puzzling Lure of Financial Globalization (Project Syndicate) – The importance of questioning dogma.
This thread has nothing whatsoever to do with crypto or the economy, but I never knew parliament buildings were so interesting.
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FUNDING
Crypto data and analytics firm Flipside Crypto has raised $7.1 million from Galaxy Digital Ventures with participation from Collaborative Fund, CMT Digital Limited and Avon Ventures, a venture capital fund affiliated with FMR LLC, the parent company of Fidelity Investments.
1confirmation fund II has closed its raise at $45 million, to invest in new projects in the cryptocurrency ecosystem.
Crypto derivative data firm Skew has raised $2 million in a seed funding round led by FirstMinute Capital, with participation from Seedcamp, Kima Ventures, QCP Capital and Kleiner Perkins.
FIRMS
Crypto platform Circle has suspended its research offering.
Online lender SoFi has launched trading in bitcoin, ethereum and litecoin.
Cryptocurrency exchange Coinbase now supports Stellar lumens and LINK tokens for New York state residents.
The American subsidiary of Japan-based crypto exchange BitFlyer now supports bitcoin cash, ethereum classic and Litecoin, with the European subsidiary also adding lisk and monacoin.
US-based crypto exchange Bittrex has adopted blockchain compliance firm Chainalysis’ real-time monitoring software for transactions to flag suspicious activity across many of its leading coins.
Fidelity Digital Assets will provide custody for the recently announced Wave BTC Income & Growth Digital Fund.
Have a tip? Drop me a line at noelle@coindesk.com. |
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CRYPTO WEBINARS
Crypto podcasts have long been a staple of market education (see links above, for example), but I’ve noticed that there is a growing stable of informative webinars out there that don’t get enough air time in my opinion.
Here you have the crypto market webinars that I know about and that I think you might find interesting. If you’d like your webinar listed here, let me know at noelle@coindesk.com (no guarantee of inclusion, though).
Understanding Crypto Exchanges Using Data Science – intotheblock – October 2, 12pm ET
Smart Money in Crypto: What Institutions Need to Know – Tabb Forum – October 2, 11am ET
The State of Crypto Custody – Gemini Trust – October 7, 12pm ET
FATF Guidelines & developing industry led AML & KYC best practices – Global Digital Finance (GDF) - October 9, 9am ET
The Path to Clean Prices in Crypto – Digital Asset Research – October 10, 11am-12pm ET
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Download our latest report "Is Bitcoin a Safe Haven?", appropriate for the intensifying macro discussions swirling around the sector, as well as our reports on Custody, Crypto Valuations and Crypto in Context.
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CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
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