I started in Blockchain full time at the end of 2016 after many years as a hobbyist, and already my pre-crypto career feels distant. I spent almost a decade on Wall Street and consider myself a product of the credit crisis, joining Bank of America’s Global Leveraged Finance and High Yield group out of college, right before the financial world went off a precipice. My first deal was the lowest yielding junk bond ever priced, in the 5% range, for an energy company that is now defunct. By the time I left, we were pricing similar risk profiles in the 20% range. These were gritty times — I was almost fired for watching Obama’s inauguration when my MD came looking for his deck. We were understaffed and overworked. I think Wall Street culture has rebalanced in the aftermath. Next, I spent a few years as a leveraged credit analyst for RBS’ bad bank, created post-crisis to manage a $100 billion book of the bank’s riskiest real estate and LBO equity and credit assets. I also covered esoteric sectors such as film finance where bankers had written blank checks to movie studios securitizing rights to unproduced films. Most recently I spent 5 years at a private equity firm and business development company called American Capital where I helped to arrange control leveraged buyouts. One theme that emerged from my career trajectory was a preference for working with growth companies. I learned a lot about pricing risk and am grateful for all the mentorship I received throughout the years.
2. How did you get into crypto?
I have been an angel investor since the day accredited investor rules allowed me to invest in private offerings. It was difficult to get on the cap tables of deals with small checks but I sought to add value in other ways. Networking on AngelList was a good way to learn about new verticals and meet interesting people. I was fascinated by Fintech. In 2013, I discovered bitcoin and bought some to try it out. There was a lot of friction but I mailed a check to one of the early exchanges and luckily they didn’t run away with the money. Once I had the bitcoins it was empowering. I could transfer them very easily, globally. Eventually, I lost them in the Mt. Gox theft. Undeterred I made an investment in one of the first exchanges targeting institutional trading and compliance which was eventually acquired by Kraken. It wasn’t until the Ethereum whitepaper and early projects like Augur (prediction markets) and Digix (fungible gold-backed assets) that I began to fantasize about the endless possibilities. My interest was largely focused on the ability to create new business models leveraging open source technology and incentivized by the promise of mutualization. For some decentralized networks, tokens are the only means to capture value as they are integral to governance, security, and utility. Simply, I viewed tokens as an opportunity to add many digital dimensions to capital assets; value is just one of many properties. When I joined Jake Brukhman and Alex Bulkin at CoinFund the space was largely technologists, but they believed the blockchain opportunity would quickly evolve. They were right, the market matured quickly and we played a major role in the inflection point. CoinFund invested in and worked closely with the first two consumer technology companies to develop and adopt blockchain based business models.
3. Tell us about CoinFund
CoinFund was founded in 2015 and is one of the first investment firms focused exclusively on crypto assets. We pride ourselves in working closely with teams on complex problems and our multidisciplinary expertise sets us apart as a financing partner. As an investment professional, I am outnumbered by financial technologists, mathematicians, and computer scientists. It is important to understand the technological trends and issues that projects face in building blockchain companies. Our subject matter expertise gives us unstructured access to potential investments and we know the right diligence questions to ask.
4. How do you go about picking assets? Describe to us your investment process?
My investment strategy is geared toward the long-term opportunity and is long only. Crypto is a nascent asset class and shorting is dangerous due to volatility and counterparty risk. There are no custodians or prime brokers, though they are on the way. A majority of my focus is on opportunities in the decentralized stack: base layer protocols and platforms, resource marketplaces, middleware & on-chain services and applications. This is a unique asset class given many of the liquid assets have a limited track record and history, and the investment process is largely a VC vocation. I pay close attention to sector-specific topics such as understanding blockchain’s value-add, regulatory strategy, and crypto economic systems design. It is critical to understand how and if a decentralized network captures value. It is essential to recognize the new variables at play and how incentives can prospectively help to bootstrap a network and provide a long-term competitive advantage.
5. What is your daily routine?
CoinFund encompasses what I have always hoped to find; something I’m remarkably passionate about, that work and pleasure blur together. I am a curious and creative person but keeping your edge in a quickly developing market means keeping up with relationships and drinking from the firehose of new information. We’ve had a lot of success, but our team has an appetite to prove ourselves in a big way and leave a legacy that is more than just a P&L. It is inspiring and there is never enough time. My partners are rockstars and I couldn’t imagine finding a more qualified group to tackle the challenge with. Blockchain is a global business, markets are 24/7 and people who have caught the bug are eager to discuss their new project. I work around the clock but every day presents new challenges so there is no routine and that’s just fine (for now).
6. How did your prior career help you in your work?
I was a competitive ski racer and spent my high school days racing all over the world and then for Dartmouth College. The discipline, goal setting, and competitive spirit stuck with me. As I developed I continued to direct my energy at accepting the challenge of excelling at new things. Crypto is the kind of passion that keeps me constantly engaged and self-improving. I worked in high finance my entire career, investing hundreds of millions of dollars, but never have I felt closer to the ups and downs than today. Wall Street has an incentive and risk management problem but I no longer feel that. I take responsibility seriously and I enjoy the focus it instills.
7. How do you think about portfolio composition?
We’re in the early innings of a growing asset class and huge opportunity so it makes sense to target asymmetric upside in positions, whether its first money, a proprietary deal or a highly sought round. I invest in thesis-driven opportunities and want the asset class to benefit from its democratization. While our team has global reach we hold biases toward teams we can diligence personally and we have a major geographical advantage as one of the prominent NYC-based investors.
8. How do you size your positions? How many positions do you run?
Blockchain is a broad, nascent technology that is applicable to countless market verticals. I believe that diversification at this stage requires optimizing for a 25-50 position portfolio but I am not afraid to make conviction plays that can be many multiples of an average position size. Risk and reward metrics drive position sizing.
9. What are your average holding time period and portfolio turnover?
I do not have a systematic approach to holding period and portfolio turnover.
10. How do you manage the portfolio over time? Do you set price targets? When and how do you take profits?
I approach all investments with return-based objectives measured by the risk-reward profile of each deal. The focus is on analyzing success scenarios and the risks in reaching them. In blockchain, there are often endogenous and exogenous risks to each project which should be accounted for separately to determine whether they compound. The early blockchain growth opportunity is unique because you can target VC style returns but outcomes are not binary in all cases. Liquidity can be a feature of the asset class.
11. Risk management, what’s your philosophy?
I am not afraid to hold cash. The carrying cost of cash in crypto is low yet there is a huge upside to being able to take advantage of technical shocks. Most cryptoasset prices are off 50-70% for 2018 yet nothing has changed other than the regulatory outlook, sentiment and a dose of reality. Bitcoin, Ethereum, and the HODL10 index make for good benchmarks. My risk management philosophy is three-fold: (1) short-term risk mitigation strategy involves continuous portfolio monitoring that requires following investments closely and using liquidity as a feature (ii) medium-term where assets are used productively, for instance by operating validators on various networks to generate current income, gaining control of a significant share of each network over time (iii) long-term risk management includes an orientation toward asymmetric upside and diversification across networks and verticals.
12. When do you cut losses?
Generally speaking, I don’t let trades turn into investments, and importantly, steer clear of positions lacking a fundamental thesis. Correlation in crypto is extremely high so cutting losses occurs based on the macro outlook or facts uncovered during our continuous portfolio monitoring such as changes to the team, progress, technological trends or competitive landscape.
13. What’s your biggest home run and biggest loss? What were the lessons learned?
We’ve been investing in the space since Ethereum was released, but the landscape changes quickly and we’ve learned to look forward rather than backward when analyzing what we want to see in new projects. We try to eliminate our biases, learn by working closely with smart people and teams and remain flexible in our approach to investing and capturing value. Our network operations business, designed to use investment assets productively, is an exciting example of how we intend to capture value in proof-of-stake systems. We spend a lot of time analyzing why or how things may go wrong so we can learn from mistakes. Here is an example from the Synereo schism.
14. How much of an investment portfolio should be allocated to PRE-ICO investments?
The term ICO is phasing out at least in certain geographies. I’ve always been at the forefront of determining the correct way to invest in decentralized networks; whether equity, convertible instruments, options. All can be viable early-stage legal technology. I choose to split capital between early-stage projects and later-stage rounds. I also invest in off-the-run liquid digital assets.
15. How much should be in small caps? and, How do you manage the liquidity?
For liquid assets I manage liquidity by monitoring asset volumes, maximizing exchange optionality and having a network of OTC traders.
16. What secular trends do you see in Crypto?
The market is quickly maturing and we’ll start to see it further fragment into verticals and use cases as competition arises. Currently, smart contracting platforms are hyperfocused on scalability. There are many competing consensus algorithms under development and layer 2 settlement may allow for instant settlement despite slower block production on the root chains. In 2018 we will see securities tokens play a bigger role but given the limitations, some of the incentive mechanisms will be obsolesced such as utilizing cryptocurrency to harness and power open source development and adoption. For this reason, we see utility tokens continuing to play a major role in the ecosystem (comments from the SEC suggest that Ether is not a security). Security tokens are best suited for introducing liquidity to private securities and real-world assets. We’re learning from early consumer proximate use cases but I don’t think mainstream adoption will occur until more time is spent on the Dapp layer to greatly improve user experience and security. Generally, investors shy away from non-infrastructure projects because they think more value will accrue to infrastructure components. We take a more balanced approach with intent to learn or follow closely more consumer proximate applications and use cases.
17. What risks do you see?
Macro risks include regulation, headlines, and slower than expected development progress. You can not simply throw money at the real problems being solved. Project-specific risks include unclear comparables, competition, and reliance on other undeveloped infrastructure components. In the early days, new projects were supported through recycled capital gains but in 2018 we’re seeing real money enter the space and losses will occur. While there is growing underlying long-term support to ride out a downturn, it is important newcomers aren’t badly impaired. In my opinion, the biggest difference between the internet bubble and blockchain is that open source code provides a template for future iterations, so the pace of innovation will be faster.
18. Where would you recommend a newbie start? How should a newbie protect himself ? what should they be aware of?
I recommend picking an industry you know well, maybe a current profession and trying to learn about all the blockchain projects targeting that vertical. Learn about how smart contracts work. Brainstorm why Bitcoin may be valuable. Divorce yourself from the complexity of the underlying technology and think about the business models. Why are Storj, Sia, and Filecoin all focused on disrupting Amazon Web Services? Two simple reasons are cost and trust. A lot of adoption and advancement will come from within existing companies and industries.
19. Let’s go back to your portfolio. What are your current favorite positions?
I’m excited about smart contract platforms, self-sovereign servers, oracles, resource and data marketplaces, prediction markets, crypto finance, privileged privacy and encryption, non-fungible tokens and key infrastructures such as crypto banking and exchange.
20. Any favorite shorts or avoids? Names?
There are thousands of cryptocurrencies listed on Coinmarketcap and there are a lot of losers. It is a nascent market. On balance I would say there are only about 25-50 projects building interesting infrastructure or application business models leveraging tokens. I am less interested in pure volatile cryptocurrencies trying to be a better bitcoin but developments in anonymity are interesting. We haven’t invested in businesses building permissioned blockchains — we believe the value capture will be realized internally through efficiency gain vs. externally. Historically we determined it too risky to short individual names. There is counterparty risk associated with borrowing, liquidity can be thin and alt-coins as they are described can move 200%+ in a few days. The market relies on project updates instead of periodic 10-K’s so progress is fluid and fundamental metrics can be analyzed directly from data on the blockchain.
21. What will drive returns for the space in H2 2018?
The media. I focus on a longer duration so it is hard to time-box expectations.
Disclaimer: This article should not be used as investment or financial trading advice. Please conduct careful due diligence before investing in any digital asset.