Cryptocurrency Hedge Funds: Two Different Schools of Thought

BlockTower Capital and PolyChain Capital are two of the most interesting crypto investment firms when it comes to the dichotomy of their philosophies. At such a highly speculative point in the cryptocurrency market it is extremely difficult to make concrete predictions about the price potential. This is mainly due to the fact that the world has never seen a market or a technology like this before.

BlockTower Capital’s CIO, Ari Paul, commented in a podcast interview while describing himself as a ‘traditional student of the market.’ This kind of mentality is derived from the school of thought created by traditional investor types such as Warren Buffett or George Soros. Ari’s firm is concerned with traditional investing strategies such as ‘evaluating behavioral economics.’ For example, in 2013 the price of Bitcoin ran up and eventually crashed due to the failure of the Mt. Gox Exchange & the Silk Road. After the course of these events, the price of Bitcoin crashed. As a result, most thought the technology had served its purpose and was ultimately rendered useless.

However, the price eventually bottomed. One fundamental idea of this school of thought is when an asset collapses and the fundamental story is challenged, there is something to look at. In other words, when an asset should die but it doesn’t, that is when investing interest should peak, or at least should become a position worth watching. This philosophy continues with the notion that markets are efficient most of the time. Milton Friedman’s concept that ‘there is no thing as a free lunch,’ is also included. Therefore, other people always have better information, and if it looks too good to be true, it usually is.

Another question which is emphasized at BlockTower Capital is, ‘how do you build structural sustainable advantages, and how do you build a structure that will consistently monetize whatever edges are in the market?’ At early stages of cryptocurrency development this becomes somewhat difficult. Currently, BlockTower Capital has said that they spend half of their time focusing solely on security. This is because storing cryptocurrency for clients at a large scale still has its difficulties.

When the dust settles, BlockTower Capital urges investors to be enthusiastic about the value created by cryptocurrency. But a bet on cryptocurrency is no more than buying Yahoo in the 90s was a bet on the internet. Most of the tech giants in the 90s died. Overall, BlockTower Capital aims to forge a portfolio playbook that is successful in a neutral market and a bear market.

Olaf Carlson-Wee, founder & CEO of PolyChain Capital, is more interested in early stage blockchain investment strategies. This approach is a riskier technique but it also has the potential for greater returns. PolyChain Capital is more related to the tech side of crypto investing rather than investing from a traditional analytical perspective. PolyChain aims to make the majority of its money from early projects. This makes them part venture capitalists,  underwriters, as well as fundamental analysts. As a result of their success, they play an important role in fostering and funding beginning cryptocurrency projects.

Trying to apply traditional investing techniques to cryptocurrency is difficult. For example, a traditional question investors will ask is ‘what are the future revenues of Ethereum?’ Well, Ethereum does not have revenues, so i’ts not really a currency. From the perspective of PolyChain, the name currency is somewhat intellectually lazy because these projects are not currencies. They are, in essence, more similar to commodities such as gold. However, the use of gold in jewelry and other applications is relatively small in comparison to gold’s actual market value. So in PolyChain’s opinion, Ethereum is a better investment than gold because it can act as a store of wealth as well as a smart contract executer. So how can investors value it objectively?

PolyChain Capital approaches investing as native tech enthusiasts. Additionally, PolyChain will examine initial project blueprints. While observing the projects, they will evaluate the source code and point out potential errors in the prototype’s source code.

Another strategy PolyChain uses to evaluate cryptocurrencies is to think about them like services such as Uber. PolyChain defines the life cycle of a coin through three different stages of buying and adoption. First stage is a very early blueprint and vision of the project with little code actually written. These projects have the potential for massive gains while taking on high levels of risk. The second stage is a contractual agreement for tokens, once they are launched on a blockchain the early investors get their reserved tokens. The third stage is when the tokens become listed on prominent exchanges with order books. Once a cryptocurrency is liquid, it is ostensibly in the final stage unless the project fails or is delisted. The absolute earliest stage consists of a myriad of protocol specifications. Furthermore, from an investing perspective, it is hard to parse out what is technologically possible. Overall, one of the main objectives of PolyChain is to invest and help entrepreneurs possess the required resources needed to launch a successful and benevolent blockchain project. This is ultimately their edge, and the most productive investments come with real breakthrough technologies which are designed to thrive in the long-term.

Both perspectives should be considered when determining a crypto investment. After analyzing both schools of thought, a common conclusion is drawn; These technologies will take a long time to develop, and the collective implementation strongly relies on the dedication of the users. The cryptocurrency community must question ‘what is missing from the vision?’ And the answer is most likely infrastructure, protocol layer components, and scalability. Many argue that there are other technological developments which will improve scalability, (such as the lightning network), Unfortunately, these developments are yet to be implemented with success.

Disclaimer: I am not a financial advisor. This is not financial advice. Please do your research independently and make object decisions. This article is intended to educate readers on two different investing approaches to blockchain technology. I am invested in various cryptocurrencies. I am not invested in BlockTower Capital or PolyChain Capital, and I have never had relations with them. A majority of the information presented in the article is derived from various podcast interviews with Olaf Carlson-Wee, founder and CEO of PolyChain Capital, and Ari Paul, CIO of BlockTower Capital. If you are interested in more material these interviews are available here at http://investorfieldguide.com/hashpower/