#19 - Blockchain Investing - Olaf Carlson-Wee and Aaron Harris

**Craig Cannon** (0:00)
Hey, this is Craig Cannon, and you're listening to Y Combinator's podcast. Today's episode is with Aaron Harris, who's a partner of YC, and Olaf Carlson-Wee, who's the founder and CEO of Polychain Capital, a blockchain investing hedge fund.
Olaf was also the first employee at Coinbase, and he was part of our first employee series, which you can check out on the YC block. All right, here we go.

**Aaron Harris** (0:19)
Hi, my name's Aaron Harris. I'm a partner here at Y Combinator, and I spent a lot of time thinking about fintech and how technology is changing the way we use and move money, and how that plays into assets, banking systems, insurance systems, which all kind of comes together for a lot of people in cryptocurrency, which is obviously this new, not super new, but fairly new in the context of money and financial systems set of things. And I think there's a lot of misunderstanding about it, which is why I'm happy we're doing a bunch of podcasts talking to people who really get this stuff, because I have a ton to learn. So Olaf, I'm really super excited to talk to you about this, because you get it way better than I do.

**Olaf Carlson-Wee** (1:02)
Yeah, so thanks for having me. My name's Olaf Carlson-Wee. I'm the founder of Polychain Capital, which is the largest blockchain investing hedge fund in the world. Far before Polychain Capital, I found out about Bitcoin in the summer of 2011, and became extremely infatuated with this concept of digital assets. I decided to pen my undergraduate thesis on Bitcoin that year. I think this was probably one of the first academic works on cryptocurrency.
After that, I joined Coinbase as the first employee. Coinbase was actually a Y Combinator company, and is now raising money purportedly at over $1 billion valuation. I was at Coinbase for three and a half years, and during that time, I was the head of risk. I was also paid exclusively in Bitcoin. From day one? Day one for the entirety of my time there. I was paid exclusively in Bitcoin.
Times when that was a good decision and times when that was a bad decision, but I think net-net it was right.
And I left last summer to launch the Polychain Fund. So we launched with a little, around $4 million under management, and now we have about $200 million under management. We have backing from Union Square Ventures and Drees and Horowitz, Sequoia and Founders Fund, among others. So somewhat unusual LP base, and we can get into that a little bit.

**Aaron Harris** (2:30)
Are those funds functioning as straight LPs or are they investing in the GP?

**Olaf Carlson-Wee** (2:36)
They're straight LPs.

**Aaron Harris** (2:37)
Okay.
So, I worked for a hedge fund for a while, so I have a conception of how that looks in my head, the kind of things that you look at, but there are a lot of different kinds of hedge funds. There are macro hedge funds, there are long short funds, there are activist funds. What does it mean to be a hedge fund focused on the blockchain?

**Olaf Carlson-Wee** (2:54)
Yeah, so a lot of those strategies you just stated could all apply to cryptocurrency assets. Some of them are mechanically much more difficult. So for example, short positions in the space are difficult to achieve in a secure way. Also, for example, something as simple as margin trading can be hard to find for the right assets that you're trying to trade in.
For us, we're sort of what I would call fundamental investors in that we're long only with a long holding period. And I spend most of my time reading research papers about cryptocurrencies.

**Aaron Harris** (3:29)
How long of a holding period?

**Olaf Carlson-Wee** (3:31)
So it really depends on how fast things grow. So we are rebalancing the portfolio roughly every 90 days.
So the goal is to hold things that are good positions for years. But we may rebalance or sell down on those positions over time.

**Aaron Harris** (3:53)
Okay, so in terms of pace of movement, it kind of looks less like a hedge fund and more like I think how people would think about almost a mutual fund kind of thing, but I'm guessing hedge fund because it allows you a lot more flexibility in terms of what you're allowed to invest in and the strategies you can pursue.

**Olaf Carlson-Wee** (4:10)
Yeah, so the tricky thing was I knew in my head what I wanted to do as far as investing in these assets.
And that it actually looks a little bit like a venture investment in that you find things extremely early when they're still just a specification. So these protocol specifications or white papers are extremely detailed descriptions of exactly what a protocol will do. It's often very possible to understand a lot about what this will look like just from that specification. And I often feel comfortable investing if I meet the team and I read the specification and really like what they're doing. So that looks very much like a venture investment in that you're investing more on an idea than you are on proven data or numbers. But from there, these investments very quickly graduate into liquid markets. And so because these things are liquidly traded on an order book, unlike a venture firm, you really have to balance those positions. You can't just sort of wait for the IPO, so to speak.