Hash Power – Ep. 2 - Investing in Cryptocurrencies

**Patrick O'Shaughnessy** (0:05)
In episode one of Hash Power, we explored blockchains as a technology, how they work, why tokens, also known as cryptocurrencies, are an integral part of any blockchain, and how these new networks might change the world. In episode two, we spent time with the leading investors in the field. Like any frenzied asset class, there are countless cryptocurrency hedge funds popping up everywhere. But founders from three of the original firms, Polychain, Metastable, and Blocktower Capital, are our primary guides this week.
Once again, this episode is brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please visit fidelity.com.
As I speak, the total market cap of all cryptocurrencies is $136 billion. There are hundreds of tokens currently available, but Bitcoin and Ethereum still represent 75% of the total market. $136 billion sounds like a big number, but it's tiny relative to any other asset class, and I use that term with hesitation. To put it in perspective, that's exactly the same size as the market cap of IBM.
But IBM has more than $10 billion of earnings. Tokens have none. As you will hear, valuing tokens is a very hard exercise. I said it emphatically during the introduction to episode 1, but given that this is the investing episode, let me say it with even more emphasis. None of what you are about to hear is investment advice of any kind. Just as you shouldn't buy Apple stock because you love their products and hope to outperform the broad market, you shouldn't buy any cryptocurrencies without deep personal research and consideration. A big part of my goal with this episode is to introduce you to the players who are shaping the investment ecosystem and how the investing ecosystem with exchanges, trading and weird custody problems works in action. Collectively, our guests run hundreds of millions of dollars, likely now approaching a billion dollars, in pure play cryptocurrency investment strategies. While we do explore examples of how to think about individual tokens, these are not investment recommendations. Rather, this is an introduction to the various stages of cryptocurrency investing, from early stage white papers to full-fledged liquid tokens, and the strategies and skill sets being deployed by the pure play investors. Before we get into the investment specifics, I find it helpful to start with one example of why investors are interested in this space.
Ari Paul, the CIO of Blocktower Capital, was the first person to explain cryptocurrencies to me in depth, over a long lunch in Chicago that ended with my mouth hanging open. I began by asking Ari about his background and the source of his interest in cryptocurrencies.

**Ari Paul** (2:58)
I'll start with the background because it kind of illustrates why I got interested. I was a trader at Susquehanna International Group doing equity derivatives, commodities, bonds, forex, almost anything you can think of, even electricity forwards. Did that for a long time. Then I was a portfolio manager and risk manager at University of Chicago for the $8 billion endowment. I'd like to think of myself as a student of markets, and the most interesting aspect to me has been kind of behavioral finance and the economic side of things. How do we value assets? And not just how should we value them, but how does the market actually value assets?
I first heard of Bitcoin in 2011, and like most people, I dismissed it.
I didn't see the value right away. What really made me interested was in 2013, the price ran up to over $1,000 from just $1 not long before. And then the price crashed because there was the Mt. Gox theft, which was the failure of an exchange. And also, one of the big use cases at the time was Silk Road, which was an illicit marketplace, and Silk Road got taken down by the FBI. And a lot of people thought, okay, that's it for Bitcoin. That was its use. That was its purpose. And what was fascinating was the Bitcoin price did fall, but it found a floor that was in many hundreds of millions of dollars of value.
And a common idea among kind of students of markets like guys like George Soros are that when an asset collapses, when the fundamental story seems to be really challenged, when it should die and it doesn't die, that tells you something. It tells you at least that there's something to look at there. So post the 2013 crash, I became really interested and I tried to understand why do people value this thing in hundreds of millions of dollars? Is there real value here? And after kind of understanding a little bit of why this thing might be sound money, then the question becomes, well, what's it going to do to the banking system? How might it change society? What other use cases are there for this?