This post was last updated on July 8th, 2019 at 06:31 pm
A deep dive into the topic of crypto hedge funds generally, and Multicoin Capital, specifically.
On today’s show, we are joined by Kyle Samani.
Kyle is the co-founder of Multicoin Capital, an Austin, Texas-based crypto hedge fund with $10 million under management and currently raising a $100 million fund.
This is a very timely discussion, given that there are now over 124 registered crypto hedge funds, most of which were created this year.
Topics Discussed In This Episode
- How Multicoin Capital differentiates themselves from other funds
- Kyle’s reaction to being called a “coin picker”
- Why, when fundraising, Kyle tells investors that bitcoin is a bubble
- Why some crypto hedge funds, but not others, can hold their own tokens and aren’t required to delegate custodianship to third party services
- Multicoin Capital’s complex custodial system, and why they believe there’s no better way to hold crypto assets
- Why the worst part of Kyle’s job is trade execution
- Kyle’s trading bot
- Why the entire VC model is predicated on lack of liquidity, and how that factors into their investment thesis
- What Kyle envies about traditional hedge funds, and What these funds envy about him
- Where Kyle competes against Wall Street and where he’s totally unwilling to compete
Links Relevant To This Episode
- Cryptoinvestor Weekly Newsletter
- Clay Collins
- Kyle Samani
- Multicoin Capital
- The Blockchain Token Velocity Problem
- Pristine Software Company
- Rocket League
- Naval Ravikant
- Naval’s Tweet
- So You Want to Start a Hedge Fund by Ted Seides
- Blockchains: A New Social Order
- Token Summit
- Polychain Capital
- Shamir’s Secret Sharing
Clay Collins: My guest today is Kyle Samani. Kyle is a co-founder of Multicoin Capital an Austin, Texas-based crypto hedge fund with 10 million under management and currently raising a 100-million-dollar fund. Today’s conversation is a deep-dive into the topic of crypto hedge funds generally and Kyle’s hedge fund Multicoin Capital, specifically. This is a timely discussion given that there are now over 124 registered crypto hedge funds, most of which were created this year.
During this episode we discuss one, how Multicoin Capital differentiates themselves from most crypto hedge funds. Two, Kyle’s reaction to being called a coin-picker. Three, why when fundraising, Kyle tells investors that Bitcoin is a bubble. Four, why some crypto hedge funds but not others can hold their own tokens and aren’t required to delegate custodianship to third-party services. Five, Multicoin’s complex custodial system and why he believes there’s no better way to hold crypto assets. Six, why the worst part of his job is actually executing trades. even, why they wrote a trading bot. Eight, why the entire VC model is predicated on lack of liquidity and how that factors into their investment thesis. Nine, what he envies about traditional hedge funds and what these funds envy about him. And ten, where and how he can compete against Wall Street and where he’s totally unwilling to compete. He also reveals his highest conviction investment to-date and the two-step process he uses to decide what to invest in. Please enjoy my conversation with Kyle Samani.
Clay Collins: Kyle, let’s start off with your story. How did you get into cryptocurrencies and cryptocurrency investing?
Kyle Samani: I started my last company about four years ago. Actually a couple steps further back, so I’m an engineer by background. I’ve been programming since I was about 10 years old. I actually studied finance at NYU thinking I wanted to go work on Wall Street. Realized that was not my cup of tea. After college I ended up working at a health IT company, this was in 2010. I spent a couple years there, learned a lot, got frustrated and quit. Started my first company when I was 23, it was called Pristine. That was in May of 2013.
Pristine built software for Google Glass, for use by surgeons. That was going rather well until Google killed Glass at which point I had a lot of problems. Pivoted the company, eventually the company ended up being sold and I found myself unemployed, that was January, 2016. For about two months in 2016 I played video games, I very much enjoyed my time off.
Clay Collins: World of Warcraft?
Kyle Samani: A game called Rocket League, it’s a PS4 game. It’s pretty cool actually, it’s car soccer, it’s giant, indoor car soccer. Anyways, I still play, that’s how I unwind after a long day of crypto. But January of 2016, I found myself unemployed. In March of 2016, I discovered this thing called Ethereum and I was just like “Wow, this is the most compelling piece of technology I’ve ever seen.” I’ve been reading about technology, thinking about technology, building technology, thinking about building technology businesses, like that’s what I do.
And that’s all I’ve done really for the last 15 years and I just thought Ethereum was by far the most compelling thing I’d ever seen. Starting in March of 2016 I spent a few months diving really deep into Bitcoin and Ethereum, really into the tech stuff, understanding the architecture of each system, why they were designed the way they were. The design decisions that were made, what were the trade offs, what were the debates? What was kind of the path dependency that got us here?
I spent a few months really diving deep into technology, became comfortable with it and started investing in Ethereum in June/July of 2016. Conveniently right as Ethereum took a dip because the DOW crisis. And then in the fall I was like “Oh, there’s other things they’re building on top of Ethereum, ah ah.” I started getting into Augur pretty early. I started mining Zcash from day one. I remember the first time I read about Zcash my brain like short-circuited. I was like a zero-knowledge who?
And so got comfortable with those technologies and then did a few more in the spring. By the time May rolled around I decided I needed to do this professionally. So made the decision in May to launch a fund and the fund went live on August 1st. My cofounder, who’s name is Tushar Jain, he’s my best friend. We met at NYU, nine years ago and yeah we’ve been rockin’ and rollin’ ever since.
Clay Collins: That’s a cool story. So just to back up for a second, were you mining Zcash literally on day one? Were you selling your coins for like a Bitcoin each or whatever?
Kyle Samani: Oh no, I wasn’t selling them.
Clay Collins: Yeah, okay.
Kyle Samani: When I looked at Zcash, I didn’t really believe it at the time, I didn’t really care, I was just like I’m going to mine this ’cause if this works, I’m going to get so much leverage on my dollars by putting it in hardware instead of buying the coin directly, so that’s what I did.
Clay Collins: Did you come into finance through crypto or were you already involved in kind of the traditional financial world prior to starting a fund?
Kyle Samani: I have never worked in finance professionally, I went to NYU and studied finance. I have a lot of friends who have been slaves to banks on Wall Street who’ve been traders who have worked at hedge funds, some of them now are portfolio managers at hedge funds. Some of them have started their own little hedge funds, trading equities primarily. I’ve got lots of friends in that world, I understand that world and kind of potentially how it works. I’ve never actually worked in finance until I guess technically now I’m in finance.
Kyle Samani: Though that’s kind of debatable.
Clay Collins: Hey, this is Clay and I’m going to take a second to explain what a hedge fund is, in case you don’t know. A hedge fund is a private investment company that really gets very little oversight from regulatory bodies, they’re not heavily regulated. And in many countries only high net-worth individuals or accredited investors can invest in these hedge funds. Hedge funds are not limited to just buying stocks and bonds, like a mutual fund might be. But instead hedge funds can pursue really unconventional nd opportunistic means to deliver returns to investors. For example, hedge funds have been known to lease oil tankers to store millions of barrels of crude oil, buy property, or arrange takeovers of public companies. They’ve got a lot of means at their disposal to deliver returns to their investors and when they see opportunity to make money, they invest.
It’s interesting that there seems to be this generation of people who are coming into finance through cryptocurrency, right, getting involved in economics to reading Mises, doing all kinds of things and contributing to this new financial infrastructure because they saw the opportunity to actually create a change, right? Wherein perhaps they might have been otherwise excluded from that world or just would have been completely bored by it without the opportunities that exist right now. Do you think you would have gone into the financial services space if watching technology did not exist?
Kyle Samani: That seems rather unlikely. I got into this space because since early college, call it 2008, 2009 I’d been reading about companies raising VC money, and like building tech companies and you know I did one, I learned a lot but I’ve kind of always in my head thought I wanted to be a VC, that seemed like the coolest job in the world to me and I’ve always wanted to be one. I have full-well known that I am like not qualified to raise venture funds, although I like to think that I am,
I like fully recognize that no one in their right mind would give me lots of money to do that. And so I kind of wrote off the concept, I never really seriously pursued it for the last year-and-a-half. I was unemployed right, like I was trading crypto in my living room and I was unemployed. My parents were like what are you doing? And so I didn’t really consider that I could ever go you know be an asset manager of any form and in the spring I realized that this requires a whole new kind of asset manager firm to do the kind of strategy I want to do and that literally no one has done before and when I realized no one had done this before that resets the benchmark and that’s my opportunity as a relatively young guy to get into this and at least have a shot at making a name for myself. When I realized that the bar is nothing, there’s no pedigree required basically, that’s my shot to jump in.
Clay Collins: Naval Ravikant has this Tweet, he said in 20th of March, “Funds investing in crypto-tokens will need to review source code, handle complex custody and trading skills, a brand new kind of player.” With that in mind and it seems to be somewhat consistent with what you just said, how does one start a hedge fund from scratch? I know Ted Seides has a book called, So You Want to Start a Hedge Fund, but how do you go from maybe mining Zcash and creating crypto-tokens to starting a hedge fund from scratch? Can you describe that journey for us?
Kyle Samani: Yeah, so it really depends on your strategies. So we have one strategy and ours is rather unique, I don’t know many other funds that have I’d say our strategy. We borrow some ideas from venture funds and some ideas from hedge funds in how we look at things. In general if you want to start a crypto hedge fund, conceptually it’s not very difficult. It looks a lot like starting a regular hedge fund and then you’ve just got some additional headache with things like custody and those kinds of things.
But it’s really not terribly difficult it’s just a little bit more annoying, there’s a lot more bullshit you have to deal with. As far as the SCC is concerned we’re a hedge fund, we’re an LPGP structure.
Clay Collins: Hey, so Kyle just said that they’re an LPGP structure and I want to explain what that is. An LPGP structure refers to the fact that Multicoin Capital, in this case, has limited partners known as LPs and general partners known as GPs. Limited partners are the folks who invest in the fund. And general partners are the folks who run the fund. Okay, back to Kyle’s explanation of his legal docs.
Kyle Samani: Our legal docs look for the most part like a hedge fund’s legal docs, with the part where it says these are token things and no one really knows what they are and it’s magical internet money. There’s those disclaimers, but then besides those it’s basically hedge fund docs. It’s not terribly complicated, we you know learned a lot by kind of going through, like neither Tushar or I had had any experience the first time around with like all the nitty-gritty that goes into PPM and the LPA, so we learned, but like nothing that’s not standard.
Clay Collins: Hey, me again, so LPA stands for Limited Partnership Agreement, which is the operating agreement for the fund that sets forth the agreement and rights of general partners who run the fund, like I said before, and limited partners who invest in the fund. PPM stands for private placement memorandum. And this is the disclosure document that investors receive when they’re about to invest in a fund and it allows them to make an informed decision regarding an investment in that fund. It’s basically a list of disclosures and essentially tells them what they’re getting into.
Kyle Samani: The better area probably to focus on in an interview would be like how do we think about strategy and investments. But the actual logistics of setting it up is like, if you don’t know enough crypto to figure it out then you’re not qualified to run one. I think that’s probably a fair bar.
Clay Collins: The question here is kind of about regulatory compliance. Do you just file the docs and then the SCC reviews them and gives a stamp of approval and then you’re in business, you’re a hedge fund? Or what is the regulatory component of the startup phase look like?
Kyle Samani: I’m not entirely sure of the details of what the SCC reviews or doesn’t. We have filed our Form Ds, they’ve been processed. The SCC has I think put a stamp on them and said, you’re good to go. Our lawyers logistically did that and then like we’re exempt, we’re below I think 150 million, I think is the threshold, we’re exempt from any additional rigor. But like basically our lawyers filed the paperwork and said, you’re good to go.
Clay Collins: How do you think institutions, pensions, large family offices, multi-family offices, how do you think they should think about investing in crypto and perhaps even diversifying their exposure to crypto?
Kyle Samani: I think you should invest in crypto if you actually believe the thesis and if you don’t believe in crypto then you shouldn’t invest in it. I am really stunned about the number of investors I interact with who for example, I’m like “Well we invest mostly in liquid tokens,” and they’re like, so you’re just a coin-picker? And I’m like yes, I’m running a liquid-venture portfolio. I’m a liquid picker. They think to themselves, well I can coin pick better than this guy because I’m a good, but they don’t really ever take the steps of like saying okay, what really are these blockchain things and how does actually the money system for the banks work and like what are the problems with it and what are all the other areas in the world in which you can use these blockchain things to like rethink large swaths of commerce and until you really are bought into that vision it can fundamentally be different and dramatically better and more efficient, it doesn’t make sense to invest.
Investors need to spend way more time to actually get bought into that and once you get bought into that it becomes much easier to invest. Then you’re not worried about the volatility. My entire net worth is in Multicoin, in our fund, excluding my condo and I have LPs ask me all the time, they say, you lost 20% of your net worth yesterday. What’s wrong with you? And I say, but I’m not worried about my net worth tomorrow, I’m worried about my net worth in five years.
Clay Collins: And you’re up like whatever percent in the last 12 months, right, it’s not about yesterday.
Kyle Samani: Yeah, so I understand short opportunity cost of capital and it’s a serious part of how we think about managing the portfolio, but saying it’s volatile therefore I have to reduce my exposure, I look at it the other way around and say, it’s volatile, therefore I’m going to beat everyone in and like once all the other suckers realize the dream two years after me they can buy from me way at the top.
My recommendation is to really understand it, I don’t mean to be self-serving but like I wrote a blog post a few weeks ago on the Multicoin Blog, it’s called, Blockchains: A New Social Order It’s the best thing I have seen on the internet that tries to walk through the thesis for crypto in aggregate. Assuming no prior knowledge and it’s not technical, and it really tries to like open your eyes to the huge opportunities beyond just Bitcoin.
Clay Collins: Yeah, I read it, it’s a great article, we’ll link to it in the show notes. You’ve, I’m sure, been involved in a number of pitch meetings while raising your fund, what kind of questions do people ask? Like bring us into that room, is a lot of that discussion like Blockchain 101? Are they asking about custodianship issues or is it more about your thesis? Or what kind of questions have you expected people to ask that do get asked and what has surprised you about the fundraising process?
Kyle Samani: It’s evolving. Our LP base is evolving so our first 10 million was mostly tech money and crypto money and now it’s starting to hit traditional, family offices. And so the kinds of questions we’re getting are evolving. Quite frankly the people I talk to have more money and are generally less sophisticated about crypto and so they generally ask less sophisticated questions. That’s like a normal function, I don’t mean to reflect poorly on them, it’s just natural state of how it would evolve. First question, is Bitcoin a bubble?
And the answer, absolutely it’s a bubble. This thing is going to get huge and then it’s going to pop, but we’re not close to the top. There are so many people, like institutions that they’re current allocation is zero. I know so many people who work on Wall Street that their current allocation is zero. I’m not really worried that we’re close to the top, barring some sort of exogenous shock to the system which there are legitimate exogenous shocks that could happen in the next twelve months, but assuming none of those happen we’re not even close to the top because there’s more money left to be the next marginal buyer.
Clay Collins: The dotcom bubble was in multiple trillions, right. Like we’re just talking about, hundreds-of-billions, at this point.
Absolutely, even a lot of the numbers that we have today are inflated because I think about 20% of total Bitcoin in existence are lost. Right, so even the Bitcoin number, you can divide, like multiply by 80% because that does not enter the market ever again.
Clay Collins: And with Bitcoin cash it’s like even more because there’s so many people that just haven’t claimed their Bitcoin cash tokens, right. In these kinds of forks and air drops and whatever, it’s just, no one has them.
Kyle Samani: Exactly. I wouldn’t read into the numbers too much. We’re really not close to the top yet. Some people ask about custodianship and we go through that spiel. The reality is most of the people who ask about it, they know to ask but they don’t really know what our answer means and I’m having to walk through you know how we handle it. I think we have a pretty rigorous process. And then like strategy kind of comes up. I do think we stand out in terms of our strategy.
Clay Collins: Let’s talk about custodianship for just a second. I was at Token Summit and I believe the guy from Polychain Capital was talking about how they can’t hold their own tokens so they need to use custodial services. One is that true? Can crypto hedge funds not hold their own tokens and if that’s not true, how do you think about custodianship, how do you answer that question when people ask about it?
Kyle Samani: If you’re under 150 million then you can self-custody, once you’re over 150 you have to custody elsewhere. I know Polychain has, I think they’re the only fund over 150, in fact I’m pretty sure they are the only fund over 150. They do have this problem.
Clay Collins: Hey, I’m going to step in here, and provide a little context on this part of the conversation. Here’s the background. Polychain Capital is perhaps the largest crypto hedge fund, in the United States at least, with over 200 million under management. Because they have this much under management they’re not allowed to self-custody, which means that they can’t hold their own crypto assets. A third-party custodian, like Coinbase or Gemini, has to hold their crypto assets or tokens for them.
Kyle Samani: I don’t know what Polychain is doing or not doing, so I can’t comment specifically on what they’re doing. In terms of what we’re doing, so we do self-custody today and most of the funds I know are doing self custody. If you need access to your liquid pool of capital, which we do, we’re the only fund I know of that’s built that has engineers and data scientists on staff and we are now beta testing a multi-storage, multi-protocol, multi-signature, cold-storage system.
What this means in practice is we have built a system that the system runs across three different computers. The one is the computer, the online computer, no private keys are stored on this computer. This computer is used purely, it reads all the blockchains, it generates transactions. On that computer the inputs basically are create new transaction, from address, to address, amount of money being sent and choose the type of asset, so Bitcoin or Ethereum or Zcash or Monero or whatever. That computer just does that, it generates a whole bunch of transactions.
Then exports all of those as a QR code. So we take a picture of that QR code on the offline computer. On the offline computer we have a copy of all the private keys, the private keys are Shamir Sharded, this is a thing called Shamir’s Secret Sharing which is based on pretty simple polynomial math but it allows us to take every private key, break it up into pieces, which Tushar and I each share a piece as well as a third person who we don’t disclose who this person is, publicly, but we have three shards, you need two of three to sign a transaction, we sign those transactions, then we export all in bulk, all basically on one screen.
And then we export these signed transactions via QR code, it goes to a second offline computer. On the second offline computer we then verify that all the transactions are what we think they are, this step exists because we assume our engineers in house are trying to steal the money and change the destination address. We verify that and then the third step is you QR code it back to the online computer and then broadcast from there. If you’re going to fundamentally do custodianship, like you have to be doing this process.
There’s ways to automate parts and pieces in here and we are working on making that better, but like that is the process. There’s just no better way than, conceptually what we’re doing. There’s fundamentally three ways to loose your keys, or to loose the money. One is to literally loose the keys and like the obvious solution there is you have many copies of the keys. And store them in different mediums and different formats and we store our backups on multiple, physical kinds of media in multiple safety deposit boxes in private vaults in multiple cities around the country.
The second way you can loose your money is if someone gets access to your private keys. The way you protect against that is you never let them touch the internet and the private keys themselves are encrypted at all times, they’re never existing in a decrypted state. And then the third attack vector is you get tricked into sending the money to the wrong address.
That’s where that audit computer’s for, that second offline computer is to make sure that we are in fact sending the money where we think we’re sending it. And by the way we are going to open source all of that in Q1 or Q2 of next year. We’re beta testing it right now.
Clay Collins: How do you think about executing large block trades whether you’re buying or selling, if you’re buying enough of some tokens you can really move the market in a way that isn’t good for you. And when you have a pretty extensive process around placing orders that involves three people and sharding and offline and online computers and all that, is it pretty cumbersome for you guys to trade?
Kyle Samani: Trading is miserable, yes. It’s funny I am now a money manager and the worst part of my job is actually managing the money. It’s just a real pain in the ass. We have a whole bunker system and it’s setup and like it’s pretty miserable to do. Believe it or not before we had our own system was worse. I know some other funds are more willing to keep parts of their portfolio on hot-wallets, which basically means they’re leaving their money on an exchange. Hopefully they’re not leaving all of their money on exchanges, but certainly I know it’s not uncommon to do that. We really don’t do that. I can’t fathom sending an email to my LPs saying, “Hey, so you know we were up like a lot, but then we lost all of it.” I just can’t mentally fathom doing that, so we really try to minimize counterparty risk by keeping as little money on exchanges as we can at any given point in time.
Clay Collins: With regards to large block trades, do those need to be executed, over the course of several days? You like dollar-cost average in-and-out of positions? Or what do you do with huge trades that you think have the potential to move the market?
Kyle Samani: Yeah, so whenever we do, you know a lot of the tokens we like to buy into liquidity is challenging, so yeah we have to cost/average in, there’s just no way around it. We have written ourselves a little trading bot that does just that. It hooks up to the exchanges, our little trading bot cannot withdraw, it can only trade. Literally we don’t have API access on the exchanges to accommodate programmatic withdrawals. We use it to cost/average in so we can set it, you know we set a number of parameters on there.
Things like, so how much slippage are we willing to accept in one trade? Over what period of time do we want the whole system to run? What’s the total amount of like, what are the band of prices we’re willing to trade in, like if the thing jumps 25%, up or down, do we want to just like stop and alert ourselves that hey, the price moved? We have a whole bunch of rules we can, parameters we can set on our trading bot and we use that you know very aggressively to manage the money. There’s just no way around it, the other thing we do, OTC wherever possible. Both with OTC desks as well as often times we’ll just buy tokens directly from the teams. Most of the teams have a treasury balance of their own tokens and we often times just buy them directly from the team.
Clay Collins: Okay, I got a little background here. When Kyle says that they do OTC whenever possible it means that rather than buying crypto assets on open exchanges where the price can fluctuate dramatically they prefer to do OTC trades. OTC stands for over the counter, and OTC trades usually involve directly communicating with a dealer via phone or email and setting upfront the cost of the entire trade. This is smart because when large orders are placed on open exchanges the order itself can dramatically impact the price in a way that the investor or trader does not want. By pre-agreeing to a price for the entire order you can prevent negative fluctuations and unwanted volatility.
Right, and that way the price is set, you know what the whole thing is going to cost and then you just call a person up and you get the deal done, is that the advantage of OTC there?
Kyle Samani: Bingo.
Clay Collins: Okay, so let’s talk a little bit about strategy right, there’s a variety of strategies that can exist here. There’s sort of passive indexes, there’s a lot of people that are buying pre-ICO, with huge discounts in flipping. There’s a variety of things you could be doing here. What are you guys doing and what’s the strategy behind it?
Kyle Samani: Our thesis is that crypto is a fundamentally new kind of capital market. We have never before had high-risk, high-reward, early-stage technology investing, that’s liquid. And liquidity changes everything about portfolio construction when you think about high-risk, high-reward investing. The entire kind of VC model is predicated on a lack of liquidity. Eight or 10 year lockup, obviously because the other assets are liquid, and therefore when you’re a VC basically once you invest, basically the money’s gone and hopefully you get it back one day. It’s extremely risky, all your outcomes are very binary. You have no control over the exit price, you can’t change your mind after the fact. Right and so when you think about portfolio construction in venture capital you basically need to be investing in at least 20 if not 30 companies out of a portfolio to try just thinking about risk and basically the goal is to catch a winner.
Clay Collins: And you’ve got like 10 to 12 year lockups and you know you can’t get your money out and all that stuff, yeah.
Kyle Samani: Right, and so that’s one problem and there’s a whole bunch of reasons why that model is designed the way it is. But here it’s liquid and so the first thing LPs are going to say is why would commit to a 10 year lockup, if the assets are liquid? That’s crazy. Even though you can try and be pedantic and say, well you just don’t know what you’re doing and we’re the tech guys and we really know what we’re doing and just like we need a long lockup. Maybe you’ll convince people to give you money on those terms, I haven’t tried to do that, I’m not sure who would agree to those terms, but hey, you’re welcome to try.
We have a one-year lockup on our fund and it was just because we want investors who are willing to commit given the volatility. But like no one would have a one-year lockup knowing we have month-to-month MABs and that we will be judged on our performance and our LPs expect returns in a reasonable time period. It’s kind of hard to think purely like a VC, it’s actually counterproductive.
We think of ourselves as managing a liquid venture portfolio. And so our investment and how we kind of handle that in our investment process is we have a unique, two-step investment process. Step one is do we want to own the asset at all? And this is a function of venture style thinking. What’s the problem, what’s the solution, how does the technology work, what are the tech experience of the team? If it works how big can it get? Those kinds of things, we aim for 100x in everything we invest in.
Obviously we will not 100x everything but we need to see a return on that order of magnitude to justify the risk because the things we’re investing in are very risky. That’s kind of step one and then step two of our investment process is okay, we’ve got this bucket of about 20 to 25 of these things that we think, or you know if they work as advertised could become very large. From there then we basically say okay, well of these 20 to 25 things, what do we want to be overweight, versus underweight today? And this is kind of thinking with a hedge fund hat on, thinking opportunity cost of capital.
There are certain assets in our portfolio that we’re overweight on today, there are certain assets that although we are very bullish on in the long run, our allocation today is actually zero because we don’t believe there’s any short-term price catalyst. That’s how we think about managing a liquid venture portfolio.
Clay Collins: What do you think is easier and harder about what you’re doing, you know versus a traditional hedge fund? Obviously trading is harder, what other things might be harder and easier? When you sit down and you talk with someone from Wall Street or a hedge fund manager where are they jealous and where are you envious?
Kyle Samani: Yeah, so I’m envious of all the infrastructure they have to do things. For us hiring a trader, like right now we’re like debating do we hire a trader and if we do, like the amount of security implications that has. Like we have to structure the system so the guy can’t run off with all the money. That’s just a big problem that like is not, no hedge fund manager is like, “Oh yeah, my trader’s are going to run off with all these Apple stock certificates.” No one thinks that.
I’m just generally envious of the entire financial infrastructure that traditional hedge funds have. So prime brokerage, leverage, shorting, all that stuff, right, like is all in fund administration. Like reports, all that stuff is all totally easier. Price availability, nothing is standardized. I don’t have any tools that really work. So I’m envious of that stuff. They’re envious of, the obvious one is returns and I would say like I can basically be, I can hae 1/10th of the IQ of a guy trading equities and I’ll probably out perform him just because I’m an exponential asset class that is going to change the world. And if you’re just trading equities in a very efficient market, good luck outperforming the exponential thing that’s going to change the world. In that sense I have it easier, but I just have a new set of problems. I think where my job becomes just different is actually evaluation, both technical/technology, but also how does value accrue? Value will accrue to these token things in a very different way than accrues to equities.
There are no revenues or expenses or even like we’re buying currencies that are priced against other currencies and so figuring out demand for currencies and the willingness of people to hold the currency is just a very different form of thinking. And then like how we get involved and actually generate real alphas, so I work with, right like if you’re at a hedge fund and you’re invested in like, I won’t use Apple as an example that’s too extreme, but if you’re invested in a company and over 300 of the S&P 500, you might get SCC on the phone or some guy from investor relations to ask questions.
But you’re not really value accrued in any way, you’re just a guy on the sidelines who demands returns. I get on the phone, I had a phone call this morning with one our investments and we spent about an hour on the phone with them and probably 75% of the phone call was them telling me their problems and thus brainstorming on how I could help them solve their problems.
Clay Collins: Oh nice, so there is some of that VC value-add, service business approach to how you guys do investing and you know relate to the companies in your portfolio?
Kyle Samani: Absolutely, I help them recruit, I help them with relationships around the ecosystem. I help them just think through some of the issues, right. There’s so many new issues in this space that there’s not a common knowledge solution to. One of the unique opportunities we have is we probably have the widest view of this ecosystem cause it’s our job to evaluate basically everything and then think about it. And so if you’re working on a team you know much more about your vertical in your market but you just haven’t seen as much stuff as we’ve seen. It’s just basically not possible and so there’s a lot of value we provide to our investment companies, our portfolios by being, wait a second, I know these other guys that had this problem right and either connecting them or just giving them the answer or whatever. There’s a lot of value we provide there as investors.
Clay Collins: When you think about 10 years out, you know 15 years out, which is forever in this space. How do you think about edge right? Let’s just imagine you can extrapolate the number of crypto hedge funds that exist 10 years out based on the trendline that exists right now, or maybe just for you guys, is edge around you know creating algorithmic models? Is it access to deal flow? Is it knowing things that other people don’t know? Is it your thesis? How do you think about your fund specifically and how you’re going to kind of accumulate an advantage over time?
Kyle Samani: Wall Street’s obviously getting into the space and so if look at anything that’s already in Wall Street’s know-how, I have no business competing on those fronts, so anything high frequency, anything algorithmic, anything that’s swing trading and anything with technical analysis, shorting the market and looking and figuring out can I trigger short squeeze to get out of a position? All that stuff, I have no business playing that game.
Even if I could do it today, the probability that I’ll be able to do it a year from now is pretty low. The market, it’s getting mature very quickly, I explicitly avoid all strategies that I know Wall Street has expertise in. So the place we choose to play is on the early stage side, the kind of VC end of the spectrum. We’ll have competition from other firms, that’s okay, the good thing is most of these deals are liquid and so we can get into them. We’re building a brand and I’m pretty sure we’ll have access to the best deals as we kind of continue to focus in this space and build our brand.
But even if we don’t being able to buy into them once they’re liquid, I think is totally fine. I use something like Augur as an example. Augur trades today somewhere between 150 million and 200 million, or valued. Augur is a prediction market system, there are some guys on Wall Street that might say that’s kind of interesting. The Augur team today is 13 guys in a garage. I’m not joking, they work in a garage. And how many hedge fund managers are comfortable going to visit their office and it’s like a hot, sweaty garage.
That’s the kind of, I just don’t think Wall Street is ever going to come do that. That’s totally normal for Silicon Valley, but it’s just not normal for Wall Street people and I just don’t think that that culture is going to be amenable to talking to early-stage teams like this and making investment decisions accordingly. I was one of those guys in the garage. I ran Pristine out of my living room.
We ran two different companies out of my living room for six months. My best friend ran his company out of the living room and I ran my company out of our living room. We had 10 people working out of our living room. We’re comfortable with that stuff, I don’t think Wall Street ever will be. We’ll have a sustained edge there and then on top of that you build the networks, the relationships, the brand, we are building very significant technology infrastructure in house, again, we engineers and data scientists on board, we’re not just building custodianship solutions, we’re also building solutions for analytics on the blockchains, there’s enormous opportunity to get real insight into how these things are being used out in the real world.
You know there’s a number of teams now working on things now analytics in the Bitcoin and the Ethereum blockchains. That’s great for those assets, right Augur traded at 150 million today, what kind of a SaaS provider building software for hedge funds is going to be like, “You know I really need to build analytics for Augur for this thing that trades at 150 million,” when there’s so many assets that trade at 500 billion or a billion or whatever. Right and so we have a real opportunity to compete on being early, explicitly.
Clay Collins: When you think about the various layers of a tokenized tech stack and your thesis with regard to them, what kind of concepts go through your head? Have you sat down and said alright we want to allocate a certain percentage to currencies and to maybe level one infrastructure and a certain percentage is going to go to app tokens or crypto commodities? How do you think about distributing risk across these different layers?
Kyle Samani: Layer one versus layer two thing, I mean that’s an interesting academic qualification or categorization. I don’t find it’s terribly useful on a risk management perspective. It is important to say, how much of our ecosystem is built on Ethereum versus not on Ethereum? That’s a very relevant question because of just systemic risk, but this is a level one asset versus this is a level two asset I think is not terribly helpful.
I think coming back to your more general question, we thought in the early days about putting things in more defined buckets and saying, X percent, smart contract platforms and Y percent, these Android exchanges and kind of doing that kind of what’s called the themes of crypto. We do maintain that internally, we do monitor that, I wouldn’t say that’s our primary driver. I’ll walk you back to our two-step investment process. One is do we want to own the thing at all? Right, so if the thing works does it become really big relative to current prices, and then step two is do you want to be overweight or underweight right now.
And that’s just a function of secular trends and what’s going on in the industry and our expectations of the future and being really close to the team and being close to the ground. I find it very limiting to say, you know we’re 20% technology and 15% oil stocks. Or 30% smart contract platforms and 20% stable coins, I don’t find that to be very useful.
Clay Collins: In my mind I see three significant categories of bets. That one is that you’re betting on something that is going to disrupt fiat currency or you know gold, some store of wealth, right. Bet two is that you’re betting on something that is going to disrupt some analogous technology that exists right now. You’re going to disrupt you know Amazon Web Services or Google Compute Engine or you know whatever similar thing exists in the real world. And then bet three is you know you’re betting on something that you believe is going to be huge but there really is nothing analogous to that right now, maybe Augur could be an example of that, if I’m thinking about this correctly. Across those three categories, right, disrupting money or gold or wealth, disrupting current technologies and something new, do you find yourself going in one of those three directions over others?
Kyle Samani: In terms of places to spend time and understand things I would say number two is probably the largest bucket. And it kind of has to be right, in terms of time spent. In terms of dollar opportunity, bucket number one is obviously the largest. I actually don’t think Bitcoin will become digital cash. I don’t think Bitcoin Cash will become digital cash. I think if any crypto becomes digital cash, as of today I think it’s most likely to be Ethereum. But that’s a separate question.
My point is the number of currencies actually vying to become digital cash is very few. There’s five, maybe six that are even trying or claiming to try. And so there’s not a whole lot, I mean you can spin yourself in circles evaluating them, but there’s just so much information that’s TBD and so much that has to play out on that journey. It’s just kind of a waste of time to spend all your energy there.
I don’t spend a ton of time there, it’s not interesting, those returns will be very large if we do end up getting digital cash, which is not a given, but if it happens there will be very large returns. I can say with higher probability that there will be utility tokens that really change certain sectors of economic activity and that could generate 100x returns in much shorter periods of time than would take for Bitcoin or Ethereum to become digital cash. That’s where we spend most of our time. Number three is very hard to do, bucket number three it’s new things. Because you’re forecasting marginal demand based on this new thing, which is generally difficult to do.
The number of applications of things that didn’t work because they were centralized counterparty risk and now only work because it’s decentralized is actually very few. I can’t think of any examples structurally. I can think of examples where it sucks and its because it’s centralized, but it’s still there and there’s at least some proven demand, I can’t off the top of my head think of anything that is fundamentally a new thing. The cloud was great because you got things Uber and Airbnb and although they’re quote unquote, peer-to-peer marketplaces, they’re still just a central server in the middle that’s connecting everybody. And so the cloud was probably the enabler for proving demand for all the different things that you could do and then now the question is, when you commit to actually decentralize, okay well how big of a pain point is the middleman and can you get rid of him?
Clay Collins: Where do you think pain points around a middleman exist the most, I mean is it around storage, is it around computing? Where do you see that being the largest?
Kyle Samani: There’s a lot of them right. I don’t remember which magazine or publication, but someone every year publishes America’s Most Hated Companies. Those are, insurance companies are at the top and banks are at the top. I think airlines are also up there. Crypto’s going to have a tough time displacing airlines because of all the physics stuff you have to do and all of the people. But crypto is pretty obviously gonna reshape insurance and banking, so like there’s pretty obvious opportunity there. Those are long-term structural plays, like you won’t see fast, exponential growth cycles there. Although it’s interesting, it’s not again, I always think in terms of opportunity cost of capital. I don’t have a 10 year LPA and so you know I’d say shorter term, I think the opportunities are much simpler.
Our highest conviction investment today is asset called ZeroX which enables decentralized exchange of assets, it allows only within Ethereum now, but soon other ecosystems, it enables trustless, global exchange of assets for any fundable asset on Ethereum and actually soon to support non-fundable assets as well. That to me is a profound concept. I can trade any artificial, digital scarcity thing anywhere in the world with any body without counterparty risk. That’s something profound. If you follow my Twitter you’ve probably noticed I’ve been Tweeting a lot about stable coins recently. I think stable coins are one of the most profound things that could happen in the world.
Clay Collins: Hey, here is some background on stable coins. Stable coins are cryptographic tokens, like BTC, whose price is stable because it’s value is tied to an asset with very little volatility. A stable coin, for example would be a coin whose price is tied to the U.S. dollar. Stable coins are extremely difficult, technological challenges for reasons that I won’t get into here. But they allow holders of these stable coins to have all the benefits of crypto assets like censorship resistance without the volatility.
A woman in Afghanistan, for example, who does not have access to a banking system or a bank account could store potentially millions of dollars in a stable coin and not have to worry about volatility and price fluctuations. Back to Kyle.
Kyle Samani: If we get a stable coin that doesn’t have counterparty risk in it, I think a lot of governments, not the U.S. government or a European government, not the stable ones. But like Venezuela, Argentina, Syria, those places, Sudan, Zimbabwe, those countries will fall. The governments will fall and people will use these currencies because people do not trust the governments.
That is profound. That with, basically if you could figure out and economic and structural model to have a cryptocurrency that’s stable in price, and there’s no counterparty risk of any form and that it’s completely global and permissionless, that totally changes the world. That would impact the lives of minimum 200 million people, up to a billion people in a profound way.
Clay Collins: How do you think about reporting performance in this space? If you were a hedge fund you’d probably talk about performance relative to the S&P 500. Do you report performance relative to some basket of like Bitcoin, Ethereum? How do you kind of think about reporting Alpha?
Kyle Samani: I don’t have a great answer, so we’re an Alt Focused strategy so if you believe in Bitcoin and Ether then you should hold Bitcoin and Ether and not pay me anything. If you want a say I think alter out strategy, that’d make more sense because there’s more high-risk, high-reward investments there, than that’s where we play. There’s not a good call.
I mean we internally have a basket thing we use but we don’t even publish it to our investors because it just shows subjective and it just brings out the question of how did you construct this. It just is not productive in the conversation so there’s just not a good answer. If you think about being in venture capital right, early stage investing, no one really knows how portfolios performing in venture capital for a few years. ‘Cause in the early years it’s just you don’t know.
And even on year five it’s still pretty gray and I’m not trying to say we should have five years to show results, but you know given how young our fund is, given how young the ecosystem is, I don’t have a good answer for comps. We’ve talked internally about it, we’ve talked to some other fund managers about it. The problem is anything we come up with is, the S&P 500 is pretty objective, to what we think makes sense to compare to, it’s just there’s not an objective standard.
Clay Collins: What kind of information rights do LPs have? Do you report, is it quarterly, is it monthly, is there some live dashboard they can log into at any time and see the performance of their capital? How do you handle that?
Kyle Samani: Our investors get monthly MABs, that’s just straight from our fund admins. Then we just provide commentary. I mean our investors I’m assuming all read our blog, which is public, which provides a good lens for how we’re thinking about things. And then we provide commentary a month later. That commentary if we’ve taken any extra margin position, we’ll talk about that, otherwise we’ll talk about what’s been going on in the markets, what we’re seeing. And then obviously we welcome questions from our investors.
Clay Collins: Kyle, you’ve been incredibly generous. If folks are interested in working with you or working for you, what’s the best way to find out more about what you’re doing and potentially contact you?
Kyle Samani: Yeah, so just go to our website, Multicoin.capital. I really recommend you subscribe to our blog. We produce some of the best research and insights in crypto. If you go to our homepage there’s an email box right there for your email there. If you’d to contact me directly, just email me kyle at multicoin dot capital.
If you use Twitter, follow me on Twitter (@KyleSamani). If you don’t use Twitter and you want to learn about crypto, get on Twitter, a lot of crypto discussion happens on Twitter. I’m a rather colorful character on Twitter, so I recommend that. And then if you want to learn about career opportunities we are hiring, we have a jobs tab on our website and so just go there and follow the instructions.
Clay Collins: Fantastic. Again, you’ve been very generous. Thank you for making time for us.
Kyle Samani: Awesome, thanks so much, Clayton.