WHAT IS BITCOIN AND WHY IS IT ATTRACTIVE AS AN ASSET?
Bitcoin is the first decentralized digital currency, and a store of wealth, akin to precious metals or oil. Because bitcoin uses a PoW (Proof of Work) protocol to solve the issue of distributed synchronization, it is incredibly secure but it probably won’t scale efficiently enough to be a viable global micro transaction system. What’s nice about bitcoin is that it’s decentralized. Many laud it as a “hedge against governments” but I’d argue gold has already been an effective doomsday indicator for some time. Unlike gold, most bitcoins are already in circulation and the supply is not dependent upon price action. The supply growth of bitcoin is fixed, self-adjusting, and slowly decreasing, therefore it’s a secure, decentralized store of wealth with an established growth rate.
WHAT DO YOU THINK OF CHINA CRACKING DOWN ON BITCOIN, AND OTHER NAYSAYERS?
Bitcoin actually has done very well in countries with tight capital controls. China looks to be cracking down on bitcoin exchanges due to concerns of citizens expatriating funds. To the high-profile investors that claim we’re in a bitcoin bubble; you may be right. This could be similar to a .com bubble where the vision is spot-on but the valuations are too optimistic. But bitcoin can’t be stopped by a government or powerful investors – it will only die if interest in it dies – and this isn’t happening any time soon.
WHY WOULDN’T AN INVESTOR SIMPLY BUY BITCOIN THEMSELVES NOW THAT IT IS MORE ACCESSIBLE, AS OPPOSED TO INVESTING IN A FUND AND PAYING THE FEES?
Depending on the management fee charged, a fund which is simply long bitcoin isn’t a great deal. For example, Grayscale offers a Bitcoin Investment Trust that just holds bitcoin, charges 2% annually, and shares of it have easily traded at a 40% premium to the actual bitcoin price. This makes it clear that some investors are willing to pay a fee not to have to worry about exchanging and safely storing bitcoins. Even those who are willing to handle bitcoin themselves are still very exposed, making a portfolio of cryptocurrencies a more attractive offering.
IN YOUR OPINION, IS BITCOIN A CREDIBLE CURRENCY TO TRADE?
It depends on your risk tolerance and liquidity demands. We’ve seen exchanges hacked in the past, and users have no guarantee that lost cryptocurrencies will be honored. Some exchanges protect dolllars with FDIC insurance, but the government has made no indication that it will be insuring digital assets any time soon. Further, the lack of derivatives may not matter to a casual investor, but it may keep large institutions at bay. There’s currently no good way to short bitcoin, and the inability to hedge exposure is an important hurdle for bitcoin to jump on its path towards legitimacy.
GIVEN THAT BITCOIN TRADING IS A NEW FRONTIER WITH A LACK OF TRACK RECORD AND COMPETITORS, WHERE DO YOU LOOK TO HIRE YOUR STAFF? WHAT TYPES OF BACKGROUNDS MAKE GOOD BITCOIN INVESTORS/EMPLOYEES?
Since nobody is incredibly experienced in this particular space, I have found success in hiring people whose experiences are most directly compatible with my needs. For example, I knew I would need to leverage Amazon Web Services, so I found a partner who worked in this department at Amazon. Another partner of mine has very strong math and programming skills that can be applied in a variety of ways.
William Vranos is the CEO and founder of Green Key Partners. After gaining investment experience at Ellington Management Group, Mr. Vranos launched his own cryptocurrency focused firm in September 2017. Mr. Vranos holds a Math/CS degree from Dartmouth.
GREEN KEY PARTNERS
Green Key Partners is a cryptocurrency focused hedge fund dedicated to the digital assets space. The firm is involved in alpha generation strategies and smart beta portfolio offerings. Before to working together, the partners were trading cryptocurrencies, working in Amazon’s robotics department, and working on a PhD in theoretical physics at Brown.