How does one find oneself running the first crypto fund in the world? What can the crypto sector learn from traditional markets? What’s the best way to model the value of Bitcoin?
SFOX was honored to sit down with Tim Enneking, the Managing Director of Digital Capital Management, Mana Companies Asset Management, and a valued SFOX client. Enneking ran the first crypto fund in the world and also started the first crypto trading fund in the world. In our interview with Enneking, we covered everything from why Bitcoin isn’t a crypto “currency,” to what crypto has in common with ancient Rome and 20th-century Cyprus, to which industries stand to benefit the most from the future of crypto.
If you’d prefer to watch this interview rather than reading it, you can find the full recording on the SFOX YouTube channel.
The comments and answers to questions are Tim Enneking’s own, and do not necessarily reflect the views of SFOX or its staff.
SFOX: Welcome to SFOX’s interview with Tim Enneking. Tim is the Managing Director of Digital Capital Management and also the Managing Director of Mana Companies Asset Management. He has the distinction of having run the first crypto fund in the world — and he’s a client at SFOX, to boot!
Tim, thank you so much for joining us today. We’re so excited to have you here and pick your brain about all things crypto and asset management.
Tim Enneking: Sure. Thanks very much for the invitation.
SFOX: What’s it like to create a fund? What does the day-to-day of running a fund look like — either crypto or otherwise?
Tim Enneking: I started, I think, eight different investment funds, which is actually quite unusual because most people don’t even start one fund, even if they work in the fund industry, because one usually doesn’t do that very often. But because I worked in eastern Europe for a while, I started a couple of funds there, split a couple of funds up into pieces, so a couple more there, and then moved into the crypto space both outside of the United States and now within the United States — I’ve actually started a rather large number of funds.
In terms of setting up a fund, just very, very briefly: It’s funny because if you have no experience in setting up a fund, it’s going to cost you a lot of money, whereas if you have a lot of experience in setting up a fund, it actually becomes probably 25% as costly to both setup and to operate, simply because one climbs the learning curve, can negotiate better deals with service providers, etc.
As far as running a fund, I’ve always divided it up into three pieces. One is attracting investment. The second is making it operate — all the operations, back office, middle office, however you want to describe it. The third part — and the one that’s ultimately the most important in terms of longevity or perennity, but it’s in equal weight in terms of actually managing the fund with the first two — is how you invest the money. And there are very, very different specialties, approaches, people, and skill sets involved in each of those three areas.
SFOX: How did you first discover Bitcoin? What were some of your “aha” moments in recognizing the value of Bitcoin as you were learning about it?
Tim Enneking: I’d love to be able to say I stumbled across crypto somehow — and Bitcoin, at the time, because this is early 2013 we’re talking about — and looked at it and thought, “This is brilliant,” and I put all my money in it and I’ve long since retired and I’m taking care of philanthropic activities. Unfortunately, I can’t.
I started working for a broker based in Malta and was doing something totally unrelated to any of this discussion. They knew I had a lot of experience managing funds, and as a sort of a hobby, three of the founders had just started a Bitcoin index fund: basically, when someone invested in the fund, they bought bitcoin; when someone redeemed, they sold bitcoin. So it just tracked Bitcoin with a fee — or a tax, as I’ve taken to calling it now — of about 2% (I don’t remember exactly what it was).
So they asked me to run this fund, and that was my introduction to Bitcoin: they told me what Bitcoin was, and I just… I don’t remember if I said it to them, but I certainly said to myself, “That is the stupidest idea I have ever heard of in my entire life. That is just ridiculous. Who the hell would invest in this?”
And so I ran the fund. The third part of the three legs of a fund “stool,” in terms of making it work, is where you invest, and since this was an index fund, there was no discretionary management — so I didn’t have to be a fan of BTC to do the rest of it. And I was good at doing the rest of it — or, at least, they thought I was — so they hired me to do it. That worked fine, but obviously, being a reasonably curious individual, I started digging into BTC.
I actually read several articles on Mr. Ponzi; I dug into all sorts of pyramid schemes; I did an inordinate amount of research into the tulip mania in the very early 17th century in Holland, which spread rapidly to other countries in Europe. And I did so much research that this company did an award ceremony in Porto, in May, I was the master of ceremonies for it, and the entire theme of the award ceremony was “Holland and tulips” because of all the research I had done and how people were amused at how seriously I took all of this, as opposed to just throwing some money at it. So, I came around to Bitcoin.
Just as a quick aside, because I have explained what Bitcoin is in particular, and what crypto is in general, to a lot of people (fewer recently, because most people at least think they have a handle on it): one of the examples I used that was really compelling to a lot of people is a reference to August 15th, 1971, which is when Richard Nixon finished what Franklin Delano Roosevelt started and took the U.S. dollar off the gold standard. After 1933, it was actually illegal to own physical gold in the United States. It was a crime — people went to prison for it, which most people seem to have forgotten now or never experienced because we’re going back a ways.
In any event, in 1974, a bunch of Greek colonels invaded Cyprus. That sounds like a total non sequitur, but it’s not at all: those Greek colonels took the southwest two-thirds of the island; Turkey invaded and took the northeast one-third; Greece and Turkey divided the country using a line that’s now called the Green Line, which ran through the capital in Nicosia — right through the airport, which is why this relatively small island in the Mediterranean has three international airports. In the southwest, there was a currency called the Cypriot pound, which was an old-style currency — until they relaunched it as another currency, completely from scratch. It was the first currency that was launched after 1971. It’s also interesting because it was backed by nothing but it was generally accepted, and the Cypriot pound became one of the few currencies that was nominally stronger than the U.S. dollar: it took two U.S. dollars to buy a Cypriot pound.
Why is that all relevant? It’s because of the following question that I would ask people: Why is it that half a million people co-located on an island in the eastern Mediterranean can simply declare by fiat that they have a currency and people accept that, and half a million people who don’t happen to be co-located on the same piece of dirt can’t? And there’s really no good answer to that.
That was one of many angles I used when I explained crypto to people; most people seemed to find that comparison particularly illuminating
SFOX: So, the thought in that comparison is that Bitcoin and other cryptocurrencies basically allow people anywhere to do what the co-located people of Cyprus were able to do?
Tim Enneking: Well, that’s going a bit further than I would go because I don’t think the term “cryptocurrency,” nor either of those two words (“crypto” and “currency”) really apply. I use the term “trading tokens” to discuss it now.
Let’s put it this way: There are three traditional things that fiat currency is supposed to act as: (1) medium of exchange, (2) unit of measure, and (3) store of wealth. I would add a fourth function, and that is (4) a mechanism for transferring wealth; although most historical writers ignore that, I think that’s very important to know in the modern day and age — just ask Western Union. There’s not a single trading token, or a single “cryptocurrency,” that provides all four of those, but collectively, they’re getting reasonably close, and Bitcoin clearly fits at least one — and, if you use my list, at least two and maybe three — of them.
But the point is that most people think of money as a medium of exchange: cryptocurrencies or trading tokens are certainly used, to some degree, as media of exchange, and no one’s challenging their right to exist anymore. And when BTC is going for $10,555 on BitFinex — I’m looking at it right now; sorry I’m not looking at the price on SFOX — there’s a general consensus that’s quite strong that there is some value here. So the fact that that value is generated by a global consensus versus consensus of a bunch of folks on a single island, a single piece of dirt — that’s a distinction without a difference. Five or six years ago, it wasn’t — so we have to rewind a little bit when we start thinking about how everyone felt about BTC or cryptocurrencies five or six years ago.
SFOX: You have asset management experience that straddles both crypto and traditional markets, which is relatively rare in the sector nowadays. To my ear, that’s evident even in how you explain crypto and Bitcoin — pointing to the Cypriot pound is a pretty unusual method of explanation! How do you see the duality of your professional experience informing the ways you think about crypto and manage crypto funds?
Tim Enneking: Let me go back and give you the most bizarre example I use to explain it — but actually, lots of folks find it very, very appealing and very understandable. I literally go back to Roman armies in Gaul when I start talking about cryptocurrencies. One of the points I make is that cryptocurrencies are not new; they’re not particularly innovative; they’re certainly not revolutionary. The roots of cryptocurrencies go back literally thousands of years.
The example I use is some Roman general rampaging around Gaul. He needs to feed his army, so he finds a relatively wealthy farmer, takes all of his cattle, and hands him a chit — a term for it that actually became popularized during World War II was ‘scrip’ — and it was basically an IOU. And we actually have some of these: they’re written on tanned hides and on tree bark. So this general wrote out his IOU, saying, “Okay, this is good for two thalers” — which is, etymologically speaking, the origin of the word “dollar” — “You just have to go to Rome to pick it up.” And, you know, a thaler was worth a lot of money, so the general took all of the farmer’s cattle, and the guy’s staring at this IOU. There weren’t really a lot of currencies there — most of it was gold — so this was the first example of a “non-hard” (or representative) currency. And I’m sure there was some guy who decided to buy all of those IOUs for 40 cents on the dollar, hike to Rome, bribe some senator with 20% of it, and pocketed the difference, so there we went with a good secondary market — that’s my speculation, by the way.
In any event, the fact is that these IOUs, these scrips, were a parallel currency. In fact, I almost called my first cryptocurrency fund the “Parallel Currency Fund.” Parallel currencies — in other words, different media of exchange to supplement hard currency and to improve over barter, which was the only other alternative — have been around for thousands of years. And that’s really what cryptocurrencies, if you take them as the currencies, are: they’re parallel currencies. They’re used to replace fiat currencies to a certain degree — I’m not a fanatic who is going to say that cryptocurrencies are going to displace all fiat currencies and Bitcoin’s going to displace the U.S. dollar, but you don’t need to go there to find a really strong role for cryptocurrencies, and that role has been around for, literally, thousands of years.
One of the reasons, from an economic standpoint, that we had the Dark Ages for a thousand years — from the fall of the Roman Empire, about 400 A.D., to the beginnings of the Industrial Revolution in the 17th century; more than a thousand years, obviously, but rounding — is that there wasn’t expansion of M1. M1 is the money supply, the money supply was represented by gold and silver coins, so unless you happen to be sitting on a new silver mine or a gold mine, you couldn’t expand M1. The easily discovered gold and silver mines had already been discovered in Europe, which is where, generally, the etymology of most modern economic thinking has come from. And so you couldn’t have any real economic growth because the money supply was fixed, except to the extent that some king or some lord decided to dilute (debase) the amount of gold in a coin and then generate more currency — and then inflation took care of it because the value of that coin fell as it was debased.
So it’s really, really important to understand that the concepts behind cryptocurrency as a currency are not at all new. And if you want to go to tokens, it’s the same thing there, if you dig into where tokens are from. So, by placing the crypto sector into a historical perspective, it actually becomes a lot easier to understand because it’s not nearly as new, crazy, or radical as folks who have less historical experience or a less historical bent would have you believe.
SFOX: You have a vast array of international experience, whether that’s your degrees in international security and international business law, or your a military career that put you in places all over the globe, or the multiple languages which you speak. When people discuss the utility of crypto, they often reference international benefits like cross-border payments and enabling global economies. Do you feel that your international experience and background have given you a distinctive perspective on how crypto can be used as a worldwide asset class?
Tim Enneking: I’ll give you the ultimate waffling answer: yes and no.
At the beginning, five or six years ago, I really thought that BTC would be used for remittance payments, which is the general term used for retail cross-border transfers of money, particularly when they take place on a periodic basis. I was totally wrong — absolutely, totally, and completely wrong. And the reason was, and the reason still is, that one needs a lot of infrastructure to use cryptocurrencies, mainly because they are not currencies. So if you want to even use BTC at this point in time, you basically have to take fiat, put it on what I’ll call a platform, rather than an exchange, and convert it into BTC. To hold BTC, you need a certain amount of electronic infrastructure and knowledge. To transfer it, you need an internet connection, and to get that fiat and to transfer the fiat to the platform, you probably need a bank, and you may or may not need a credit card. At the end of the day, it’s basically less flexible — a lot cheaper, but less flexible — than using something like Western Union, which is the six-hundred-pound gorilla, let’s say, in terms of remittance payments. Banks really don’t play a role if you’re talking such small amounts.
Say some taxi driver working in New York gets is called by his mother in Ghana (sorry for the stereotype, but I can’t resist), who says, “I need 30 bucks for groceries this week,” or something. You can’t, on an economically sensible basis, transfer that money. You can use Western Union or something and still pay a 25% fee or even more, because the amount of money you’re sending is relatively small; sending a bank wire transfer is completely absurd. And that assumes both parties involved have bank accounts. So the idea of the unbanked and the unfinanced using cryptocurrencies for remittance payments — which is still a brilliant idea, and there’s a crying need for it — doesn’t work, because you have to have all this infrastructure to still deal with fiat. So the key that would make it work — if, let’s say, the mother in Ghana wanted to make a rental payment — would be if her landlord accepted BTC directly, or, in our previous example, if the grocery store accepted BTC directly. If BTC were really a true international “medium of exchange,” then the remittance payment issue would be addressed.
So, Bitcoin — there a lot of issues with it, but if Bitcoin had a truly stable price, it would have a much better chance of becoming a genuine, comprehensive currency. And so, we can look to what’s replaced it. Because Bitcoin was probably the ninth attempt at a cryptocurrency, with the first having taken place at Holland in 1998. Bitcoin is the first successful mover here (though far from the first mover), but you often expect the folks who come later to take what the first movers have done well, keep that, and throw out what they have done relatively poorly. So now you get a transition to Libra — or, probably, Calibra would be the better example, since Mark Zuckerberg’s cryptocurrency is actually two cryptocurrencies. There is a cryptocurrency — assuming it meets that name, or maybe we should call it a stablecoin instead — that has a chance to displace fiat and be used for remittance payments. And the biggest single difference is simply stability: it’s a stablecoin, so you don’t have to worry about the price increasing 10% or decreasing 10% by the time the cab driver sends it to his mom and his mom uses it to buy groceries or pay her rent.
SFOX: Let’s take a step back for a moment and explore your experience in fund management. You still run a crypto fund, whereas a lot of the less fortunate set up shop and ran crypto funds in the 2017 boom and have since shut down. What are some of the biggest misconceptions about starting and running a crypto fund? What has led you to be successful whereas so many others have closed up shop at this point?
Tim Enneking: I think I’ll take a step even further back, if you don’t mind.
There’s a phrase I’ve used in a couple of contexts like this, and that is that there are three things that folks with experience in finance have acquired: knowledge, experience, and wisdom. They’ve acquired those things in the fiat space — almost everyone, because the crypto space is so new — but all three of those apply directly to the crypto space. Phrased another way, doing business in the crypto space ain’t so different from doing business in a fiat space. The principles are the same; human psychology hasn’t changed; from a general rules and principles standpoint, it’s identical.
What changes from the fiat space to the crypto space are a couple of things. One: it never shuts down. 24/7 trading has an enormous number of impacts on how one runs a fund or trades, depending on what kind of fund it is. And the second thing is, partly because of the first thing, is that things happen really quickly. This is a very rapidly innovating space.
What I have discovered is that most mistakes that people make entering the crypto space — as a fund manager or as an investor, it doesn’t matter — is that they throw the baby out with the bathwater. They think, “Oh my God, this is totally new! Nothing applies. Valuation rules don’t apply. Nothing applies.” Absolutely, totally wrong: everything applies. You have to be a bit creative about how you apply it at times, but all of the fundamental rules of investing apply: I tell people, “Look, why are you trying to decide whether to put all your money into this or all your money into that?” Diversification, which is one of the fundamental rules of any kind of investing, applies just as much — arguably more — in the crypto space, certainly not less. So what anybody has learned about investing, whether it be on a fund basis or on an individual basis, all of that applies to the crypto space. You just need to be a little bit more nimble and a little bit more open-minded.
For that reason, there aren’t a lot of people who have a lot of experience in the fiat space who have moved to the crypto space. It’s happening more and more, but I was probably the first. And the reason it happens is not because they didn’t necessarily believe in it or they weren’t smart enough to understand it, but they were already too set in their ways and could not make the transition. So, instead of trying to apply general principles, they were trying to apply specific rules. That you can’t do; but all the principles of good investing, they all apply in the crypto space.
SFOX: It’s really interesting to hear you say that old rules about valuations can apply to crypto, when there are a million and one different new valuation models for things like Bitcoin that people claim we need because crypto is so “radically different.” How do you approach the task of evaluating Bitcoin and other cryptocurrencies?
Tim Enneking: When I first started looking at Bitcoin, which is pretty much the only cryptocurrency that was running around at that time, the bar in my head that Bitcoin had to reach to become “real” was very high. In other words, the bar indicating where fiat currencies were was much higher than the starting point for where Bitcoin was.
As I mentioned, I dug into all sorts of Ponzi schemes, this craze, that craze, pyramids, the whole thing. And after a relatively short period of time, I realized, “You know, none of those apply to Bitcoin. Bitcoin is not any of those. So, what the heck is it?” And then I started looking at the other half of the equation, the other bar: I asked myself, “What am I really comparing Bitcoin to? Let me dig into fiat currency” — because a lot of these historical examples and stuff I’ve thrown out to you, I didn’t know five years ago. I knew Nixon took the U.S. off the gold standard in the 1970s, but I didn’t realize that Roosevelt had started it before even the Bretton Woods WWII-era fixed currency agreement up in New Hampshire. And so I started asking, “Okay, what the heck is fiat? I mean, if I’m going to make a comparison here, I have to look at both sides of the comparison.”
So, I started digging into it. I went back into the history of money — you know, shells, and salt, and all this other good garbage, to hard money and all this other stuff — and I realized, “Son of a bitch: fiat isn’t what I thought it was!” If you ask someone, even today (or maybe moreso today), what backs the U.S. dollar, what backs the euro, what backs the yen, what backs the Swiss franc, they’ll list all kinds of stuff. I’ve asked that question many times, and the people I ask give me all kinds of crazy answers — and some not so crazy answers — but they are all wrong. The fact of the matter — notwithstanding what Warren Buffett tries to claim, or Alan Greenspan as well — is that they’re not backed by anything tangible, and that, to me, was a real shock.
Before Roosevelt, in theory, you could take any U.S. dollars that you had and convert them into gold. And Roosevelt was sneaky: he said first, “Okay, you can’t do that anymore,” and then, over time, Roosevelt, Nixon, and the various secretaries of the treasury would slowly reduce the percentage of U.S. dollars that were backed by gold. So it went to 90%, 80%, etc., and then Nixon just cut it off. And that allowed M1 to grow, but I don’t think anybody planned on QE — on quantitative easing — where, in 2009, the United States Federal Reserve was printing — people say “printing,” but there’s obviously no printing involved — 90 billion U.S. dollars in a single month. I’m not saying that was a bad idea: I think quantitative easing eased the recession and stopped it from turning into a Great Depression, but it’s all speculative. QE certainly bailed us out of that. It may have kicked the can down the road, because who knows what we’re facing in the immediate future now, but it certainly was effective for a good decade and it allowed economies to grow at varying rates around the world. But it also demonstrates that fiat is backed by nothing — or it’s a religious question, and it’s backed by faith, or as the dollar used to say, the “full faith and credit.” As for credit, throw that out when you’ve got 20 trillion dollars of the debt in the U.S. alone that’s going up by a trillion a year, so what you’re left with is full faith. When you look at every currency in the world today, they are literally backed by nothing.
And so, suddenly, the bar that I was looking at way up there that Bitcoin had to meet to be acceptable in my little mind as a currency — that bar plunged. And the more I dug into fiat, the more I realized that Bitcoin and cryptocurrencies didn’t have to do three thousand different things to be acceptable as money because, guess what? Fiat didn’t do three thousand different things to be acceptable as money! And then I went right back to the ’74 example of Cyprus: these guys did nothing. There are no resources in that country. There’s nothing there; it lives on tourism. It’s totally, physically isolated; it could be cut off in a nanosecond; and it still worked. So, again: if half a million people co-located on an island in the eastern Mediterraneancan make up their own currency, why the hell can’t 500,000 or 1.5 million or 5 million who weren’t co-located on the same piece of dirt make a cryptocurrency?
That literally became the beginning and end of the test for a currency: Is it accepted? It’s accepted, yes. Why? Because people have faith that they’ll be able to get something with it on the other side. That’s it. That’s the entire test for a currency. And that was a real eye-opener for me.
SFOX: So, if Bitcoin, like fiat currencies, is grounded mostly in faith or acceptance, how would you go about modeling its value?
Tim Enneking: For BTC, which is not project-based — it’s not a security; even Jay Clayton has agreed it’s not a security — it’s just something that is akin to a currency, and it fits in, pretty much, a unique framework. If you look at the market cap, ETH is next. ETH is not really an individual project: it’s a backbone for a whole bunch of projects. Third is XRP, and I’m not even sure that it should be on the list, given how different it is from other tokens.
The reason I bring that up is that the way to value different cryptocurrencies, or trading tokens, depends on which one we’re considering. For Bitcoin, based on what I just said, there is one very, very clear metric for what bitcoin is worth, and that is what people are willing to pay for it. Anything more complicated than that is simply wrong because Bitcoin has no intrinsic backing. So that’s why if you look at the trading, which is what I do a lot of, people are relying more and more on technical analysis because it’s just a horse trade: your horse is worth what someone is willing to pay to buy it.
Bitcoin is certainly not the first asset that is determined solely by market value and not so much by what its intrinsic value is. Take gold as an example: the intrinsic value of gold for use in industrial purposes is subject to debate — nobody really knows what it is — but it’s probably around $500 or $600 per ounce. The price of gold is about to cross over $1600 per ounce. So, there are a thousand extra bucks there for every ounce of gold. Where is that from? That’s from what the market thinks it’s worth. It’s totally identical, indistinguishable, from the value of bitcoin. In gold’s case, there’s some residual intrinsic value, but the rest is all speculation. Gold has something that I’d like to call “historical financial inertia” behind it because, for at least ten thousand years, the human race has recognized gold as having some value because it’s relatively rare, it’s relatively shiny, and… that’s it. But it’s important to acknowledge that a lot of the value of gold is pure speculation — it’s what the market says it’s worth. Folks lose track of that because gold is viewed as a safe haven, etc., but the reason it’s viewed as a safe haven is because of that ambiguous, speculative portion of the price that’s worth somewhere between two-thirds and three-quarters of the market value of gold. Bitcoin doesn’t have that industrial value; it doesn’t have any physical manifestation. So, it’s all what the market says it’s worth — and there’s nothing wrong with that because there are all sorts of examples of this. Diamonds are another wonderful one: sure, they have industrial applications, but no one’s going to take the Hope Diamond and break into a bunch of little pieces to put it on the blades of saws so they can cut metal faster. There is this enormous value that’s not based on any utility whatsoever. All artwork is like this, too. I mean, there are all sorts of examples of assets that are valued at far more than whenever the utility is — look at a $1,500 bottle of wine — and there are no equations for any of those valuations. There’s only historical precedent, which is essentially technical analysis. So, the value of BTC is a rather unique beastie within the crypto space, but there are plenty of examples outside of the crypto space — and, as I’m wont to do, I like to pick comparisons from each of those two worlds.
When you get to other sorts of valuation, like what is IOTA worth, what is Presearch worth, what is RNDR worth — token projects that either are backbones or have specific utility that they provide, à la utility tokens — there, you get into an interesting equation because there’s a minimum price that you can pretty well work out, right: “This is the utility that we get from using this token, and its price is worth X.” But because there is this enormous speculative element in those tokens that generally has forced the price much, much higher, it’s really difficult to come up with a valuation that’s, say, based on velocity, or based on a number of tokens held versus number of tokens used on a daily basis, or based on wallets, or based on concentration, or based on transfers. There are lots of interesting ideas, all of which have a basis in the fiat world, but I’m sure the dust has not yet settled on how to value every flavor of cryptocurrency — or, in this case, much more particularly, trading tokens — out there. The world is sort of spiraling into a right answer — or, more precisely, the markets and traders are sort of spiraling into a right answer — but, as you can tell with the insane volatility in trading tokens, we’re a long way from a final response to that question.
SFOX: I love that you drew that comparison between Bitcoin and gold, because it leads us directly to the question of Bitcoin’s principal investment value. On the one hand, as you said, there’s the purely speculative value of Bitcoin; but on the other hand, with U.S.-China trade tensions and other macroeconomic issues, people are increasingly discussing Bitcoin as some kind of safe haven or store value, like gold. How do you think about the utility or functionality of Bitcoin in those macro contexts?
Tim Enneking: In that context, Bitcoin has no utility and it is a store of value. We talked about the functions of currency: medium of exchange, unit of account, store of value, and a way of transferring wealth (the fourth one is mine). I think BTC meets the last two. That is, it’s turning into a great store of value and it’s always been a good transfer medium — you know, regardless of how many kopeks miners are getting for moving 1 BTC from one end of the planet to the other, it’s a heck of a lot easier to move it around than virtually any fiat currency.
In terms of supplementing gold, you can already say that Bitcoin is “crypto gold” — it’s the equivalent of gold in the crypto space — but that’s not saying very much. I mean, the crypto space is tiny: it’s $250 billion; even at its largest, it was less than $1 trillion. I think it’s going to grow again to that level, and higher — potentially much higher, depending on what happens with the tokenization of real assets. But it’s a tiny, tiny space, so Bitcoin is a big fish in a very, very small pond. Gold is probably a medium-sized fish in a very, very big pond. Everyone understands gold is a commodity, it gets put into commodities, but it’s also got a special asterisk next to it because of the safe-haven aspect.
I said this in a couple of webinars I did for my management company: Bitcoin is — particularly now, because yesterday, its dominance went back up to 71%, where it hasn’t been since March 2017 — starting to move itself into almost a whole different asset class. Bitcoin is not like anything else in the cryptocurrency space. I mean, at 71%, it’s pushing three-quarters — over two-thirds of the entire sector is represented by one token. Well, maybe we should redefine the sector to take that one thing out of it. And we’re getting to that point; it may never happen, but Bitcoin is very, very different and becoming more different, not less — which, frankly, is another anticipation I was totally wrong about. I thought that Bitcoin dominance would continue to drop as the value of the 2,600 or whatever others that were competing with it started to acquire or to demonstrate their intrinsic value. But the opposite has happened because it’s taken so long for many of these projects that do have legitimate value to realize it. In the meantime, Bitcoin is just kicking butt left, right, and sideways.
Then you see things like this amazing article that came out about 10 days ago in Bloomberg, where it said very casually in a single sentence that gold and Bitcoin were safe havens. I was just stunned when I read that because Bitcoin went from being ridiculed or not mentioned at all, to then being mentioned but ridiculed and treated with a little bit of skepticism on Bloomberg — I’m not picking on Bloomberg, I think it’s a wonderful reflection of how society as a whole was looking and looks at the crypto space in general and Bitcoin in particular — and I was just amazed by that sentence. And then, on August 10th, BTC dropped almost 10 percent from about $10,300 to $9,300, and a number of folks announced, “Okay, this is the death knell of crypto as a safe haven because gold didn’t do that — gold didn’t plunge — and Bitcoin’s price is too volatile.” While those statements are generally true, within the crypto space, BTC is clearly a safe haven, and even globally, it’s not going to go from not being a safe haven to being a safe haven overnight. Clearly, the trend is there.
Frankly, in the QE world, or the near-post-QE world, there are two things that people cannot find. The first is real diversification. I mean uncorrelated diversification, not buying two shares of stock and saying, “Oh, I’m diversified” because those two shares of stock actually have a positive 0.9 correlation. That’s not what I’m talking about: I’m talking about real diversification, where assets don’t move in lockstep with one another or the opposite of one another. BTC is very clearly the least correlated asset in the world. So, if you want to have a truly diversified investment portfolio, you have to put something into crypto and preferably into BTC.
The second thing people are looking for is yield. In the QE world, with interest rates at or below the floor, $17 trillion worth of bonds with negative interest rates — that’s insane! Keep in mind that 20 years ago, economics textbooks said that negative interest rates were impossible. Literally; that was just accepted wisdom. And now, something like 50% of the world’s debt has negative interest rates, and people are talking about the United States, which uses more debt quantitatively than anybody else in the world, seeing negative interest rates; that’s a tough world to find yield in. Bitcoin’s appreciation, even though we’re not going to see it go up 5000%, as it did in 2014, is still pretty damn good. Even with a drop from $20,000 to $3,000 — depending on when you got in, obviously — but if you have enough patience, it’s going to clearly take out $20,000.
There is a strong argument for both Bitcoin as a “safe” haven — but, much more importantly, as an investment vehicle that provides the two things that have become as rare as dodo birds in the fiat investment world, and those are real diversification and yield.
SFOX: Let’s say that investors who are not exposed to Bitcoin right now are sold by what you’re saying and want to invest in crypto funds. What would you suggest that they look out for in terms of determining the quality of a fund? How can someone from the outside get a sense of whether a crypto fund is good or not?
Tim Enneking: First, let’s talk about the three kinds of funds that really exist in the crypto space, because there are only really three at this point in time. There are “HODL funds” — “Hold On (For) Dear Life,” the typo that’s gained its own life. The equivalent in the fiat space is just a buy-and-hold fund. Then there are private equity funds, which just mean that your investment will be locked up for a long time, and, presumably, the yields will be greater. And then there are trading funds, and a trading fund is going to buy and sell, presumably in a way to increase the value of your initial investment.
If a person wants to go into the crypto space, I would first say, to go back to my first principles of trading — not fiat trading, not crypto trading, just trading — the first principle is diversification. So, I would look at spreading your money around a bit in the crypto space, provided you have enough to do that. What I’ve told people, by the way, who have zero money from their portfolio in the crypto space — I think there’s a Forbes article where this actually got quoted in, and they changed “idiot” to “fool,” but I’ll give you the original quote — is that you’re an idiot if you don’t invest in the crypto space and you’re an idiot if you invest too much in the crypto space. So at a minimum, I tell people, put one to two percent of your portfolio in the crypto space. It’ll probably turn into eight to ten percent of your portfolio — and I’ve had that happen several times, where guys came to me and said, “Look, I’m really sorry, but I have to sell some of your fund because it’s too big a piece of my investment portfolio now.” This is a good problem to have!
So that’s what I would recommend to people as a starting point. Put some in. Don’t put too much in, but put some in. It’s financially irresponsible to not have some money invested in the crypto space.
As far as evaluating funds: you’re going to start yelling at me because I keep saying the same thing, but use the same criteria you apply to any fund. What is its track record? What is the infrastructure like? Do your due diligence on that fund. What is management like? How long have they been around? What skin do they have in the game? What risk mitigation procedures do they follow? What compliance procedures? I mean, all the standard stuff, boring crap, that applies to any fiat fund — it all applies to crypto. Every bit.
SFOX: I would never yell at you for being consistent in your answers — that’s my favorite thing to get from an interviewee!
There are so many different profiles of people and investors who engage in crypto; on SFOX’s platform, we see people just buy bitcoin once and HODL, we see day traders who sit at home and trade every day, we see institutional investors, and we see fund managers. Do you think that there are any lessons that any of these groups could learn from any of the other groups? For instance, if I’m a regular retail guy, is there something that institutional investors know about that I should know about — or vice versa? Could institutions learn something from individual day traders?
Tim Enneking: That’s an interesting question. I’ve never had anybody ask me that question.
My initial reaction is to say “no” because they’re in such very different places: if you’re investing $1,000 or $10,000 versus $1 million or $10 million, the underlying principles are identical but I’m not sure that the specific aspects of one informs the other. If you’re investing $1,000, right, you’re probably going to be less diversified; it’s your own money, so you may apply a little bit more risk; you may do more of a long-term strategy because someone’s not beating on you every month for returns — as opposed to an institution, where all of those things are the other way around. I don’t think there’s a lot of cross-fertilization there, simply because the positions are so different.
I’m sorry to give you that answer, but there’s nothing that readily comes to mind as some “Eureka!” cross-fertilization that institutional guys know and retail investors don’t — particularly nowadays, when so much information is available to everyone over the Internet.
SFOX: That’s fair enough. Maybe we’ll discover some insight by the end of the interview — who knows! But, with that in mind, let’s shift our focus to the institutional side for a moment.
We’ve seen certainly over the last couple of years — as we’ve already discussed in reference to the blooming of crypto funds — that there’s been more institutional interest in crypto. To what do you attribute that growth of institutional investment in crypto? What do you think right now is the biggest obstacle to even more institutions putting crypto into their portfolios?
Tim Enneking: In connection with this question, I think I’d almost rather ask you. Let’s take a look at what I said earlier: the crypto space is quite small, right: a quarter of a trillion dollars. What that means is there are tens, if not hundreds, of funds on the planet that — ignoring the fact that they’d drive the price up — could buy the entire crypto sector. So, it’s just not very big. I mean, there are funds that aren’t going to make a commitment to anything unless they can put $1 billion in it, or $100 million in it, or whatever — and the crypto space isn’t suited to any of that. So, when people talk about institutional involvement — and yeah, you hear about JPM coin, and you hear about Goldman Sachs opening a desk and then closing a desk to try to trade crypto — yes, that’s institutional involvement, it’s obviously institutional involvement, but it’s certain institutions putting their little toe into the water, as near as I can tell — simply because, looking at market cap and trading volume, there just ain’t room here for institutions. I mean, I’m sorry: $50 billion is the 24-hour trading volume according to CoinMarketCap, right? Over the last 24 hours, $50 billion; that is three orders of magnitude less than what trades on the FX market. It’s not even a pimple on a gnat’s ass — it barely exists.
So, from my perspective, just mathematically, there can’t be a lot of institutional involvement because there isn’t room in the entire sector for institutions. So I would I actually be very curious what SFOX would be able to say about it. Sure, you’ve probably had a lot of institutions to a limited degree, but are there any institutions — any big institutions — that are significantly involved in the space? By “significantly involved,” I mean average trading volume — and just looking at it, I think the answer almost has to be “no,” or maybe one, just because there isn’t enough room. Maybe I’m looking at it too simplistically, so I’d ask you to correct me if I’m wrong.
SFOX: That’s a great observation that may actually tie into the previous question of retail versus institutional perspectives. The crypto news cycle of how crypto can construe something like JPM coin or Goldman looking at a desk as a signal of major institutional involvement. And while institutions are interested and crypto funds exist, it sounds like you’re offering the healthy perspective that there’s still a long way to go, if the goal is major institutional investment, because crypto still isn’t even really a big enough sector for many of these really “institutional” institutions to get exposure at all.
Tim Enneking: And the key word you used there was “major.” I mean, the average size of a crypto fund is less than $10 million. If you roll up every crypto fund — including Pantera, which is, as far as I know, the biggest one; throw in Grayscale Bitcoin Trust, which really isn’t a fund; throw it all together — it’s a small fraction of the crypto space, and the crypto space itself is, as I said, a minuscule fraction of the investment space. So, there can’t be big involvement from major institutions; there can be tiny involvement from major institutions, or what they consider major — I mean, I guess, technically, we’re an institutional investor, right: we’re 100% in crypto. But, you know, we’re a lot smaller than JP Morgan, unfortunately. So we don’t move the needle like they would.
SFOX: Your fund is an SFOX client, and we’re very thankful to have you in that regard. How did you first hear about SFOX?
Tim Enneking: We’ve been an SFOX client since I had this offshore crypto fund and we set up the U.S. one, like, two-and-a-half years ago, and I honestly don’t remember where I first heard about SFOX. We’ve been a client pretty much since the beginning — but I know what we were looking for, and it’s still the main purpose for using SFOX, although that may expand as your range of services expands. That purpose is the on-ramp, the gateway, the portal between crypto and fiat.
We use SFOX for this because of the all the cleverly named strategies you have — the octopus strategy, and everything else — for being able to trade quite a bit between fiat and crypto without moving a given market. Honestly, I don’t remember if it was just a plain-old Internet search or something more specific — I think it was probably a general search, but maybe it was a referral; I’m sorry I don’t really know. But for over two years now, we’ve used SFOX for that purpose, and given the fact that we were one of the referral customers when you guys did your Series A, I think it’s been a mutually beneficial relationship.
Tim Enneking: I forget what they’re all called! The Polar Bear one; whatever they are.
SFOX: I love that idea, though — “Octopus” is perfect!
Tim Enneking: It is perfect, because of the diversification across — well, in that case, I suppose you have to limit it to eight, but who knows.
Tim Enneking: That’s certainly part of it. I’ll give a shout out to SFOX’s Danny Kim here because another part of it is customer service. It’s becoming less of a differentiating factor now because customer service is improving with some of your competitors — I mean, it could hardly get worse — but SFOX’s customer service, from the very beginning, has been extraordinary, and that counts for everything. I mean, I would pay a significant number of basis points more to work on a platform where I know I can get ahold of somebody when I need to than pay less and not be able to ever get ahold of somebody directly out of support — and I won’t name any of your competitors, but I’m sure you know who they are.
For example, we had some issue where someone phished us: I don’t know how they got it, but they actually got ahold of some address at SFOX and were trying to move some of our assets around. I, or someone on my team, got ahold of Danny at, like, 7:30 on a Saturday morning and said, “Just don’t do anything with this — it ain’t us!” That solved the issue.
It’s not every exchange or platform where you can get ahold of somebody at 7:30 in the morning — and by “get ahold of,” I mean actually talk to them personally on their phone, because I’ve got his personal mobile number. It is fabulous! I mean, that really, really counts for a lot. That’s the single biggest distinguishing factor that comes to mind.
There are more serious players entering the market, but SFOX is responding correctly by expanding its suite of products and services. At various times with Danny and others, I’ve had conversations suggesting improvements that we would be interested in; some you’ve done, some you haven’t, because you look at where your core clientele is and where your room for growth is — but the feedback has been very, very good. I don’t like to overuse the word “partnership,” and it probably doesn’t apply here because we’re not strictly partners or anything, but this has been the closest thing to a partnership one could have without mutual ownership ties.
SFOX: Digital Capital Management advertises active ETH and BTC management — identifying ether and Ethereum as a distinctive aspect of the crypto sector, much like a lot of people think of Bitcoin. One of the things that the SFOX research team has been noticing in our work over the last few months is that ether and Ethereum do seem in exactly this way to be coming into their own and not viewed as “just another altcoin” anymore. What led you to view the value of ETH as distinct from BTC and the rest of the crypto sector?
Tim Enneking: Well, let me clarify what we’ve done. We created, actually, the first — at least, the first that we know of — bitcoin-denominated share class and then we wanted to do ETH as well simply because it and BTC were the two biggest by market cap. But it was more difficult to find a third party that would do adequate KYC and AML for ETH transfers; it was relatively easy to do that for BTC — there were several candidates — but for ETH, it was harder.
In 2018, we had an interesting year because, in terms of ETH, the value of our “Class E,” as we cleverly called it, went up 75%; it got hammered in U.S. dollar terms, but if you figure that ETH is going to recover to $1400 or whatever it hit, then you’re ecstatic because you got 75% more ETH, and that took some of the edge off of the drop in U.S. dollar terms. So the rationale there was, basically, “Let’s attract the HODL crowd to an investment fund because they sit on BTC, they sit on ETH — I mean, by definition, there are more of those than anyplace else because of the market cap — so, let’s create investment vehicles for people denominated in those currencies, if you will, in those tokens.
It was interesting because we have a lot of investors in our BTC-denominated share class, but initially, we had very few investors in our Class E — it was just me and my brother, actually. And it didn’t take long to figure out why: that was because we started talking about it in late 2017, we founded the share class in April 2018, and anyone who had ETH — not so much in 2018, but certainly in 2017 — was dumping it into one ICO or another. So what we did was then start to go to ICO companies — you know, the recipients of this ETH — and say, “Hey, you’ve got your cash flow here, you’ve got your controller, you’ve got all the cash you are sitting on, whether that’s fiat or crypto; give us what you have in crypto and we’ll make it grow.” And, sure enough, we had all sorts of ICO companies that then gave us mostly ETH — some BTC — mainly because when they did their “distribution,” let’s call it, they received ETH and they were sitting on a whole bunch. So had they been smart, obviously, they would have sold it into fiat and watched ETH go down. But many of them just watched the value of their ETH go down and since they were incurring expenses in fiat, that was an expensive proposition.
Billions of dollars were lost by people who just sat on their ETH. People who invested with us lost a lot less in USD terms and gained a lot more back since ETH bounced off of $80 — although, obviously, ETH has lost half its value again in the last several months, but still, it’s more than double its low. And for people who had a 70% or 75% increase in their ETH in 2018, they’re feeling a lot better now than people who didn’t do that. So the idea there was to have gains generated, denominated, in crypto, not in fiat.
SFOX: I imagine that the degree to which that investment vehicle was innovative might have made it a little bit harder to explain how it functioned to LPs as you were attracting investments — did you have trouble with that?
Tim Enneking: Well, maybe less than you might realize because the only people, by definition, who were interested in those two share classes were crypto fanatics. So, a lot of those people’s lives are already sort of denominated in BTC or ETH, or certainly less-rooted in fiat than the rest of the world. So, yeah there are some nuances to explain, but it wasn’t nearly as bad or as difficult as your question implies, mainly because these people were the aficionados: they had climbed a lot of the learning curve already.
SFOX: So it’s a self-selecting audience.
Tim Enneking: Yeah.
SFOX: In a similar vein to this discussion of ETH, I wonder what you think about the future of crypto with respect to how many different cryptoassets will ultimately be successful. Bitcoin maximalists think that it will just be BTC and everything else will go to zero; others think that we’ll see a handful of successes; still others think there’ll be a huge plurality of successes. What’s your position?
Tim Enneking: Well, again, I go back to first principles of investing. If you look at ICO companies as startups, at least the ones that weren’t outright frauds, 90% of startups fail. For the crypto space, we can naturally assume, let’s say 50% of this huge, insane range of ICO projects were frauds — or, at least, people did a lame effort to try to do anything, it didn’t work, and when it wasn’t super easy, they let it go. So you’ve got 50% left, 90% of those are going to go belly under. So it’s probably the case that 95% of all crypto projects are going to die. And that sounds like a huge number, but it’s really not. I mean, in the overall context, it’s pretty natural but 95% of 2600, or pick your number, is still quite a bit.
Clearly, BTC is going to survive for a long time — probably until the last one is mined. I can imagine the headlines that’s going to make! I don’t know if any of us will be alive for it, because, you know, it used to be projected to happen in 2026, now it’s 2041… I recently saw a study that talked about 2090 because difficulty is increasing so much — who knows, we may never find the last bitcoin. But when it hits the last million BTC, and the last hundred thousand — everybody likes round numbers — those are going to be huge headlines that drive the price up, at least for a while, rationally or otherwise.
But there are going to be a lot of other, let’s call them “cryptocurrencies,” running around. There’ll be the backbone cryptocurrencies — the ETHs, the IOTAs, and some of the others — there’ll be the anonymous coins that governments will try to go after — the DASHs and the Moneros — there’ll be coins that provide direct utility — like BAT or Presearch, for instance — and there’ll be tokens, like subway tokens and amusement park tokens — we haven’t gone down the rabbit hole of the etymology of utility tokens, but hey, they have some utility and they’ve got a public market, cool. A lot of them will survive, and then we’ll get back to the valuation discussion that we had earlier.
So, in numerical terms, the total number of cryptocurrencies will be maybe triple figures — but it almost certainly won’t be quadruple figures, and if it is, it’s only going to be because there’s some “metacoin” that’s going to link them all together. You can’t walk around with an electronic or physical wallet with 500 currencies in it, right? So, there’s got to be a way of simplifying that down effectively to one, or to the point where the currency just essentially becomes zero and you just look at a “thermometer” in your wallet to see if you’ve got the money to pay for something.
So it’s not going to go to zero, but it’s kind of a comparison of apples and oranges because, as I discussed earlier, Bitcoin plays a very different role in financial life than ETH does, or XRP does, or Presearch does, or IOTA does — very different roles.
SFOX: What opportunities are you most excited about for the future of crypto? What do you think are the biggest challenges ahead for crypto?
Tim Enneking: Let me take them in the other order.
The biggest challenge for crypto is mainstream acceptance and, really generalizing, there are probably two big baskets that that fits in: one is regulation and the other is ease of use. Those two baskets are very, very, very different — there’s not much overlap between the two of those — but both of those factors are our real challenges for the crypto space, if I’m speaking at a super high level.
What I’m excited about is the general acceptance, the increasing acceptance, of crypto. I mean, without that, it just becomes somebody’s hobby. If it’s only 1.5 million people on an island in the Mediterranean that accept BTC, it’s not all that big a deal since you’ve got 7 billion people on the planet. But the fact that it’s rolling out things like Libra — regardless of what you think of the project, the fact that people actually took it seriously and paid attention to it — that, to me, the general acceptance is probably the first point that I’m really excited about.
The second one is tokenization of real assets, which, in a way, is crypto and, in a way, is not at all crypto. My favorite example is that I want to go to the president of the Louvre Museum in Paris — I still may do this! — and say, “Hey, how’d you like to sell the Mona Lisa?” And, of course, he’ll tell me to pound sand and throw me out. But I’ll say, “Okay, I’ll let you sell half the Mona Lisa: you keep half of it, and you keep physical possession. — okay, you sell 49%.” And so then you go to all the art lovers in the world and say, “We’re going to sell you a tokenized Mona Lisa; the Mona Lisa is now represented by one million tokens. We will sell you a token for $1000 — which, not incidentally, values the Mona Lisa $1 billion. And you can represent that you are legitimately an owner of the Mona Lisa. And, for another 50 bucks, we will give you a certificate that’s gold-plated that you hang on your wall, and it says, ‘You own one token of the Mona Lisa.’ And every third Thursday of every quarter, you can go in and look at your piece of art that you own in the Louvre free of charge” — or whatever, some such combination. Then, the Louvre, which gets $490 million dollars out of that deal goes out and buys some more art, which, if it’s popular enough, the museum can tokenized, etc. etc. etc., rinse and repeat.
The tokenization of real estate is another one that everyone loves to consider. At some point in time, there’ll be an announcement for a new subway system in Austin, Texas, and here’s where all the subway stops are going to be, and you can go to a map with tokenized real estate and put $1000 into one building next to each of the locations where the subway is going to stop. That’s impossible today — you can’t put a thousand dollars on a piece of real estate — but tokenization will allow that.
Tokenization in terms of provenance is another example. Wine, sports memorabilia, blood diamonds, everything: you’ll know where it came from because if it’s listed twice on the blockchain, you’ve got a problem. Those are really more blockchain developments: crypto trading tokens need a blockchain, but blockchains don’t need trading tokens.
The blockchain is all about trust: it’s simply a list you can trust. If you look at the finance system, the entire finance system is built on overcoming a lack of trust — not distrust but just, “I can’t trust you because I don’t know you.” That’s why letters of credit exist; that’s why literally the entire financial system has been built. What the blockchain is going to do just because you can trust it — it’s much easier to list the businesses or the business sectors that won’t be seriously affected and positively affected by the blockchain — by a trusted source of information — than it is to list those business sectors that will be affected by it. And I think I’ll stop there because, as I think about it, there are a whole bunch of other areas I get truly excited about, but those are some of them.
Thanks to Tim Enneking for sharing his views on the past, present, and future of crypto from the eyes of a fund manager.
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