Investing in Blockchain Technology

EMS:

Hi, Srini and Phil, thank you so much for being with me today.

Srini Dhulipala:

Thank you, Elana. Thanks for having me.

EMS:

Absolutely. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

SD:

Sure. Thanks for the opportunities. The name of the fund is actually New Form Liquid Opportunities Fund. And as the name suggests, it's a fund that basically gives investors exposure to the liquid blockchain ecosystem. Now, we are a fund of funds, and we have two distinct investment strategies and investors have the option of investing in either or both strategies in any proportion they feel like. So, we have a liquid token strategy, which is directional. It generally tends to be long biased and gives investors a liquid long bias exposure to the crypto blockchain ecosystem. And then we also have a market neutral fund or a market neutral strategy, which really is a strategy that deploys traditional markets strategies such as arbitrage, market making, high frequency trading and vault trading to kind of take away a lot of the discrepancies that exist within this ecosystem to present a market neutral return to the investor.

The fund really was launched in April of last year. We are still young, and we are still new. We have about $13 million in AUM as of now, and that an AUM is split roughly 65/35 between the directional fund and the market neutral fund. So, the two partners that we see here, we are the big partners in the Liquid Opportunities Fund. And our third partner is New Form Capital, which is a venture fund that was founded in 2019. It's a small minority owner and it's a partner and they have been a VC fund in the ecosystem since 2019 that manages about $100 million in AUM. So, it's a big team, it's a seasoned team, and it covers the entire gamut of investing in this exciting new technology.

EMS:

It definitely is an exciting time in your space, so love to hear from one or both of you, your overall outlook.

SD:

Right. So, before I go into the outlook, I also wanted to clarify how we approach this ecosystem. So, we feel like the ecosystem is in its very, very early stages and in the parlance of baseball, I still think we might be in pregame. We haven't really started off, and I think it's because of the fact that it's such an early-stage ecosystem and the market is still trying to figure out where this technology is going to take hold and when it does take hold, what kind of magnitude of adoption it's going to have. That's why we have so much volatility in the ecosystem. So, one of the things to mention, we feel like the best way to access this ecosystem is really in a liquid form. And I'll go into it at a later form. And because it's so early stage, because it's so volatile, we feel like, and because the use cases are so large and so wide, we feel like owning a few tokens is really not the right way to go about doing it because we just don't know which tokens, which projects will take hold.

We do know that'll be a lot of failures. And at the same token, the only way to approach this is through a professional lens and because the ecosystem is so volatile, putting your money with one manager also tends to be very, very dangerous and idiosyncratic. And as data shows you one out of every two managers fails. So, we feel like while generally having a background in hedge funds and in investment banking, I've never really been a big fan of fund of funds because they generally tend to add costs, I feel like fund of funds is really the most optimal way to access this ecosystem safely. So having said that, I will answer your question. I'll just back up and say this is one of the most exciting and innovative technology platforms I've seen since the internet revolution, like what the internet did for information, I think blockchains does for transfer of assets, transfer of value, verification, security.

And as such, I feel like over the next four to seven years you will see a massive increase in adoption. You will see a massive increase in market cap of this ecosystem. I'm also a bit of a student of history, even though my background is in finance and engineering, every time there is an innovative technology that takes hold. So, whether you go into the 19th Century and think about the railways or you think even the recent past the internet revolution, what you see is 90% to 95% to 97% of the projects fail. And this is not going to be any different, just like it won't be any different for AI. So, I think the outlook is extremely bright. The only issue is trying to figure out how to navigate this ecosystem that will have a lot of volatility, that will have a tremendous amount of failure rate, but also the small number of projects that do succeed will be 100x, 200x type of return.

So, in my mind, over the next four to seven years, most settlement payment of different assets like cash securities will eventually be done on blockchains and it'll be done in a way where you wouldn't even know it that the underlying technology is blockchain that is affecting these executions, but it'll happen. And I think when I really think about it even deeper and every day that passes, I find new and new use cases for it. I think there are use cases in 5G, there are use cases in governance, and I think the only recent example I can lean on is cloud computing. So, I remember when I started my hedge fund, I had a tech stack, I had a tech room that had a bunch of servers where all my information was stored. Fast forward three years, all that stuff was gone, everything was in the cloud.

And in a way, cloud is decentralized. It's basically taking all your data, taking it out of your tech space and putting it into the cloud. If you are a user, you don't really see any change yet. There is a massive upheaval and change and an upgrade in terms of security speed that happened with the cloud. And I think this is what blockchains will do for industries, from gaming to insurance, to telecoms to AI, all the way to finance is going to be cloud-like except on steroids. So, I feel like this is going to be a massive, massive change. And the last thing I'll add is unlike the internet, which was a public protocol wherein you couldn't invest in the technology itself, you could only invest in companies that utilize the technology for their efficiencies. The blockchain actually is a private protocol, which effectively means that you can actually own the technology itself. And the more that technology that gets used, the more economic benefit you get by owning the tokens of that particular blockchain. So, I find that to be also a very, very exciting outlook for this ecosystem.

EMS:

Great. Thanks Srini and I would love for one or both of you to touch on more specifically, I know you addressed some of this already, but any other opportunities and challenges you see in this space and how you're addressing them?

SD:

The challenges and opportunities in this space are kind of like two sides of the same coin. I think the opportunity here is I feel the usage and adoption of blockchain will grow by leaps and bounds. And I would think if I had to put numbers on it, I would think that the network traffic on blockchains will increase a millionfold in the next seven to ten years. And when that happens, obviously the market cap of the liquid token ecosystem or cryptocurrencies will potentially be a multiple of where we stand right now, which is $1.6 trillion. The greatest opportunity, or rather, let me start with the greatest challenge. I think this will happen, this increase in market cap will happen in the context of more than 98% to 99% of the current projects and projects that are yet to come failing. However, the projects that do take hold will potentially return like a 100x, 200x type of returns, like generational wealth can potentially be made kind of being invested in this ecosystem.

And I think it's precisely for that purpose I feel like the fund of fund approach is the most optimal way to do it. And I think for a fund of funds to work properly, there are two, I think basic things that people have to get right to work a successful fund of funds. Number one is really to kind of have a process in place to kind of construct the portfolio, balance the portfolio and maintain the portfolio. And the number two is you need to have people running the portfolio that have a very extensive background in risk management as well as identifying good business practices when it comes to investment process as well as operational process. And I think given our extensive background, we check both boxes. My background is six years in investment banking at Morgan Stanley, six years running a proprietary desk at Merrill Lynch, nine years running my own credit hedge fund.

And Phil's background is very complimentary to mine. His background is in quantitative trading, macro trading since 1986. So, I think with our combined 60 years of experience, I think we've done a pretty comprehensive job of scouring the landscape for, we've so far conducted over 140 interviews of managers. We've talked to multiple exchanges, custodians, so we have a pretty good understanding of the ecosystem where the weak points are. And I feel like we have a portfolio since April that has performed extremely well. And with time it's only going to perform even better because we are identifying better and better managers and the construction of the portfolio is getting better.

Phil Simotas:

I’ll add one other point which I think is important for investors to know is this project got started because both Srini and I were looking for ways to deploy our own capital. We both have had, as Srini was mentioning before, we both have had extensive experience managing large pools of capital for investors. But this time around we both independently came to the conclusion that we wanted to have exposure to this technology because of its groundbreaking nature. And we had independently also made ad hoc investments into the space. I myself had tried to bought some tokens on my own. I invested in a manager one off, but I quickly came to the conclusion and realization that what I was doing was suboptimal. This is one spot where a fund of funds construction would lend itself perfectly and Srini came to that conclusion independently and we based by chance because we knew each other, we were comparing nodes on our investment strategies in the space, we were both looking for a solution for ourselves to invest our own capital and couldn't find one out there. And so we thought, well, maybe we should just go build one ourselves. And there are probably a lot of investors out there like us that are looking for this type of solution. So why don't we make it put all this together into a vehicle that's of institutional quality where other investors would feel comfortable joining alongside us.

SD:

The only other thing I'll add to that actually the principles in this fund are about 50% of the AUM. So, this really, as Phil said, started off as a way for us to invest our own capital. And when choosing investments, I've always found it very important to make sure that the principles of the fund that we were investing in were invested alongside us. So, people should note that about half of capital in this fund is the principals’.

EMS:

We've covered a lot of ground today and wanted to see if either of you have any final thoughts you'd like to share.

PS:

I would say just in terms of what blockchain and the digital asset ecosystem has gone through, we've gone through a number of boom and bust cycles. We're just coming out of a really big bust cycle right now. And from our standpoint, it looks like all the necessary ingredients are in place for a next leg up in the digital asset ecosystem that will be meaningful. So, we're very optimistic about the outlook over the space over the course of the next 18 months to two years for the next big move.

SD:

And all moves are different. I think the great thing about this particular stage that we are in blockchains is coming out of the 19 2017 bust cycle, it wasn't very clear at that point whether blockchains would survive, whether there was actually a use case for it, whether it mattered if blockchain survived or not. I think now there is just overwhelming consensus as well as enough adoption to make sure that blockchain is a very viable technology and an innovative tool for settlements and payments. And I think this next leg up will be a little more differentiated, less speculation and more kind of adoption. One last thing I'll say is people always think about blockchains as very speculative with no use cases. By and large, it's rather true. However, people should be aware that just last year there was more than about 11 trillion of stable coins that were moved across blockchain rails without a single failure. And stablecoin is effectively just fiat currency in our token form.

EMS:

Well, Srini and Phil, I wanted to thank you both so much for sharing your perspective with our listeners. And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.