Tetras Capital, the Third Fund to Join the Apex Token Fund: An Interview with Tetras Founding Partner Brendan Bernstein
What is your background? How did you get involved in the crypto space?
I started investing in public markets in high school and lost my shirt trying to trade the traditional large cap stocks. I could never compete with the large institutions dueling over the limited alpha in large cap markets, so I learned I needed to migrate elsewhere and used my (unfortunately small) size to my advantage.
Since then, I’ve been investing in, what I deem to be, very inefficient securities — microcaps, NOL shells, alternative assets, special situations and illiquid international stocks. These were assets the broader market didn’t understand, believe in or was just incapable of buying because the mcap or ADTV was too low, for example.
I discovered bitcoin in college in 2013 under the same lens, which checked all three boxes above stronger than any other asset I had ever seen, and subsequently made my first investment. The majority of the investment decision was actually predicated on the inefficiencies, rather than the technical underpinnings.
I went to Duke to study Economics and Finance and fell down the Investment banking route at Goldman Sachs after college. I ended up becoming much more interested in tech and VC and left to pursue those interests with an angel investor in NYC. I helped him run three businesses that he was incubating and ultimately lead his blockchain focused investing. It was readily apparent in 2016 that a new technological cycle was forming around blockchain. As a tech investor, you lose your job from missing a cycle. We knew we wanted to invest in the space but there were major impediments to doing so ourselves — custody, liquidity, 24/7 trading, operational complexity, deal flow, etc. After diligencing most of the funds that had already launched, I found a niche that was not yet filled and I left mid 2017 to form and build a fund that had the technical understanding and financial literacy to invest across the entire crypto asset universe.
I partnered with two cofounders to help achieve that: Tom Garrambone, one of my roommates from Duke who was a Control Systems engineer there and also subsequently an investment banker, and Alex Sunnarborg who had been working at Coindesk as their head of research after selling his company, Lawnmower, to them. We also are working closely with 6 hands on advisors and operating partners who help to round out our skillset: Tom Ding (String Labs / DFINITY), Johnny Dilley (Blockstream), Fabio Berger (0x), Rick Dudley (Ethereum), Raphael Ouzan (Thrive Capital) and Dan McMurtie (Tyro Partners).
What type of fund strategy does Tetras Capital employ?
Tetras Capital is a multi strategy hedge fund that merges (1) active, catalyst driven short term trading, (2) thematic and narrative driven investing and (3) long term buy and hold. At a high level, our portfolio solves for an optimal risk/reward profile within volatility and liquidity parameters. At any given time the portfolio makeup is a good mix of (1) pre ICO SAFT’s and (2) liquid tokens (ranging in MCAP size). The market regime/paradigm has and will continue to constantly shift and a flexible strategy that can adjust accordingly will capture significant alpha and generate superior long term performance. For example, in the summer of 2017, ICO and early stage investment expertise tended to outperform but more recently all of the alpha has been in liquid token picking. The Tetras team has a blend of technical blockchain knowledge and financial market literacy which enables the fund to capitalize on both environments. By not segmenting our strategy unnecessarily to one portion of the overall asset class we can outperform over a “full market cycle”.
Much of our strategy is currently predicated on leveraging our hybrid engineering / financial backgrounds and our technical advisors to build a fundamental market narrative that we feel is not yet reflected in asset prices. Since launching in September, our most profitable trades have come from synthesizing our views on “macro” capital flows with an understanding of the cryptographic and technical underpinnings of each protocol. We tend to take concentrated bets (holding less than 8 positions) and aim to hold most positions for > 1 month. However, with that being said, there are instances where we will short term trade around a catalyst, such as a hard fork.
What do you benchmark against? How have you performed relative to this benchmark?
When discussing benchmarking, the most important question to ask is what is the investors “passive” alternative. For most of our current investors, they have the know how to buy and custody BTC and also an equal weighted portfolio of the “coinbase assets”. We benchmark ourselves against both and have significantly beaten both net of fees since launch.
How do you analyze new investment opportunities?
The crypto market is currently moving in waves and cycles, with value entering through the most liquid crypto assets and fiat on ramps, and then trickling down into lower market cap, longer tail assets. Each new investment decision starts from building a picture of where we are in the current market cycle.
It goes without saying, but the current market is not fundamentally driven whatsoever (i.e. based on real drivers like quality of code, team, transactions / day and adoption). Narrative and sentiment are the prevailing forces. We spend a lot of time understanding the core motivations of buyers and sellers, planning scenario analyses, and identifying underpriced or followed market narratives and the key players that will benefit from a shift.
We currently feel BTC has an extremely attractive long term risk reward in the space and it is therefore crucial to think of any longer term trade in terms of opportunity cost to bitcoin returns. When we take “derivative risk” outside of bitcoin, we need to identify an asymmetric return profile. For example, around the b2x hard fork we built a thesis that both miners and investors would use BCH as a hedge and that most of the sellers for the time being had already left BCH. We also noticed that miners, who are generally more risk averse given high fixed and operating costs, were holding more BCH than they typically did (they tend to sell around 70–80% of block rewards and retain the remainder). The risk profile of the trade was very strong and we moved a significant portion of our portfolio into BCH around this time.
On the early stage front front, we chat with most, if not all, of the more well known and upcoming ICOs regarding their pre sale round. Given illiquidity, we cap ICOs as a % of portfolio, so we tend to be much more selective. For ICOs, team, structure of the sale, valuation, and scarcity are the most important considerations. We’ve helped many protocols think through their ICO structure and valuation and tried to help bring a semblance of structure to the space — drawing from the IPO world given our investment banking backgrounds. Our operating partners will also help us to do a deeper code review if we’re taking a large position.
What trends are we watching?
In 2018, we’re keeping a close eye on privacy implementations, masternodes and other passive income solutions, bitcoin side chain implementations, alternative consensus mechanisms to PoW, smart contract platform competitors to ETH, and sentiment towards dex and interoperability protocols.
What projects are you excited about?
All falling under the umbrella of trends mentioned above, we’re very excited about DFINITY, Rootstock, Monero, Zcoin and Decred. We’ve been following DFINITY for quite some time. They have one of the strongest teams in the space and are developing real cutting edge technology. The risk / reward is one of the best we’ve seen. RSK is also a fascinating architecture and one of the first major BTC sidechain implementations we’ll see live. On the topic of smart contract platforms, we are excited to watch the start of more dapps launching, like REP on ETH, and the migration of ICOs and dapps to and from alternative blockchains like XLM and UBQ. We have long been fans of XMR, XZC, and DCR, all money use case tokens with major upcoming catalysts for holders including privacy features, custody options, and masternodes.
What are your projections for 2018?
Seems crazy to say, but the crypto run up is just getting started. Institutional capital has not had a meaningful move into the space yet and is just starting to tip toe in. We’re going to start to see real, institutional quality infrastructure emerge for crypto very shortly — ETFs, qualified and insured custodians, more performant exchanges, etc. Most of the capital will initially flow by large majority to what’s most liquid and easy to safely secure — BTC, ETH, etc. — and will then trickle down into some of the more “speculative” assets.
The entrance of institutional capital will start the transition from a market that’s entirely narrative and sentiment driven to one that’s predicated on fundamentals. The entire transition will not happen in 2018, but we’ll see the first signs of it. Tokens that satisfy the money use case — those that investors / users buy and holder rather than just use on a one off basis — will start to accrue more value than utility tokens. As “utility” tokens no longer becomes a misnomer and usage begins, velocity will increase dramatically and most prices will start to fall (in BTC terms at first) given the erroneously high valuations and the velocity increases.
Ethereum’s network effect and competitive moat will prove to be less than many price in and project. ICO’s and dApps will migrate to alternative protocols such as Stellar lumens, UBQ, DFINITY, etc.
Cheap, onchain scaling in a secure and decentralized fashion is a fantasy. Lightning network launch will hurt bitcoin alternatives that compete on transactional cost alone.
Why did you want to participate in the Apex Token Fund?
As investors, we get excited when we find a strong team revolutionizing a stagnant industry. Apex token fund is a highly technical, forward thinking team seeking to upend the fundraising and capital allocation space — a field where there’s been a dearth of innovation. We’re extremely excited to be part of this transition to a more democratized, open and liquid investment industry, furthered by funds like Apex.
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