Client Spotlight: BKCM Digital Asset Fund
In this installment of the Client Spotlight series, we spoke with Brian Kelly, founder and CEO of BKCM Digital Asset Fund.
BKCM is a digital currency investment firm with a focus on global macro and currency investing. Founded in 2013, BKCM was one of the first management funds to truly focus on digital assets. In this interview, Brian shares some of the wisdom he has picked up over the years and part of his vision for the future of crypto.
Obviously, you are an OG in the bitcoin world, and like many people, you were a skeptic at first and you thought that bitcoin might be a scam. I’m curious about what you saw when you were investigating that flipped the switch?
Brain Kelly: Yeah, I was a total skeptic! That was primarily because I came from the traditional FX world, where the currency had to be backed by a government, backed by an army, or “backed” by something. So, I really struggled, originally, to find, “What was bitcoin backed by? What was so special about this type of thing?”
My “ah-ha” moment was that, ultimately, what you have here is simply a piece of software that dis-intermediated financial services. I went, “Oh, let me take a look at some other industries that were disrupted by technology.” The first thing I looked at was, “Well, what happened to the post office when email was invented?” And I went, “Oh, that doesn’t sound great for financial services and I’m in financial services. I better think about this.”
So that was my “ah-ha” moment. I took away all the thoughts of what a currency needs to be and just looked at what this did. It was software that took the middle-man out of finance. And that was it.
So, it’s one thing to discover that value and make that realization, but you were really the first one to hop on that and benefit from it. How did you have the courage to do that, when everyone was a skeptic at that time, and what were your first steps?
BK: Yes, everyone was a skeptic and there were definitely some hushed whispers that BK had gone crazy! I’ve found in my career that the single best trades and/or investments that I’ve made are when everyone thinks I’m crazy. So that was one signal for me: when everyone thinks I’m nuts, I know I’m on to something.
Number two: I started to look at it holistically. I was running a global macro fund and I started to look and say, “What do the next 10–20 years of my career look like? Where’s the growth area on Wall Street?” And I looked at demographics; I looked at the investment greats like Buffet, Peter Lynch, and everyone who came up and rode this wave. They were certainly smarter and better than the average investor, but they also had this massive tailwind of baby boomers every month putting money in their retirement account. And then I thought, “Well, that’s ending. Baby boomers are retiring; they’re going to start taking money out. So who’s the generation that is going to give me the tailwind?” That’s the millennials.
Then, I realized: millennials couldn’t care less about stocks. They do, but they’re not going to put money into stocks like baby boomers did. But I knew that millennials loved bitcoin and crypto. I put two and two together, and said, “Well, if I want to be in the growth area of finance for the rest of my career, and I want the demographic tailwind, then I’ve got to be in crypto.” I knew I could carve out a niche, I had an interest in it, so that’s really where it snowballed.
That’s interesting. Part of what millennials like about crypto is the volatility and social media aspect of how crypto fluctuates. A tweet can completely change the market. But, how sustainable is it to be so volatile and so connected to something like social media or the whims of any which person?
BK: Well, I do think it’s sustainable. Let’s compare it to the stock market. Every day on CNBC, the channel that I’m on, you have baby boomers come on and tell you about their favorite stock, and if the baby boomer’s influential enough, then the stock price moves. So you’re seeing the same thing with crypto, it’s just that it happens in a different medium. It happens on Twitter, on TikTok, it happens in the area that the new investors — the millennials — watch all the time. This is the way that millennials and this generation will tell the story. So you just need to pay attention since that’s how the story is being told.
What also probably contributes to the volatility is that there are a lot of new players joining and lots of shitcoins being added just because there is such a low bar to entry. Do you think that bar will go up? How do people start to make sense of all this noise as so many people are entering so quickly?
BK: As you guys know, you do any kind of educational piece on crypto, whether it be a conference, a call, or you write something, you just get massive demand for that. Everyone wants it. I used to say this is 2018, there’s still a bull market in crypto education. It’s just massive there. I think research will evolve with the market. Originally, the research was very much done on the lines of BitcoinTalk. That was kind of the old way you found out about what was going on with the different protocols and all that.
Now you’re starting to get some more of what, I would say, looks like more traditional resources. I think it will mature, I think it will evolve, but I don’t think it will mature the same way. I don’t think that the crypto community, the people that are buying it and investing in it, want a traditional investment bank report on crypto. I don’t think there’s demand for that. I think there’s a huge opportunity for people who are into research, into educating, to fill that void. Because there is a void there now.
In addition to that, what would you say are some of those untapped opportunities for people who are still trying to hop on the crypto wave?
BK: Yeah! I mean, we’re invested in Messari and Ryan Selkis is the head over there, I kind of use that as a template. They’re doing a great job, if I want to learn about a protocol, they have a really quick and dirty paragraph or two on what the protocol does, who the key players are, etc. There’s still a lot of room there.
Frankly, there’s just a wide-open field. Most people are just looking at bitcoin and there’s just so much more to it. What I’ve always said to everyone from the beginning is: figure out what you are doing now in the traditional world and try to apply that to crypto. And carve out that niche for yourself. There’s just so much room for people to carve a niche and be successful in this space.
I know a lot of people come from traditional finance, so from your point of view, what is the main thing that people should keep in mind that is very similar between traditional finance and crypto and the main thing that people should keep in mind that is very different?
BK: It’s very similar in that human fear and greed drive the market ultimately. In traditional markets, you could look at PE ratios or the 200 day moving average. But human fear and greed are ultimately what makes someone hit the button to buy or sell. So, that’s similar.
What’s different, and what is really difficult for a lot of traditional money managers and investors to wrap their heads around, is you don’t necessarily have cash flows. In general, what you are really looking at here is the network effect. And so I always encourage people to take a look at how you analyze Facebook and Twitter in terms of valuation. You look at the network effect, you look at the monthly average users. In this space, try to look at those as your metrics. How big is the network? How fast is it growing? What’s the address growth look like? Those types of things are different from traditional finance because you have to understand what an address is and what that means to the network growth, but there are parallels to traditional finance.
Shifting gears a little, I hear that you have moved your headquarters over to Wyoming. Essentially, the reason you did that was that they have a lot of regulations and rules that are very crypto-friendly. Is that right? That’s interesting because that’s good and that is helping the growth of the crypto community there, but also, a big thing that people really like is that it’s unregulated and it’s not tied to anything. What do you think about the line of freedom and the value that adds to crypto vs needing some kind of regulation for it to be viable?
BK: The way I think about it is twofold. The one thing that crypto allows you to do is opt-out of the traditional financial system if you choose. If you really want to get out of the traditional finance system, get yourself a ledger, put some bitcoin or ethereum or your favorite coin on it, and you can opt-out. And that is the so-called “unregulated” part of crypto. And I think there’s value to that, I hope that never goes away….at the same time I operate in a regulated world. We run a hedge fund, we’re regulated by the SEC, we’re regulated by the National Futures Association. So that’s the world I operate in, and therefore, as a fiduciary for my clients, I need to make sure the jurisdiction I operate in is the friendliest regulation we can have and the clearest regulation.
So one of the big things about Wyoming, they passed about 30 or so different laws covering crypto. But most specifically, they define what it means to own crypto. In other states you don’t have a specific definition, you’re relying on other laws, not that they’re bad. But, Wyoming says this is how we define ownership of crypto and we are going to put it in our laws. As a fiduciary, that makes a big real difference in terms of where I’m going to store my assets for my clients. I want to make sure there is a clear line of ownership of where I store my assets, where I operate, and where I’m holding them for my clients.
Nice, so looking backward, what is something that you might not have seen coming or something in hindsight that you realize?
BK: So certainly the 2018 bear market, I did not see lasting as long as it did. We got into June of 2018, bitcoin was trading at around $6k and kind of traded there for a while, and I thought that was it. 2018 was difficult because the market to short bitcoin was nascent. It wasn’t very big. You didn’t have the ability to really be short. So, all we could do as a fund manager was buy the dips, and that gets real painful when it keeps dipping.
Moving forward, my mantra is I never ever want to go through another 2018! It’s definitely driven us to make sure we have the tools to handle a bear market again. Which we do now, we have the tools and strategies, thanks to fine folks like B2C2, we have that ability to go long and short.
Looking back that was…probably the most painful, let’s put it that way!
For cryptocurrency, blockchain, de-fi, or anything in the realm, what do you see as the next big milestone?
BK: For, me it is interoperability. I’ve had this view for a while. And this was informed by what I saw in the 1990s. When I was trading in the 1990s during the internet boom, at first I did not get the internet either, and that’s part of what drove me into crypto and bitcoin. I said, “Well dammit I missed the internet, I’m not going to miss this one!” And so I look back on that a lot and think, “What did I miss and what didn’t I see? And I think what that was, at least the most obvious one, was email. If we had two different types of email accounts, we couldn’t send each other emails. Then you had the interoperability protocol, so you could now send emails to everybody and that’s when everything just exploded and proliferated. It’s the sharing of information and data across different platforms.
And I’m really looking forward to seeing what happens. Because frankly, I don’t know what’s going to happen; I don’t know what people are going to create, and the most exciting thing about this business is that it’s going to look really different six months or twelve months from now. I have no idea what it’s going to look like but I’m here for the ride!
I think that’s really exciting but I think that’s also pretty scary for a lot of people. To wrap this up, what would you say to those who are interested in the space or looking to invest, but are too scared to make the leap?
BK: To me it’s all about position sizing. How much of your investable capital are you going to put into crypto? My rule of thumb has always been to take 5% of whatever you think you’re going to invest and put it in crypto. And my reasoning is this: if I’m wrong, or we’re wrong, about this and crypto (which is not my view, I think we’re well past that point, but I’ve been wrong before so let’s just say!), you’re going to lose 5% of your investable assets. It’s going to hurt, but it’s not going to change your life. But if I’m right, and this is the next big asset class, and this really is going to replace the plumbing of traditional finance services, then that 5% of your portfolio is going to be a meaningful amount. And so you have the opportunity to do that and I would just say if you’re small enough if you size it correctly, then you’ll be able to withstand the volatility. You’ll be able to withstand the unknown, and you won’t be so scared like: “Oh my God, I’m going to lose my life savings!”.
