DAA Manager Insights: Arnold A. Sternberg

Jose Andres said, “The modernity of yesterday is the tradition of today, and the modernity of today will be tradition tomorrow.” This idea can be applied to Switzerland’s open attitude toward the crypto scene, confirmed by our DAA Manager Arnold A. Sternberg, who explains this relationship in detail.

You are an active member of the crypto-asset ecosystem in Switzerland. Could you tell us a little bit about the Swiss crypto scene and its development?

Switzerland is one of the global jurisdictions that has proven to have an open stance toward the new crypto-based technologies and their impact on the current economic and financial systems, and the country is leading the way as a global crypto hub in supporting, in its neutral and exploratory way, the evolution of this digital revolution.

The financial sector in particular has traditionally been one of the core industrial sectors of the country with leading banks like UBS and Credit Suisse having their base here, but also other industries where DLT and related technologies are expected to have a key impact, like Pharmaceuticals, Chemicals, Insurance and Manufacturing/Logistics, have a stronghold in Switzerland.

In addition, an ingrained respect for privacy, as expressed e.g. through banking secrecy and other legal structures, as well as a strong history and focus on neutrality, democracy, and decentralization of political power, reflects many of the values that open blockchain technologies like Bitcoin stand for in their essence. Finally, but probably not exhaustively, Switzerland has been a global leader in high-tech/engineering in various industries for a long time, and with institutions like ETH Zürich, one of the leading technology and engineering universities in Europe and globally, the country has a natural interest in and foresight regarding the development of leading-edge technologies.

All of the above have helped create a vibrant ecosystem of politicians, legal advisors, financial institutions, researchers, tech companies, investors, etc., which during 2017 in particular has started attracting a critical mass of individuals from all walks of life to allow discussion about these technologies to go mainstream.

Cities like Zug and Zürich attract global talent active in the crypto space to experiment with their ideas, and such municipalities are even early adopters of these technologies.

It is easier than in most jurisdictions to establish crypto companies, and pioneering experimentation with new trends and concepts like ICOs (for project/company funding) has been very widespread.

So, long story short: even if by no means perfect and with its share of opposition, Switzerland, in its typical Swiss way of doing things and slowly finding its way, is a great place to be active in the crypto space. I am very happy to be able to pursue my dream here and to be part of this next wave of technological evolution. Instead of putting hurdles in the way to maintain the status quo, Switzlerland has the openness and attractiveness within a cooperative ecosystem to push this technology forward as a leading country, seeing more opportunity than issues.

You first named your DAA Kryptonite, but it turned out that name was protected under Disney Superman trademarks, so you changed it to Kryptostar. Does your DAA have some “secret power”? What is the core strategy you are implementing at KCOR?

It would be quite presumptuous to claim there was some “secret anything” to the strategy we (my team and I) are pursuing with KCOR, as would be the case for most investment strategies in any investment field. And even if there was one, I have seen such “secret sauces” lose their taste quite quickly during my tenure as a hedge fund-of-fund manager. Very few investment managers can outperform the market over an extended period of time; I had to learn that the hard and experiential way.

This becomes even more relevant in a new field like crypto-asset portfolio management. As a technology, if putting everything in one basket, it is still very early days to see where it is all heading (like the internet in the mid-90s). We believe that DLT/blockchain/cryptocurrencies/tokens — whatever you want to call the space — are here to stay and will fundamentally change how things are done on many levels and across industries. We are currently witnessing the development of the key components and infrastructure within the space that will lay the foundation for this massive change. The key focus for us at the moment is the network level as the core enabling platform, with different technological layers capturing different functionalities developing on top of the network level. Additionally, the application level is showing the first signs of evolution, where ideas are still quite young to be implemented in an economically and technologically viable way because much of the core infrastructure is not yet ready. But in our view, this is only a question of time and timing as this field evolves, and some promising projects already exist.

With KCOR, we are therefore attempting to give investors, above all, concentrated exposure to what we believe are key infrastructure components, such as Bitcoin, Ethereum, and Monero. We feel we have some good insight and exposure through our Swiss location (e.g. Ethereum was initiated and still has a strong base in Switzerland), as well as through my involvement with Shift Devices AG, a company producing another key component of this new financial system: secure storage solutions. Shift Devices AG is a hardware wallet/enterprise storage solution provider that empowers individuals and institutions to efficiently and securely store their digital assets. The company was co-founded by a Bitcoin Core maintainer (Jonas Schnelli) and is deeply embedded in the local and global crypto ecosystems. We receive requests from customers to add new coins all the time, making it necessary to do the necessary due diligence and thus to have educated views on many of these coins. We regularly meet with founders, developers, managers from various projects (e.g. Monero, Melonport, ICONOMI, and many others), and we feel we have much more than a superficial understanding of the state and potential of these projects/companies and are also able to vet other projects with such key experts from the field. KCOR tries to utilize this information to create a simple portfolio structure with core positions focused on more established projects, as well as some inclusion of what we feel are promising technologies for the future.

They say that one day in crypto is the same as one month in the stock market. As someone who has a lot of experience in the traditional financial industry as well as in the crypto market, do you agree with this statement?

Judging by the past few months, it’s more like a year in the stock market is like a day in crypto. Volatility is quite fascinating, and from an investment point of view it offers a number of opportunities not found in traditional financial markets. The early-stage nature of the technologies and ecosystem — with a highly fragmented exchange landscape, limited regulatory oversight, low but growing volume, a lack of transparency, and limited fundamentals — offers investment opportunities that are exciting but at the same time very dangerous. Crypto is still in its infancy, but it is growing up very quickly and, in our view, in an unstoppable way. In such an environment, investors need to be able to handle large swings without panicking and should only invest as much as they are capable of losing. This is not a “get rich quick” scheme, as many of the newcomers to the space seem to believe and get burned by, and whatever “homework” can be done to understand what one is investing in should be done before committing any money. This is no different than in traditional markets but is even more relevant in crypto at this stage.

You recently joined an innovative company producing hardware wallets for cryptocurrencies. Is there anything interesting or counterintuitive you have learned about cryptocurrency security that you would like to share with our community?

I mentioned Shift Devices AG in one of the above questions, and I am fortunate to be able to combine my past experience with the knowledge concentrated in this company and to be part of an amazing team. Getting into crypto has opened my eyes to the importance of security in our digital lives, and witnessing the many security issues of recent months — hacks, scams, and people losing their private keys and thereby any possibility to recover the value of their digital assets — shows that safely storing digital assets is at the core of this new financial system. If you don’t own your private keys, you don’t own your assets. For this reason it is important for everyone involved in this space to understand what this means and to take responsibility for ensuring the proper handling of their own wealth. Hardware wallets are currently a major way to do this, with other technologies evolving over time to enable individuals and organizations to handle this appropriately. Cryptocurrency security is paramount.

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