DAA Manager Insights: Reinhard Berger
If we combine K. Cunningham’s saying that “Trust is something that is difficult to establish” and our DAA manager Reinhard Berger’s thinking about the three T’s of institutional investment, we can predict that institutional investors will enter the crypto world slowly but surely. Reinhard explains it well.
You have experience in the hedge fund industry. How fast is this sector jumping into the crypto space? What are some critical issues that need to be resolved to see more interest from the institutional area?
From what I have observed in traditional finance, in particular in alternative investments, the keys for success are track record, transparency, and, most importantly, trust. I call these the three T’s of institutional investment. Track record speaks for itself. Institutions don’t lead; they follow. Rather than investing in ideas, they need to see proven success. This also includes asset size, of course.
A diligent investor needs to have confidence in the ability of the manager to handle a substantial portfolio. Both the investment process and the results thereof need to be transparent. Last but not least, personal relationships and trust are key.
A last word about trust: Large institutions have sophisticated due diligence procedures to begin with. But at the end of the day, the senior decision makers put the money where their trust is.
Your ICO will take place in the United Arab Emirates. You have a sales agent present in the Middle East. Is the atmosphere there regarding crypto any different than in Europe? Does Dubai have big plans for blockchain?
We see a high demand for crypto in the ME. The Emirates and other wealthy ME countries have traditionally embraced alternative assets, in particular gold and other precious metals. Crypto is regarded as an alternative asset in that very sense. One could say that Arab investors have had a good hand in spotting trends. However, decisions are not made in the way that we are used to seeing in Europe. Decision-making is less analytical, and people put high emphasis on and trust into “localness.“ For the UAE in particular, there is huge support for blockchain technology from the government side. There are concrete plans to have parts of the land registered on a blockchain. The ruler of Dubai has appointed a member of the royal family to oversee Dubai’s blockchain activities. This is one of the major reasons our upcoming ICO will be conducted out of the UAE. Token owners demand predictability, especially regarding the regulatory environment.
What are some of your beliefs about cryptocurrencies and digital assets that are widely thought of as outstanding?
Well, I’m not sure if my perception of the overall market is that extreme. Many investors think that Ethereum, ERC20 tokens, and ICOs will outperform bitcoin. I do not expect this to happen; I have a rather contrarian view. The ICO market especially is highly overvalued. The great majority of crypto start-ups do not have sustainable business models. At the end of the day, it’s revenues and earnings that count. Even for some very high-profile companies, I see no way of materializing these revenues. Take the card companies, for example. If you add up the market cap of all the major providers, you are looking at more than half a billion USD. Aside from the fact that some have significant operational challenges, I simply do not see the masses of users needed to support such sky-high valuations. So the asset token market is purely driven by speculation at the moment. Most of these assets will face a compression to 5 to 10 percent of their current value, if not more. The same applies for Ethereum. While this may sound heretical to many, I don’t think Ethereum smart contracts will be the last step in blockchain technology. It is very possible that Ethereum will suffer the same destiny as Myspace or AltaVista. From an investor perspective, it is a great diversifier, at least for the time being. However, the ever-growing ICO volume puts permanent pressure on ETH.
With respect to BTC, my firm belief is that it still has a bright future ahead, simply because there are too many exit hurdles for a systematic shift, whatever this might be (e.g. Bitcoin Cash). If any major exchange took the first step toward a BTC successor, for example, everybody would turn their backs on the core product.
To conclude my contrarian stance, one thing that is going to happen in 2018 is the big crypto bust. People will start to realize that not all crypto tokens are created equal. The market will devalue to anywhere between 50 to 80 percent. The survivors will be a few selected cryptocurrencies and several companies with either outstanding technology, high brand value, mass market access and operational excellence, or, at best, a combination of these capabilities. Some companies with real revenue will not be hurt either.
In your portfolio description, you state that the portfolio will always be well diversified, especially regarding asset category, maturity, and geographical exposure. Can you explain that in more detail? How do you see geographic disclosure taking place?
Our portfolio is actively managed. We don’t want to leave our performance and returns to the fluctuations of the market; we want to yield maximum profits, reduce risk, and draw down.
So far, we have successfully kept our principles and are proud of the performance of our fund, PCC. There are more than 1,800 cryptocurrencies out there right now. The more there are, the more specialized their operational tasks or use cases become. Our well-diversified and risk-adjusted cryptocurrency portfolio focuses on “blue-chip” blockchain assets from different sectors such as finance, computing and storage, media, asset management, gaming, and many more. In short: we diversify by keeping a balanced variety of asset categories but invest only into assets with unique value propositions and high performance potential.
Some coins are more important in some areas of the world than others due to their use cases or the firms behind them. OmiseGo, for example, will hardly be used as a payment processor in the European market but is a well-established and well-known payment processor in the Asian market. There are many other examples of coins and tokens that are used either by a certain group of people or are limited in some way to a geographical area because of preference, use case, or branding.
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