Feb 24 2020
Tom Kineshanko: Current Threats & Opportunities in Cryptocurrency, Crypto-Friendly Countries, and Professional Money Management
Tom Kineshanko is the co-founder of the Swiss cryptocurrency hedge fund, Protos, which utilizes an interesting (and proprietary!) trading strategy for those HODLers who want to hold a long-term position in the top 10 cryptocurrencies. We talk about his experience in crypto, including the current threats and opportunities, the macro environment we find ourselves living in with QE, MMT, the weaponization of the U.S. dollar by Washington, etc., how crypto stacks up against gold, who is (and isn’t) talking their own book in the crypto world, which countries are the most crypto friendly (hello Zug, Switzerland!), how much someone should allocate to crypto in their portfolio, and part of the philosophy of liberty underpinning Satoshi Nakamoto’s vision for bitcoin. If you want to know more about crypto, professional money management, and why Switzerland is such a desirable locale then this episode is for you. Favorite Quote: “Life is super short. I want to spend time serving people who I like, doing something that I think is interesting and matters. I think crypto matters because we need a new financial system. We need a new way of collaborating.” Tom’s Links: Tom Kineshanko | ProtosTom Kineshanko | LinkedIn Other Relevant Links: 2018 Cryptocurrency Crash – “Crypto Winter”Crypto Brawl: Alex Mashinsky vs. Nouriel Roubini “Dr. Doom”Paul Graham Zug, Switzerland Below is a transcript of the highlights from our conversation: How does the future of cryptocurrencies look to you? A lot of people, for example, talk about how crypto isn’t correlated to traditional assets, which is true but during the last couple of years: Point A.) we’ve never had a recession since the start of Bitcoin, and B.) when there’s a little flash crashes in the equities markets, Bitcoin immediately correlates to the stock market. It correlates and goes down. This is just an example of how I’m thinking about crypto right now, it’s like, we’re heading into a crazy year, what I’m constantly thinking about for our clients and also for myself is what bad stuff could happen to my crypto? What could cause it to go down? What are the opportunities to earn good returns? When you think about some of the bad stuff that can happen to your crypto, you’re talking about on a macro level, are you talking about the US election? Or are you talking about a recession, what are you referring to? I’m going to dive straight into Tom Kineshanko crypto thesis. That’s a quick start. I think that you have a macro environment where you see banks basically with a ton of money, giving money out for extremely low-interest rates to questionable borrowers. You’ve got the US dollar dominating the world and I believe that it will totally continue to dominate the world, and the US can put pressure on other countries to do things economically. You’ve got a generation of people like us who can be in Ubud recording a podcast. You have all these digital native people that wouldn’t mind, just transacting with each other without having to go to the smelly, old currency exchange office, who probably want just some shared currencies or just an easier way to get around. You’ve got a possible war or wars, you’ve got a possible recession. I guess you have take all the stuff together and if there is an economic recession globally, does Bitcoin go up because people flee to it? Or does it go down because it’s a risk on asset like an angel investment and people are just trying to get the hell out. I think my thesis is really, really simple. It’s basically if you take all the big macro trends in the world, there’s just so much evidence for why people would want a store of value that is decentralized and deflationary. A.) Limited in supply like land, except it’s shrinking because people lose one every day, people lose Bitcoin every day. B.) We’re now in an 11-year Bull Run for Bitcoin. There’s never been a period of more than 13 months of negative returns so we’re in a huge Bull Run, I think it just keeps going. I think we see all-time high prices this year but then at the same time, I believe that Bitcoin is still a risk on asset and if there’s a serious stock market crash, the data that we do have is going to drop. Because the only data we have is this micro stock market drops when Bitcoin immediately correlates and drops so if there’s a recession, I think it drops. Then the last bit of my thesis is that, say there’s as a big stock market crash, there’s an outside probability that people are like, “Oh, damn”, and they start actually rushing into Bitcoin and actually blow it up because people see it as an escape from the existing system. That’s my Bitcoin thesis in a nutshell. So would you buy cryptocurrencies, and what percentage of your net worth would you allocate to cryptocurrencies? I would probably say the data we have is that it correlates during these micro drops in the stock market and therefore, and we have no data showing what happens in a recession so if you’re taking a data-driven approach, you have to say, “It’s a risk on asset if there’s a recession, it’s going to drop.” If you are just like, “Tom, you’re playing with just your own money and you can do whatever you want like what would you do.” It’s like, I would much more feel that my gut sense is that our generation is going to see a lot of the chaos in the world and be like, “You know what, I just really like this stuff A.) and B.), I’m a little scared of the existing system and I’m going to move into it.” The question is, you have a portfolio. Make it simple $100. How much of it do you put into to let’s just say Bitcoin? You can talk about the different crypto assets, but let’s just say Bitcoin for now. I think the question is, do you buy it? I think the way you answer that is, it’s been the best performing asset of any asset of the last 10 years. It’s in a sustained long term Bull Run with a lot of volatility. For generational reasons, for currency crisis reasons, like all the macro stuff we talked about, it seems like a good thing to buy. It’s scarce. I think the answer to that is, yes, you should probably have some. When do you buy, how much do you buy and when do you sell? When do you buy, I think it doesn’t really matter. If you look at the return graph of the last decade it’s like you should have just bought the day that you concluded that you should have bought. Effectively every time you add extra cash dollar cost average into it? Yes, dollar cost averaging is a great principle. Yes, why not do that? Even if you just didn’t want to mess around just throwing money in it tomorrow and then just forgot about it for the next five years, I still think that’s better than trying to wait for some bottom. When you buy, how much do you buy? We broke down what happens to your typical portfolio, the idea the all-weather portfolio? An all-weather portfolio is, I think Tony Robbins probably brought this to the masses. Is like, if you look at the best asset managers in the world, several of them have tried to build portfolios that do well in good times and bad times, hence all-weather. It’s basically a portfolio that performs in good and bad times. We looked at if you add Bitcoin to a typical all-weather portfolio, what does it do over the last one year, three years, and five years. We just looked at a 1% allocation of your assets 3% and 5%, under all of those conditions, it improves your absolute returns. What I would say is, on a personal level, I’ve got way more than 5% of my money in Bitcoin. On a fun level, I would just say, I would feel totally comfortable pushing data across the desk and being like, look, the data says you should probably allocate 5%. How does Protos fit into all of this? For example if someone comes to you and says I’m going to take 5% of my liquid net worth and put it into crypto, what is it that Protos does that is the special sauce? Protos is for people who want to hold a long position in the top 10 crypto assets. Let’s just say again, Bitcoin, because we just weight them by risk. We hold, let’s just say, Protos is for people who want to hold a long term position in Bitcoin. Along with Ethereum? What would the other top 10 be? Yes, we take the top 10 and we weight them by risk, which for us is just a standard calculation using stuff like volatility. Most of our allocation is to Bitcoin though and we run fully systematic quant strategies to protect in the event of downturns without missing the upturns. The reason people come to us is we’re a Swiss Fund, we’re regulated fully transparent. Our strategies aren’t some black box quant strategy. It’s just classical trend following. You can go to ProtosManagement.com, sign up for the newsletter, and we will send you the trades that we run each week. We believe in basically, there are different people in the world that could build a trend-following system. Trend-following means catch the runs, move out during the drops. When you’re out, use the cash to generate yield through lending, whatever, some safe yield. There’s a lot of people who could build those systems. I guess what’s different about us, is we’ve actually built those systems and we’ve run them with our own money and with other people’s money for two and a half years and consistently outperformed the market for the entire time. When you say trend-following, the trend is driven by technical analysis? What actually indicates to you that its trend on for Bitcoin or trend off? Basically we’ve built a data environment that essentially shows us volatility on price and the rate of change in price. The big thing with the trend-following system is and I can go back more into my background. I come from more of a venture background than I do coin background and my two partners are the quants, but essentially, with trend-following it’s like do you trust the price data you have? Then if you do, what’s happening to the price data? Is it changing quickly? From that, you make a decision. How much are we in the market? 60% of our money, 70%? How are we weighting the assets that we hold? For example, we mostly weight our assets by volatility as a bit of a formula to basically compute risk. You put that all together into a system and it basically just gives us a signal and says, today is a 6.3 out of 10 long position and in your top 10 assets and this is the weighting and the system responds and moves money into and out of the market and weights the different assets accordingly. A big thing that we’ve learned is, okay, cool, that’s all fine. But how frequently do you trade? There’s a risk associated with each trade you make as you’re making a trade, does your exchange get hacked? There’s a cost. You put all that stuff together and you run it for a long period of time. You optimize it and you reach conclusions about this is the system that is going to give you a long term position in Bitcoin, but you’re going to move out and avoid the big drops. You’re going to use that cash to earn yield while you’re out of the market and you’re going to not miss out on the runs. Prior to the show, you mentioned how Protos actually works with people. They have an account at an exchange and then you remotely manage it. Is that how it works? We’ve got three products. The first fund we did at Protos was actually the first or one of the first fully legal tokenized hedge funds, which just means we offered a security token. It was deliberately a security. People could buy it with a $1 minimum in 97 countries. Raised something like $7 million US in a couple of months. That was our first fund. That was in late 2017. We actually raised our first fund a week, closed it like a week after the peak Bitcoin press. It was about the worst possible time you could raise a hedge fund. There was a 90% drawdown in the assets and in the price of Bitcoin, which is like 1% greater than the Dot-com crash. We took a bit of a pause and we set up this new asset management firm in Switzerland at great personal expense, to manage other people’s money because we believe we do a good job of that and to also have a way of trading our own money. We basically took a decision to not start any new funds during the depth of the crypto winter. We tested all these systems and we built all these systems and they were really working. At about nine months ago we concluded we would do a second one. We set up two products in the last nine months. One, is the traditional hedge fund, for high net worth individuals, large holders of crypto and the other is something that we’re going to announce pretty soon publicly, but it allows us to apply our system to people who have crypto in their own wallets. They give us API access and our strategy trades their crypto within their account. That can be applied to almost anybody. In the second scenario, there’s about 25 different exchanges and custodians, like for example, Kraken, Binance, where you just move the amount of crypto you want us to trade for you in our system into that account into that particular wallet and you give us access to the API. We put the API into our trading system and then whenever our system makes a trade, it applies it to your crypto. You mentioned a third thing you want to start to do, could you explain that? We want to be running a really, really excellent trading system and we want it to be available to whoever wants it. What’s been the blocker to setting that up? There’s kind of two things. One is, hedge funds are typically only available to accredited investors, in some case, even super accredited investors. We have a traditional hedge fund, you do have to be an accredited investor to put money into that. This third product is similar to our first product. The goal with the first product was to democratize access to professional crypto-management. I spent some years in crypto. I really got into it actively in 2013 and it was beautiful. The culture was beautiful, people were in it for, in my opinion, good reasons more beyond making money. People were trying to change the system and blah, blah, blah. Then it got pretty ugly in late 2016 and into 2017. A lot of people came in and there’s a lot of dishonesty and cash grabbing and scams, which I just personally don’t not really into. There were a lot of scams. It made me sad, in the sense that I loved the spirit of the market before that and all these scams came in and part of motivation to do a tokenized hedge fund was that we saw the first tokenized venture capital fund done by these guys, we really admire called Blockchain Capital. They’re one of the best venture funds. They did the first tokenized VC fund and we basically just did something very similar a few months after they launched that to allow people to place money with us into a legal structure. We were going to trade it and invest it for them as a bit of an antidote to the madness that was going down. We were trying to be the good guys. We’re trying to just give what we knew to a bunch of people. With this new products, similar ethos. A lot of people hold crypto, our system works proven for two and a half, two and whatever years. Through a super tough time with space regulations. Now, can we give anybody who wants that system access? That’s part of the mission on the third product. You guys are effectively targeting people who have bought Bitcoin and have just held on to it, not really knowing what to do with it with this product? Yes, well, there’s a couple things I think. One is, a 90% drop in something, it’s not really necessary. We could have all written that up and we could have applied our data, we could have started taking gains as it was getting crazy and put your money into an asset that wasn’t going to drop 90% or after it dropped 30% maybe take your money out. The challenge is how do you know when to get in or out? I think holding is better than not holding and people should be long Bitcoin. There are now systems like ours and others that you can get some of your crypto to and it could just be managed for you. Those systems are proven to avoid the major drops and without missing out on the long term runs. We’re at this point now in crypto where you just don’t have to suffer the pain of the volatility. I really think that if you don’t have the time to research active management or some of these services like ours, just still get crypto and put it somewhere really safe offline. If you have some crypto and you want it managed in a system that’s transparent and proven, that’s now available, but it’s just become available. Like in the last year in a bit, I would say. Other than some of the crypto funds which you could put money with, but most of them are venture funds. Most of the quant funds haven’t done super well. What do you recommend you should do with your cryptocurrencies once you’ve bought them? I think now there are services available where rather than sitting at home and buying 30 different stocks and trying to rebalance them every day and things like that, like we did before ETFs, now there’s ETF like services. There’s stuff like ours where it’s a quant system and there’s indexed products that you can buy. It’s just going to allow you to still be in the market but just avoid the huge drawdowns. The other point is, do you really want a bunch of gold at your house? I don’t want a bunch of gold in my house and I should have opened the podcast with this. I don’t have a bunch of Bitcoins sitting under my mattress. My Bitcoin is in our fund, or where I’ve liquidated a lot of it and diversified so that I can live. That was something that gave me a lot of stress. Especially in 2017 you’re seeing your wealth grow every day. Good feeling, but then like the corresponding thought is, “Oh, shit, at what point do I need a gun?” I don’t want a bunch of golds under my mattress. I don’t think many people do. So that’s the other reason to think about getting a trip to somewhere else. There’s people who really want to hold onto their crypto, which I understand. The world, maybe it gets crazy, like it’d be nice to have some money you can use. There’s people that I know in crypto that have like disappeared and sort of set up addresses where people aren’t aware of where they’re at, it’s just not for me. If there’s a gun to your head, you’ll find your private keys pretty quick. I think that’s a huge reason to consider like, you want exposure to crypto, get it in a way that isn’t going to put you at risk. What are the differences between the funds? A crypto venture fund is effectively someone raises cash and then they’re putting money into teams? What is a crypto venture fund putting money into? Then what is a quant fund, what are they doing? They’re basically trading amongst all coins? There’s two things that have changed. One is, in 2017, I can’t remember the time period, but it’s sort of the exact time period but basically there was, billions of dollars raised into these ICO’s. This was unaccredited, largely unaccredited investors buying these tokens, which have mostly been deemed to be illegal, but it outstripped venture capital for a period of time. Investing in ICO’s, is that venture capital? That’s changed. The other thing is are crypto assets, venture assets. If you’re holding Ethereum, it’s a kind of like a share in a company that hasn’t quite yet grown up. There’s all these applications that are proposed to be built on it, but right now you can’t do a whole lot with it. You can do some really, really important cool stuff. You could probably argue that Ethereum is a venture capital asset. A fund holding Ethereum is, therefore, a venture fund, but the asset is liquid. Is it now a liquid venture fund? A typical venture fund, you give money to, it’s locked up for seven to 10 years. They buy stock in a corporation, a corporation’s sales or IPOs and you get a return. A typical hedge fund, you give money to, usually, there’s like a, let’s say a year lock up. You’re locked up for a year, or some cases you’re not locked up at all, and there’s just a redemption period of where you make a request and maybe two months later they give you your money. They just need a bit of time to rebalance their portfolio to get cash out. Hedge funds are typically a bit more liquid. I think with crypto, most of the money has gone into what you’d call venture funds. These are funds that do have lockup periods for a period of time, two-plus years, and they are investing in early speculative assets. Typically, a lot of those funds will hold positions in Bitcoin and Ethereum. At crypto, your average crypto fund is like a shorter lockup in a venture fund. Is mostly investing in a newer, riskier stuff, but also holds a position in some of these major assets. Then I would contrast that with a crypto hedge fund, or let’s say a crypto quant fund, like Protos and we actually have done a lot of venture, we can talk about that if we want. With Protos, where we were much more liquid than that. The longest lockup period we have is a year. The new product for people who hold crypto, the more consumer-focused product that I can’t probably speak about because of legal reasons very much, but we’ll announce pretty soon, is no lockup whatsoever. You want your money back, just take it out of the system, boom. Done. Then the other difference is that we’re systematically trading the assets. We’re not making discretionary choices about, “Oh, we think this one has a good CTO so we’re going to invest in that.” We are using basically price and volatility data to make our trading decisions we’re only in the top 10 assets. Who do you follow, or who do you think isn’t talking their own book in the crypto space? There’s a lot of misinformation. There’s a lot of because you have this asset– These coins that people can sell and raise money and then they can use that money for stuff. You have liquid assets. There’s this you can get rich quick idea. A little bit like gambling, lie a little bit to raise some money and then, make yourself wealthy, deal with the guilt about doing it later. There’s a lot of that going on. For me, I don’t feel good about stretching the truth. Yes, I mean, we, as a management company we are, we’re growing. People are giving us their money and we’re trading it for them. We serve those people. I don’t feel good about myself if I stretch the truth in any way in terms of how to like, share what we’re doing. Even the amount of sharing I’m doing with you makes me like mildly uncomfortable. Just in that. If people are going to give me money, I want it to be for something that I really believe in, have some of my own money in. Life is super short. I want to spend time serving people who I like, doing something that I think is interesting and matters. I think crypto matters because we need a new financial system. We need a new way of collaborating. There’s a whole bunch of other reasons why I’m into it. I want cool clients who believe in crypto to give us their money. I want to share with them transparency what we’re up to. If we totally screw up and lose your money, I want to disband the fund and leave and then say we’re sorry. In terms of people I follow? I think there’s really different people you follow if you’re looking at quant trading, like trading crypto versus finding early-stage tokens to invest in. I don’t do a lot of speculating on early-stage tokens at this point to wrap that up. While you’re here and there invest in some small things. I would follow the top crypto venture funds and read the stuff that they’re publishing because they usually publish what they’ve invested in pretty soon after they’ve invested. I think material beats method. You could read, and you could listen to a thousand crypto podcasts and hear about every new and shiny new deal but I would just say the people who have proven themselves to pick good deals are probably going to continue to do so. That does change when there’s a paradigm shift. I think that the younger guys in the crypto venture game are actually going to come out on top. I think that it’s such a paradigm shift that I don’t think this is maybe an unpopular opinion, but I don’t think the A16z’s of the world are going to find the next biggest crypto projects. I have a little bit more trust in like a younger internet native type of people. In the quant game, we publish our trades each week, you can sign up for our newsletter and we’ll literally show you how we’re weighting our trades, the system has outperformed the market by a percentage that I can’t say because of legal restrictions. Do you think that early-stage tokens or the ICO model is broken? Or did you get burned and decide that the risk profile was too much? I mean I made about 37 early-stage investments, Ethereum, ICO to I think the most recent one was buying some, make a sort of going big into maker as early as I could. I just think leading– I don’t enjoy venture capital all that much in the crypto space. I think there’s enough money. What I think is more important to me now is actually bringing crypto to a lot more people and making sure that the people who are into crypto do well and actually become rich. I think that’s something that matters to me because it’s the values I want to see spread. It’s a system I want to see spread. I’d personally rather see Bitcoin go global than I would support probably a hundred startups below it. Also I really think that in order to get a bunch of cash into crypto, we’ve got to prove that people can participate in a way that is safe as well. I’d say if you’re interested in new crypto technology and like new startups and stuff like that which I totally am. Just right now I’m a little bit more interested in getting large amounts of money into the major ones like the Ethereum but if you were really into that thing and I think there’s a ton of money to be made, I think DeFi is where it’s at for the next few months. What’s Switzerland like in terms of Cryptocurrency? What do you feel is happening at the jurisdictional level, as countries compete for some of the talent and the money that’s going into this? I did a co-found of what became the first licensed asset management company for crypto in Canada. We went through the process of basically trying to create a crypto asset manager in Canada, get licensed to manage Bitcoin and we achieved it. Ultimately, co-founded it with people that didn’t work for me, but it was extremely hard even to get licensed to manage Bitcoin. As a Canadian resident, I had to make a tough decision. It’s like, I want to work in this industry. It’s really difficult to do it in Canada because it just seems like the regulators just dislike it or they believe it’s a threat to their system or whatever. As a Canadian, it’s tough. I am not a resident of Switzerland, but to be a part of a fund there, I’m actually pretty restricted in what activities I can do for the fund. I have to limit what I can do and I have to have– We have to have the majority of our team in Switzerland, but I still am so happy that I helped to start a business that’s there. It’s hard to walk around the streets of Zug without seeing a bunch of people I know, which is really interesting. As a number of Americans that have left, like people in their 40s with kids that have operated and moved to Zug to be amongst the crypto peers in a place where they can experiment with this stuff in a way that’s legal and transparent and non-scammy. A fast summary is, Zug is a place where Swiss law is legit. It’s really costly to be regulated there. People who are doing stuff in crypto in Switzerland are doing it in a really credible way. There’s a hell of a lot of talent there. It’s awesome, I love it. It’s expensive, but I love it. Zug is a canton, which is like a province or a state. Each of these cantons in Switzerland has slightly different laws. The reason everyone goes to Zug is basically because it’s near-zero taxes, zero tax. Otherwise, financial regulations are pretty much the same but it’s just lower tax, and it’s 20 minutes something by train from Zurich. You could live in Zurich, have your business in Zug, commute and save on tax. YC founder, Paul Graham, talks about how, he wrote a great essay one time about there’s certain areas in the world that became the startup hubs and it was cultural. There was something special there. I think, having read what he believes is the fundamentals for the birth of a new industry. I do think that Zug has those fundamentals and that’s what people starting to see. Puerto Rico, I’m not sure I haven’t been. It didn’t attract me. I didn’t have a lot of personal interest and I was also just too busy trying to figure out Switzerland, to be honest. Malta, I have not checked out as well. I can’t or I shouldn’t give an opinion I haven’t been. To me, it just didn’t quite smell right. Maybe as a Canadian, or maybe as I don’t know, I really liked the idea of Switzerland, given its history and it just felt, smelled right. US I think it’s going to be pretty difficult. It’s the innovation capital of the world. Asia is a whole another story. That’s the conversation for a book but crypto in Asia is going off as well. Can you talk a bit more about the status of crypto in Asia? Japan is amazing. Japan’s regulators seem logical about how they’re approaching it. I think the big question is, do the people running a country think that crypto will threaten or take down their existing power systems? If so, they’re going to be really combative and that’s what’s happening in the US and Canada or do they think systems evolve and it’s cool and will keep up with it? Switzerland’s like, “Well, we’ve always evolved and we’ve permitted. Our system is one that evolves.” Whereas, I think the US is taking the opposite stance. Japan seems to be somewhere in the middle. And what about China and cryptocurrency? I know little bits that help to start a crypto mining company and we ordered a lot of machines from China. I was a founding advisor to a company called Argo, which is like a publicly listed mining company that buys a bunch of these machines from China. It’s hard to say. They can seem to change their opinion all the time. I think, ultimately, they’re going to try to create their own national digital asset, and they’re going to try to control and I think they’re going to back crypto, but they’re going to just try to really control it at least what goes on in their country. They seem to be trying to use it. It feels like they’re trying to get their heads around it, which I think they have their heads around it. I think they’re going to try to actually– I think they see it as the future. They know it’s the future, they’re going to jump to it. They’re going to try to use it as just one more tool to have leverage over other countries. If they know what their citizens are doing with their money, that’s good. I think if the US doesn’t pay attention to that, that’s a really bad thing. Escaping capital controls is one of the big macro drivers for why I want to hold Bitcoin for sure. P.S. If you liked the show, please leave a review on whichever podcast platform you listened to it on. 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