Managing Director Alexander S. Blum was on the Around the Coin podcast with Mike Towsend talking about how Two Prime started and proper Bitcoin portfolio allocation.
Listen in If you have any questions on how Two Prime operates and their strategy on managing client funds.
If you want to learn more about intelligent exposure to Bitcoin and Ethereum, check out our one-pager.
Watch our Digital Asset Market Review with Chief Investment Officer Nathan Cox.
Full Transcript of Podcast below
[00:00:01.110] – Mike
On this episode of Around the Coin, I interviewed Alex Blum. He is the managing partner of Two Prime.
[00:00:09.360] – Mike
Two Prime is a digital assets fund. Effectively, they are allowing high net worth individuals to manage Bitcoin, Ethereum, and other digital crypto products.
[00:00:22.830] – Mike
Alex is incredibly articulate and knowledgeable about the crypto and blockchain space. We dive into all sorts of topics.
[00:00:29.730] – Mike
He’s loaded with great anecdotes, great stories, heuristics. I learned quite a bit in this conversation and Alex is a pretty young guy with great experience.
[00:00:40.200] – Mike
His two partners are extremely impressive. And we dove into the philosophy of managing cryptocurrency, the risks that are involved, what he sees as the future of derivatives trading, and much, much more.
[00:00:55.710] – Mike
I highly recommend this conversation. I hope to have Alex back on someday. This show is sponsored by Otter Labs. Otter Labs is the place to go if you want to find developers and build a remote team.
[00:01:09.510] – Mike
They source roughly 800 developers from Argentina down to South America. And so this is a great option if you’re running a US startup and trying to hire engineers.
[00:01:20.850] – Mike
Otter Labs has been around for over two years and has worked with dozens of clients and hundreds of developers.
[00:01:26.610] – Mike
So it’s a great option if you’re building out a tech team or if you have an idea and want to build out a product from scratch, reach out to the folks at hireotter.com.
[00:01:35.340] – Mike
And with that, I hope you enjoy the show. I give you Alex Blum, the managing director of Two Prime.
[00:01:48.100] – Mike
All right, we did it, we are live here. Alex Blum, Alexander Blum, the managing director of Two Prime. I’m excited to dive in with you and have a conversation today.
[00:01:58.870] – Mike
Alex, for myself and people listening, can you just give a quick background as to what you’re working on now and what you were working on previously?
[00:02:08.000] – Alexander Blum
Yeah, thanks for taking the time to speak, Mike. Right now, I’m the managing director of Two Prime. We are a hedge fund focused on risk-managed , exposure to digital assets.
[00:02:21.480] – Alexander Blum
So basically, we use options trading strategies to take some of the risk and downside, big downside movements out of major investments in Bitcoin and Ethereum.
[00:02:33.100] – Alexander Blum
So it’s mostly an institutional structured product if you’re familiar with that kind of terminology. And basically, we’re using put protection to when you have these historic, 70, 80 percent moves downwards in Bitcoin every four years or so, we want to experience a lot less of that for ourselves and for our investors.
[00:02:54.210] – Alexander Blum
We’re managing our own funds since the early part of 2020, which is really when Bitcoin was even… options were even introduced to the CME, introduced Bitcoin options in January of 2020, an issue where we’re running our own capital of about $40 million.
[00:03:11.340] – Alexander Blum
And now just as of February of this year, I’ve started reading outside funds and I have about 100 million under management, currently.
[00:03:20.460] – Alexander Blum
I’ve been in the crypto space for a while. Initially, I bought bitcoins for nine bucks in 2012, not not as many as I wish I would have. And be doing various stuff in the space: venture funds, working at traditional hedge funds that had some exposure to this space as well. And then the consulting work for the World Economic Forum, the Gates Foundation, and most recently, to actually answer your question, I was running an investment bank focused on providing both the compliance for investing into digital asset companies, as well as actually raising funds on their behalf called Atomic Capital.
[00:03:58.560] – Alexander Blum
And so basically, I and one of the investors in that company, Atomic Capital, whose name is Mark Fleury, started this fund together, looking at how do we keep our exposure to Bitcoin and Ethereum, but not have so much at risk all the time because I’m pretty happy with how much money I have and I’d like to have more, but I also don’t want to lose what I have.
[00:04:19.350] – Alexander Blum
Mark is a very interesting guy, a Ph.D., and theoretical physics as well. And he previously started a company called JBoss that was acquired by Red Hat in 2006 for a few hundred million dollars from the first open-source software companies with a successful acquisition.
[00:04:34.860] – Alexander Blum
So it’s the two of us, plus our chief investment officer, Nathan Cox, who I’ve worked out in traditional VCs kind of volatility hedge funds and the public equity space and combined our forces to run Two Prime now.
[00:04:50.380] – Mike
Cool. Congrats on all the progress. Did it feel like a natural evolution? So you’re sitting at Atomic Capital, you’ve got some investment background. It sounds like you did some cool stuff with the World Economic Forum and the Gates Foundation.
[00:05:03.400] – Mike
Did it just gradually turn into an opportunity that you’re like, hey, this is cool? Let me invite a couple of friends and then you spin up a fund or was there more to it than that in terms of [crosstalk 00:05:15]?
[00:05:15.740] – Alexander Blum
Yeah, I’d say it’s mostly, but like a lot of things mostly defined by failure, like trying lots of things and then pulling out what actually works, which is we’re trying to do all this crazy stuff with a coin that represented closed-end fund and trying all these different investment structures.
[00:05:35.020] – Alexander Blum
And the thing that works through all of that was just we were just buying Bitcoin and Ethereum and managing the risk on it. And we stripped away the rest and this is actually what makes sense for ourselves and makes sense for outside people.
[00:05:47.200] – Alexander Blum
And so I always have a tendency to want to have complexity and novelty and everything and be seven steps ahead of anything based in reality. And it’s humble by what people actually want and what reality wants.
[00:06:01.210] – Alexander Blum
And we settled on a pretty basic, what to me feels pretty basic in terms of where the markets are in that become this product.
[00:06:11.740] – Mike
And is it most people… Do you think of most of the, I guess, consumers or LPs, not consumers, should be investors that you have in LPs as they have some bank account like I’d imagine is in the multimillions. They’re more concerned about losing it than they are about making more of it and so they give you guys this with the primary value proposition of, don’t lose a lot of it. Is that how it goes or do you guys think of the pitch differently?
[00:06:41.650] – Alexander Blum
Yeah, I think there’s a couple of categories of investors that we’ve added to the fund. One is people similar to myself or Mark who has held crypto for a while. And they’re starting to be like, hey, this is not a small part of my portfolio. I don’t want it to be so subjected to downside moves, like why do I give it to somebody who can manage that for me either?
[00:07:03.640] – Alexander Blum
People sent us directly Bitcoin and Ethereum rather than US dollars. So that’s one category is kind of the long-term holder.
[00:07:10.960] – Alexander Blum
And there’s been people like, this Bitcoin thing doesn’t seem to be going away. I need to get some exposure. I don’t know how to deal with private keys. I don’t want to go. I just don’t know what’s going on in the space, but I accept that. I need to have some exposure to it, even if it’s a couple of percent of my total portfolio.
[00:07:29.440] – Alexander Blum
We have a couple of actual corporate treasury clients who, you know, there’s all this talk about putting Bitcoin on your balance sheet. But our position is like, yeah, put on your balance sheet, but while you protect it a little bit against major downside moves. So it’s a more responsible way to have that.
[00:07:44.440] – Alexander Blum
We have a couple of family offices that are investors. I think, especially family offices never invest in the space. If you’re a manager there, these jobs are so defined by risk. Like no one gets mad at you for buying a bond and it returns two percent. They do get mad at you if you buy some shit nobody has ever heard of and then it goes down 70 percent.
[00:08:02.530] – Alexander Blum
And so having some rails on the risk parameters through our fund helps some of those family offices get initial exposure into space as well.
[00:08:13.570] – Alexander Blum
And then lastly, what surprises me is a couple of venture capital funds. They just have cash sitting. They might be deployed in two years from now. And they’re saying, why don’t I put this to work in some way rather than having it slowly being eaten away by the price of it, inflation costs. So those are the various buckets we’ve come across today. Yeah.
[00:08:34.830] – Mike
Yeah. It makes a lot of sense. I can relate to having been on the founder’s side, not having accumulated enough personally myself to have this problem, but we raised about 24 million for my last company and we had that sitting in an SVB bank account.
[00:08:54.660] – Mike
And I remember just thinking like, God, it seems so simple to just have cash sitting in the bank. But is strangely not a huge incentive for at least startup founders to invest it in different areas because it’s like, okay, your value proposition is the company you’re building.
[00:09:15.270] – Mike
But even if you like, for instance, my brother coincidentally raised 100 million this morning. His company is called Cameo.
[00:09:21.870] – Mike
And he was telling me he’s like, yeah, we just have it sitting in the bank. And I’m like, man, it just surprises me that maybe there’s an opportunity I’m sure there are people doing this. But to take the vertical startup founders that have been on like Series A, B, C, D that have 20 million-plus.
[00:09:40.500] – Mike
And I guess there’s nothing wrong with keeping it in cash and there’s not a huge incentive to even grow it 5, 7, 10 percent per year, but it does seem like it’s a risk when inflation starts to happen.
[00:09:57.680] – Mike
I wonder, I’m curious about your thoughts on this. So the Federal Reserve or the Biden now and Trump previously issued these massive stimulus packages. I literally got a $2,800 check in the mail a couple of days ago, and I forgot this was even going on.
[00:10:13.880] – Mike
And everyone gets it. And then it happens again and again and again. Eventually, there’ll be a point where we really start to feel this slip of the US dollar.
[00:10:22.370] – Mike
And I wonder if is that the catalyst for companies to invest in crypto bigger where instead of thinking it as like I want three percent of my portfolio to be in Bitcoin for the upside, do they think of it as a downside risk for the dollar? I don’t, does that ring true at all, or is that just to-
[00:10:43.190] – Alexander Blum
Depending on the company, there are multinational shipping corporations that are dealing with 70 different currencies, there’s always this currency risk. And then there’s around the world inflation risk right now that surely is going to come to fruition at some point. I don’t know if that will be in three months or 10 years.
[00:11:08.690] – Alexander Blum
But a third of all the money that’s ever been created… all the dollars that have ever been created have been created in the last year, which is insane.
[00:11:16.610] – Alexander Blum
And they’re talking about creating more. Biden is putting another three trillion in infrastructure investments in the next coming months here.
[00:11:26.360] – Alexander Blum
So yeah, if you look at the historical behavior in terms of correlation to equities or the dollar, Bitcoin is attractive because it is uncorrelated or very little correlation to those things over its history.
[00:11:38.960] – Alexander Blum
And so if you could think about it from a sizing perspective, how do I get… I don’t know if you’re familiar with like in the investing world, there’s this thing called the efficient frontier. So there’s like a chart of here’s the things in my portfolio and here’s their return over time.
[00:11:51.830] – Alexander Blum
And then the other factor is the standard deviation. So that’s like, how do I maximize my return and minimize the standard deviation? Meaning I can have a predictable return with the highest amount.
[00:12:01.790] – Alexander Blum
And you can statistically look at how much you get we do with our fund, or if I just had held Bitcoin, where it would be the point of balancing historically where I’d have the least deviation in my total return and the greatest return overall?
[00:12:15.050] – Alexander Blum
And what you find is almost every portfolio between three and 10 percent of it, if it had been in Bitcoin or we do it with our fund, it would have done a lot better historically.
[00:12:26.870] – Alexander Blum
And then on top of that, yeah, like all this money printing, it’s interesting right now a lot of the stimulus has gone directly to banks who are supposed to give it out as cheaper loans or invest in things.
[00:12:40.160] – Alexander Blum
But so what you have is all these financial companies that have all of this new money. And so you see major inflation, I think, first in equities, Bitcoin, things that are investable assets because that’s who has the money is investors that might slowly trickle down into regular people.
[00:12:56.030] – Alexander Blum
I don’t know if you heard the term Cantillon effects. But basically where money enters the system has a big bearing on who benefits from it and where that shows up in the price of things.
[00:13:06.350] – Alexander Blum
And so if I send all my money to farmers, you’re going to see the cost of farming equipment inflate first. We tend to send all of our money to banks or financial entities first from the government. And so that’s where prices are inflated.
[00:13:19.550] – Alexander Blum
But when you send $1,400 checks to everybody, then it’s a little bit more in the hands of regular people. And so you’ll probably see consumer prices inflate shortly thereafter.
[00:13:30.440] – Alexander Blum
And I don’t know if you look at the price of lumber, certain precious metals, there’s such a weird inequity in where inflation is happening, but it’s happening undeniably.
[00:13:39.740] – Alexander Blum
I don’t know if you’re familiar with Michael Burry from The Big Short. But his thing now is like inflation is coming and you better prepare for it.
[00:13:48.480] – Alexander Blum
Bitcoin, obviously with a finite supply, and Ethereum with a pretty tight inflation regime as well are both well poised to take advantage of inflating environments.
[00:13:59.030] – Alexander Blum
So yeah, it’s just the more money printed, the more money there is to buy the same amount of Bitcoin. And so you’d expect the price to go up.
[00:14:06.770] – Alexander Blum
And even interesting even this week is as markets are down, Bitcoin and Ethereum continue to move upwards. Same as gold is down today a couple of percent and Bitcoin is up to five percent.
[00:14:18.170] – Alexander Blum
And so I think you also see this decorrelating between Bitcoin and even gold or equities over time because it has unique characteristics in the way it’s structured.
[00:14:29.840] – Mike
Yeah. I like that. Well, some good… what would you call? It’s like just thought examples or case studies heuristics. I had never thought about it that way. As the way, the entry point for money is largely what dictates the impact across the economy in a time sequence. The farmer example.
[00:14:51.350] – Mike
Yeah, it seems like if we’re going to ever print money and just give it out to people, that giving it out to people directly is the best option.
[00:15:00.690] – Mike
I’ve swapped back and forth on universal basic income. At one point I was like, this is it. This is definitely the answer. And then time goes by and I’m like, I don’t know, man.
[00:15:15.320] – Mike
To me, I’m like, well, on one hand, if we don’t do universal basic income at all, the prices of things are going to naturally decline as technology progresses.
[00:15:24.680] – Mike
So if we think that technology is stealing our jobs, in particular, is the rhetoric that gets thrown around. Well, technology would make things so cheap that you wouldn’t need more money than you currently have because it’s not a fixed supply. It’s like something being delivered to my house via a drone manufactured in a warehouse with no humans like it takes no human capital to make that thing.
[00:15:48.900] – Mike
So I hear both sides of it. I don’t know, are you a UBI fan or have you made a decision on where you stand with regards to that?
[00:15:59.620] – Alexander Blum
Definitely, it’s interesting. I think it’s such a divergence from… I mean, in a certain sense of the stimulus checks which continue, I think will likely continue, we’ll have a soft version of that being implemented already.
[00:16:14.400] – Alexander Blum
I think like Andrew Yang, it’s undeniable that automation and technology are going to eliminate a lot of jobs and going to reduce the costs to procure certain services and resources.
[00:16:26.470] – Alexander Blum
I do think to me the question is like not… like the reason a bank does well is that they give a loan and then they earn back more value than the loan costs. So it’s like I give money for you to buy a house, the house goes up in value and I’m earning interest on it.
[00:16:41.560] – Alexander Blum
And so I think with all these stimulus bills, it’s really a question of not like, if we did UBI and everyone bought crack with it, then it’s not going to work out well, but it really depends on where that money gets allocated to. And I think that’s the big unknown is if you give everybody, everyone is like there are no jobs, things are cheaper and you give them, whatever, 5,000 bucks a month. Like what do they actually do?
[00:17:03.040] – Alexander Blum
And I think that’s a social experiment that hasn’t ever really been done.
[00:17:07.630] – Alexander Blum
And I think it’s because of tech and automation, like the first time in history where that’s we’re facing this issue where there’s… Marx would differentiate between work and labor. And so it’s like, okay, we can really reducing the time of labor that we need to have but are people like if you give… I know for me, if you give me all the time in the day, I would like to think I would sit down and create art and write novels, but that’s not what I do.
[00:17:33.770] – Alexander Blum
I watch YouTube videos and take naps.
[00:17:35.770] – Alexander Blum
And so I’m not saying we need people to be desperate for money to keep things going, but I just think it’s a really complex question ultimately of human nature. I don’t know. What do you think?
[00:17:46.690] – Mike
Yeah. I think you’re spot on. I think there seems to be, in my first-hand experience, an accelerator, something where I’m like, oh, there’s this great example psychologists would run on mice.
[00:18:01.440] – Mike
So they would take mice inside of a straight line, like a straight tunnel. And they would put… first, they would take the mice, they put cheese at the end and they measure the time the mice took to get the cheese.
[00:18:14.160] – Mike
Then they would starve the mice for a week or so. And then, of course, the mice would run faster when it had the cheese. But the fastest mouse was the one where they sprayed cat urine behind the mouse and they starved the mouse.
[00:18:26.430] – Mike
So it is both accelerated from the cat urine to not get eaten and also really hungry for the cheese. And I think there’s something to that psychological effect. If I feel motivated to build something, to create value, to reap the rewards of it, but I’m also motivated to help other people.
[00:18:42.720] – Mike
So it’s like the cheese and the cat urine, both together seem to be the balance. You have to have the push from behind and the pull from the front. And I think if you lose one of those, if you lose the cheese, we fall into despair, depression. We’re stagnant. And if you lose the threat from behind, you get soft.
[00:19:05.070] – Mike
This is like you’re sitting around and writing literature, watching YouTube videos all day and there’s no actual progress.
[00:19:12.810] – Mike
So I think progress seems like it’s almost like the thing to optimize in society. The hard parts, what is progress? What does it actually look like and how is it distributed?
[00:19:23.430] – Alexander Blum
Yeah. There’s a lot there. I don’t know if you know Daniel Kahneman or like behavioral economics, but people are way studied and proven. People are way more motivated by risk avoidance than they are by opportunity or positive things.
[00:19:42.970] – Alexander Blum
It makes sense, obviously, like if you’ve ever been chased by a lion. It’s better to be paranoid we’re going to get eaten by a lion and be wrong than be calm about it and be wrong.
[00:19:55.080] – Alexander Blum
And so, yeah, I think we’re predisposed to avoid risk. It’s the same, I vaguely remember reading studies that if you tell someone they’re going to lose a $1,000 rather than not make $1,000, there’s very different behavior. People don’t like to lose things.
[00:20:12.870] – Alexander Blum
Or like if a company does something bad, most people will tell 10 people about it. But they do something great, on average, they’ll tell one. And so I just think we’re more oriented toward [inaudible 00:20:22] around negative behaviors. And that shows up in the way we make financial decisions, the way we are motivated day today.
[00:20:28.380] – Alexander Blum
We’re just big mice ourselves. I think also… I forgot what I was going to say, but, yeah, I don’t know what the right [crosstalk 00:20:39].
[00:20:41.640] – Mike
Yeah, it almost feels like when that functioning breaks down, then you have something like an addiction to gambling where it’s almost I’m losing money constantly hoping that one day I’ll make it. It’s almost like the inverse of what you sell.
[00:20:55.230] – Mike
It’s like you sell the value proposition if you’re not going to lose a lot of money one day and you’ll slowly make it over time. And that feels like a healthy cognitive function to have for most people.
[00:21:06.210] – Mike
And so I imagine your target clientele would never be people addicted to gambling because is just the opposite thing.
[00:21:16.380] – Mike
And yeah, I also wonder about these. I’ve read about Daniel Kahneman and this study, and I wonder if we’re in a time right now where we are a function of our environment, a product of our ancestors effectively.
[00:21:31.680] – Mike
I think that the cultural cognitive impact of World War II was so insanely large and undervalued, underappreciated today. I’m 33. My grandfather was in the war. He had friends who died, yours probably.
[00:21:49.350] – Mike
Just about everyone who’s around us is not more than two generations from people who are incredibly traumatized by downside and depression. And I think that that’s still riding on our subconscious. And people are really scared to lose stuff because they know, hey, this could be really bad.
[00:22:06.720] – Mike
And I wonder if we’re… I bet it was different around the time of the Renaissance or times when things were pretty good where your creative mind just shoots.
[00:22:16.740] – Mike
So it’s just like I would love to get a universal basic income, sit around and write art and dance and whatever else, but you have to not be traumatized in order to do that. Otherwise, you’ll chase the YouTube videos, the numbing effect of drugs, and other things.
[00:22:34.490] – Alexander Blum
That’s even like we deal with a lot of high-net-worth individuals and even just, forget generationally, just now and today if you’re living in poverty or you don’t know how you’re going to pay your next month’s rent, that’s very different thinking than like, oh, knowing I have enough money to live the rest of my life pretty much doing whatever I want. And so I both make very different decisions. I think on a very different time scale and I’m more inclined to like keeping what I have, not so much creating something wholly new because I like the way things work.
[00:23:09.840] – Alexander Blum
I’m set up for today.
[00:23:11.490] – Alexander Blum
And so I remember reading this book, I was in the Peace Corps years ago and I read this book called [inaudible 00:23:18] they’re called Poor Economics.
[00:23:20.130] – Alexander Blum
And it was talking about why just some of the economic decisions by the poor seem so irrational. Like if you get $100, why would you spend that on candy and shiny things when you should be saving all your money?
[00:23:31.300] – Alexander Blum
And it’s like in that case, they say, the odds of you ever getting to a point of enough savings where you can actually move out of your situation with so many unexpected events that occur in the life of somebody living in poverty, it’s futile. And so just enjoy… people enjoy a couple of minutes of joy rather than this fantasy of saving thousands of dollars.
[00:23:52.110] – Alexander Blum
But I just think we really tend to assess, like other people, even our present day, how they’re thinking and how they’re responding, obviously from our own shoes. And it’s really different to think about that.
[00:24:02.520] – Alexander Blum
The same even in the crypto world, I think it’s interesting. It’s such a gambler’s mindset. It’s been such crazy returns. Obviously, it attracts a lot of people because of that, but the leading edge of it is high-risk-takers who don’t have a lot to lose because that’s only… I mean, that’s the only way to participate at first.
[00:24:18.420] – Alexander Blum
And so it’s very like our fund, which actually intends to make less return than Bitcoin on a raw return basis. That’s a very specific type of person that within the crypto around, people are asking, how do I do three times better than Bitcoin, 10 times better than Bitcoin? And Bitcoin is an insanely positive returning asset. And so it’s just different psychology and kind of group.
[00:24:41.460] – Mike
Yeah. It was a crypto company I started. I worked on it for two years, called [inaudible 00:24:47]. And we allowed people to trade different cryptos with different alternative payment forms like gift cards or airline miles or just Venmo, that sort of thing.
[00:24:59.250] – Mike
And we would get… This is in 2018, 2017. So we would attract people who were like, oh, I’m leveraged, I’m cracking. And then I bought it on Coinbase and I leveraged down there and I’m like 50X margin.
[00:25:12.960] – Mike
It just boggles my mind. It put me in perspective to think, I’m not actually high risk. There are people out there who are willing to just crank up the dial and pull the slot machine.
[00:25:26.370] – Mike
Yeah, you’re right. It does feel like that makes sense if you have less… It’s like I think the dynamics there are how many people are you taking into consideration for your decision and then how far out are considering.
[00:25:41.450] – Mike
So if I’m poor, I’m going to make a decision for myself at the moment. I’m going to buy candy, buy a lottery ticket, whatever it is.
[00:25:51.020] – Mike
If I’m ultra-wealthy, Warren Buffett style, I’m going to be concerned about the entire future of humanity from multiple generations down the line.
[00:26:00.920] – Mike
Like your work actually is a good translation. You were to the Bill & Melinda Gates Foundation. They must be thinking about multi-generation global health. I’m curious how you view that project and what you did there specifically.
[00:26:18.070] – Alexander Blum
Yeah, so mostly I worked on was as a consultant. I went to Tanzania in Africa. And was looking at a project they were doing helping farmers get a better return on their farming investment by providing loans and capital upfront for them to farm and then teaching them more effective farming methods.
[00:26:40.720] – Alexander Blum
And the part I brought me in to do was to look at how can we integrate technology into this? And not everything was done on paper or manually on Excel. Could we use smartphones or tablets or other physical items and can we use money in a more efficient way to transfer capital or make it less friction, make it have less friction? And the short answer is like, yeah, you should do that. It would be better.
[00:27:05.920] – Alexander Blum
But I think, the frustration of these big institutions and why I’m more attracted to doing private business and startups is, yeah, they are thinking of this long time scale but there’s also… there’s an incredible amount of layers of bureaucracy and there’s also a lot of money spent. When you have so much capital at your hands, there’s not the same whether you want to be super-efficient or not, like there’s just not the same urgency to use every dollar intelligently if you were budgeting to get your groceries bought for the month.
[00:27:39.020] – Alexander Blum
And so I think there’s a psychological difference there, kind of like what we’re speaking to. But I think at the same time, there’s a wisdom to the patience of it, like something like in a startup, if it doesn’t work for two weeks, you might pivot, whereas some things are just predisposed, like trying to change an education system or change a food system. That’s a generational activity. And it’s hard to make bets that take a generation to get accurate data about their outcomes.
[00:28:06.650] – Alexander Blum
And so it’s the same like the Internet was largely developed by the government over many years through DARPA or a lot of investments that an individual may not make, but a large institution or very wealthy group might make. And they have the patience to see it through. And if they lose the money, they’re going to be okay either way.
[00:28:27.410] – Alexander Blum
And so it’s interesting to observe. But I guess I don’t… Personally have so much patience where it’s like I just trust and have faith that maybe this will work. And if not, it’s just my whole life that I wasted on it.
[00:28:38.900] – Alexander Blum
So this repeating thing there and I think both could benefit from learning that from the other.
[00:28:48.120] – Mike
Did you know a guy named Jack Langworth from the Nile in Africa, by chance?
[00:28:56.040] – Alexander Blum
[00:28:58.090] – Mike
Yeah. I only asked you because he’s a friend of mine. He’s running an African startup that is helping farmers financially purchase and exchange for maize. So it’s like it’s got to be… And I know he talked to Bill & Melinda Gates Foundation at some point.
[00:29:14.670] – Mike
And one thing I would ask you about is so running this fund, what’s your day-to-day? On one level, I’d imagine you have the obvious conversations with your LPs, your investors, probably reviewing the portfolio performances, tweaking the buttons here and there.
[00:29:31.860] – Mike
But once you have that in place, is it highly active or how do you spend your time or think about spending your time?
[00:29:40.320] – Alexander Blum
Yeah, so I think a couple of things. I mean, varies day today. For me, the core thing right now that we’re doing is just talking to new investors.
[00:29:53.610] – Alexander Blum
So a lot of that’s getting calls and just explaining what we’re doing and seeing if it fits for people and building relationships on usually once a month. I’m in a different city, we host a dinner and get to know people.
[00:30:07.140] – Alexander Blum
I’m going to, you mentioned Austin. I’m going to Austin in a couple of days here. So some of that and then it’s also taking really good care of the investors that we have.
[00:30:18.480] – Alexander Blum
And so I don’t want to have… This isn’t like retail and consumer products. We have just over 10 investors that are large investors. And I like that.
[00:30:29.280] – Alexander Blum
I like taking really good care of those people and bringing them other investments that are outside of our scope or answering questions for them, sending them interesting news articles that are relevant to them, and just having those deeper relationships.
[00:30:41.280] – Alexander Blum
And so some of that’s sending them a shirt or sending them a card or whatever it may be that just really invests in those relationships that we do have.
[00:30:51.210] – Alexander Blum
Some of it is just paperwork like we’re dealing with lawyers and structuring the fund, things like that, making sure our taxes are done correctly, making sure our investors will have questions about onboarding, and things like that. So not very glamorous, but administrative paperwork.
[00:31:09.210] – Alexander Blum
And then in terms on the investment side, where CIO and myself spend a good amount of time is just always looking for new statistics and new indicators and continually improving their trading technology and infrastructure so that we can keep pace because when things are like… whatever strategy you have, it eventually so other people catch on to it. It doesn’t work the same or the margins get worse or whatever it may be. And so always just keeping abreast of what’s going on there.
[00:31:36.510] – Alexander Blum
It’s been really interesting in the crypto derivatives markets. First of all, they’re growing incredibly quickly.
[00:31:42.390] – Alexander Blum
In 2020, the volume of options grew group 1,800 percent just over that year. And then they are about growing by 50 percent every month since then. So huge influx.
[00:31:53.040] – Alexander Blum
And then also what’s interesting is the behavior of those options, positions, like how many people are buying puts and the complexity of the trades that we’re seeing is changing a lot, which if you’re like a retail gambler, basically you buy calls and hope that the price goes up.
[00:32:09.570] – Alexander Blum
If you’re an institutional buyer, you tend to actually buy more protection and you hope it’s just a waste of money on insurance, basically.
[00:32:17.700] – Alexander Blum
And so we’re seeing a greater influx of puts being purchased on these exchanges and which tends to also affect the price of the underlying.
[00:32:27.120] – Alexander Blum
Like just at the end of February, there were six billion… sorry, end of March, six billion in auctions expired. A lot more of it waited towards puts that historically have been, which depresses the price down.
[00:32:39.000] – Alexander Blum
And then when those expire, you see these big pops up like we’re seeing the last couple of days on Bitcoin. So just always keeping a pace of the way the market structure is behaving and looking at whatever data we can find on-chain data, off-chain data, how much exchange Bitcoin is available.
[00:32:55.650] – Alexander Blum
Also always looking at the correlation between Bitcoin and Ethereum. They’re typically pretty correlated like 92 percent, but they’re very different assets if you really understand what they do.
[00:33:04.410] – Alexander Blum
And so we expect those things to diverge as they mature. And so looking at how that’s behaving as well. So a lot of that and this investment analysis as well.
[00:33:15.360] – Alexander Blum
And then just keeping track of… And I guess the main thing that I’m starting to integrate more and more into myself that maybe you can relate to is having clarity in health for myself, where it’s like, I don’t have to make a thousand stressful decisions every day. Maybe if I could just make three really important, really good decisions every day and having the clarity to do that, which means taking care of myself, eating well, going to the gym, things like that. That’s a part of it as well.
[00:33:43.860] – Alexander Blum
That I always felt was like a vanity thing earlier on. I need this massage or I can’t do my job well. I’m not getting a daily massage or anything, but really understanding it’s having some peace and clarity among such a fast-moving market, that’s really where we want to be differentiated and it starts with me as an individual.
[00:34:03.100] – Mike
Yeah, daily massage is our stretch goal. In some ways similar to… it reminds me of golf. No one used to work out. People were largely overweight and in bad shape until Tiger Woods comes around, and then he gets ripped in the gym and just knocks out 450-foot yard tries and wins all the championships. And it’s like, that’s… I hear you.
[00:34:27.010] – Mike
I don’t think enough people talk about that, but I think that the intellectual gain you get from being a good shape, meditating, just having a peaceful mindset is hugely impactful.
[00:34:40.900] – Mike
I mean, almost like the classic developers, overweight, playing World of Warcraft in a spare time, eating Cheetos. And I mean, we run at Otter labs. I run a company called Otter Labs. We connect developers down in Argentina with startups in the US. And the vast majority of the developers that we meet now are like their part-time hobbies are going across fit, doing jujitsu. They’re sharp.
[00:35:03.190] – Mike
I mean, I can kind of see it across the board that people seem to… there seems to be this correlation between high performer intellectual people and being in good shape. Yeah, it’s just interesting to observe that trend. Thais is a good trend over time.
[00:35:18.970] – Alexander Blum
Yeah. And I think if you have people addicted to Adderall, drinking soda all day and sitting around with chain-smoking, that on some level will get into things that are created. The more mindset and culture that is integrated into whatever gets created, the way it’s marketed, communicated, the values implicit in that.
[00:35:39.230] – Alexander Blum
And so I think that according to exactly how, like me, meditating every day, how that gets absorbed into what we do, but I’m sure that it does over time that has compounding effects.
[00:35:50.760] – Alexander Blum
And it’s just a better… I wake up every day feeling healthy and happy. And so even if it’s all for naught other than that like that’s pretty I’m happy about trade-off regardless.
[00:35:59.550] – Mike
Yeah, totally. And you seem like just a well-composed calm guy. You can meet people who are just like they’re vibrating, they’re anxious about something. Especially in your position, it’s not the kind of person I would give my life savings to manage it.
[00:36:15.220] – Mike
And it’s like… So I think there’s something to be said for that. I want to ask you if you’re open to it, a couple of questions on just tools you use behind the scenes.
[00:36:24.870] – Mike
I’m interested if there are a few specific tools that you use to gather data in the market on-chain or off-chain. Maybe to start there, is there some that come to mind that you rely on or recommend?
[00:36:39.340] – Alexander Blum
Yeah. So I mean… Oh, my God, just basic data level, a lot of good crypto data comes from sku.com as well as Glass node. Skew is specifically has a lot of good data on the derivatives markets that we can pull from.
[00:36:55.380] – Alexander Blum
So in terms of data, there’s that. And then there’s… we don’t do this yet. But I’d like to is you can run your own Bitcoin node instead of trusting Glassnode for their data or whatever. They want to give it to you every minute but maybe I want the data every second, I could just run my own bitcoin node and get it. We’re not there yet, but that’s something I’d like us to move towards.
[00:37:14.490] – Alexander Blum
And then in terms of trading tools, one of the… for institutional derivatives trading on crypto, there’s… We just did a webinar with them, but this company called Paradigm, the paradigm.co is their website. And they are basically like an OTC messaging and derivatives trading platform that gives you better spreads on things.
[00:37:40.170] – Alexander Blum
Trying to think what else? I mean, we have our own API connections to the exchanges that we use in order to just live pull data and keep track of our positions.
[00:37:49.440] – Alexander Blum
And then we have that’s live feed into our own custom software so that we can have a number of indicators like, oh, we’ve moved three standard deviations over the last 24 hours. That’s a pretty good signal. We’re not going to keep moving up where it’s just statistically.
[00:38:06.240] – Alexander Blum
So there are basic things like that and then you can build out the complexity of those indicators. I think right now things in crypto are so fluid and then are changing so quickly that we don’t really trust, especially in the options market, automating a lot at this point because nothing is really stable on even a weekly basis. And so we mostly use a lot.
[00:38:28.680] – Alexander Blum
Ten of our 12 indicators all say buy or sell. That’s a good influence on us. But ultimately, we feel there’s a good degree of human judgment still needed in what we’re doing just because not enough data and not enough stability for anything to be really predictive at this point. And so [crosstalk 00:38:47].
[00:38:47.820] – Mike
And so there’s so much more to it than just the… In the example, I’ll say, I guess every market is complex, but I’m thinking about saying like copper or something. If you’re a metals trader, you have a creative constraint, a barrier around where you’re investing, whereas crypto seems to involve every government, every banking institute.
[00:39:14.910] – Mike
The number of things that it impacts in the world just seems like, how could you ever quantitatively assess that with any rationale?
[00:39:22.410] – Mike
Even looking previously, when you were talking about earlier, looking back in time and calculating the precise deviation between returns and risk. It’s like how correlated is the past, the future? I don’t know. It just seems probable not usually.
[00:39:40.620] – Alexander Blum
And that’s… Well, there’s a couple of things there. One is you can be right 99 times and just wrong once and the game could be over. It’s like if you gamble and you like go on black and it’s black 99 times in a row, you’re rich until it’s red one time and then you’re out of money.
[00:39:57.660] – Alexander Blum
And so I think that mindset of like, really just it’s never done. And it only has to deviate once for everything to get screwed keeps me alert, I would say.
[00:40:09.990] – Alexander Blum
And then, yeah. I mean that’s why I find so much attraction in crypto. And it’s an endless source of interest is because there’s such complexity to it. It’s social, it’s political, it’s economic, it’s cultural.
[00:40:22.860] – Alexander Blum
And so how all those things all get combined into a single number like the price of Bitcoin? I think that’s interesting. That’s what financial markets do, is they take all of this noise, all this real human experience, and make it into a single number like do you want to buy it for this price or not do it? And do it why and when?
[00:40:39.180] – Alexander Blum
And I think that that’s fascinating. There’s fun like there are a subjective element and a very objective mathematical part that has a union right there that’s really interesting to me.
[00:40:50.030] – Alexander Blum
And then the other part that’s interesting in trading crypto as opposed to public things is most financial trading tools are used based on linear trading like things go up linearly or down linearly or they revert to a mean.
[00:41:05.810] – Alexander Blum
Bitcoin has this exponential movement in it. So it has some local linear behaviors like standard deviation, predictions, and mean reversion. But historically, every four years or so, you have a 10-20X rise in price. And so how do you… Those are way different time scales and risk behaviors. And trying to integrate those into a trading strategy is a pretty interesting challenge for us.
[00:41:28.460] – Mike
Yeah. That’s really well put. Do you guys… Is it only Bitcoin now or what’s the distribution of holdings?
[00:41:36.260] – Alexander Blum
We’re about 50 percent bitcoin, 50 percent of Ethereum in the fund. We down sit on a quarterly basis, but because we trade options and we can protect a lot of the downside, I know my personal opinion is Ethereum has a lot more upside in it still, but also the potential to not exist still. And so it’s a risk-reward there.
[00:41:57.450] – Alexander Blum
But because we trade options on it, we can take the risk because we can limit exactly to the number, how much we could possibly lose doing it. And so that window, like Bitcoin is like gold. There’s no founder at the top of it. It’s just almost like an institution.
[00:42:15.620] – Alexander Blum
Ethereum is a company run by individuals and there are competitors to it. And so it’s more like tech investment than it feels like investing in a natural resource, which Bitcoin feels more like.
[00:42:29.220] – Mike
Yeah. That makes sense. I was to do a really good podcast with Tim Ferriss and [inaudible 00:42:34] a few days ago. It just came out and so much respect for this guy.
[00:42:39.270] – Mike
And he was asked the question, Tim ask some question if you had $100 million today, how would you invest it or how would you recommend investing it or just how people think about it?
[00:42:49.350] – Mike
And he’s like he said your exact distribution. He is like I would put 50 percent of Bitcoin and 50 percent of Ethereum. So you should send that podcast to your investors, telling them you’re on to this insight.
[00:43:03.030] – Alexander Blum
[00:43:03.030] – Mike
How do you guys store the crypto? Are you using a, what’s the word I’m looking for? Like BitGo [crosstalk 00:43:12]. Custodian. Yeah, there.
[00:43:16.570] – Alexander Blum
So all the capital that we have at Ether is lent out to other third parties like large hedge funds primarily so we can earn interest on it or, and these are really well-known funds in the space with tens of billions of dollars on their balance sheets. So are pretty secure in the diligence we’ve done on them just so we can earn a little, it’s better sitting there than sitting, just earning no yield on it.
[00:43:45.160] – Alexander Blum
So it’s really their custody, which I think in some cases a BitGo where they have their own in-house custody systems.
[00:43:51.520] – Alexander Blum
And then the crypto that we use for options trading sits on the exchanges that we use. And those exchanges keep most of that with a custodian like BitGo or in cold storage in some ways so that even if they’re hacked, it’s pretty limited, up to 10 percent max of how much is even available to be hacked.
[00:44:11.230] – Alexander Blum
And so that’s where the money sits. But if it’s just sitting in BitGo for us, it’s basically there are other places we could make more with it. And so we send it there.
[00:44:23.990] – Mike
Do you get into, and don’t worry, I won’t tell anyone in this, do you get into Nexo or… I like Nexo and Celsius, which are decentralized finance options that provide lending and borrowing. Do you guys use them through the fund?
[00:44:41.090] – Alexander Blum
So the short answer is no. We’ve talked to them a bunch of times. What a lot of those groups do backfire also is they take retail people, they take their five bitcoin and then they aggregate that and lend it out to my company or to the companies that we lend to at better rates for them. And so we just cut out that middleman and send it to the end-user, just to our own diligence on it and get those better rates for ourselves.
[00:45:07.730] – Alexander Blum
But we’ve had…. There’s also, it’s interesting right now in the crypto world, as there is no shortage of people looking to lend Bitcoin or Ethereum.
[00:45:15.540] – Alexander Blum
In fact, some groups don’t want it. We wouldn’t ever borrow Bitcoin, there’s no shortage of it. Where there is a huge shortage is in US dollars or stable coins, like you can get 10-12 percent interest lending the US dollar out.
[00:45:29.780] – Alexander Blum
We were speaking to some just private lenders of regular lending funds that are trying to figure out what’s the real risk in lending to some of these crypto funds because the rates are so attractive.
[00:45:44.900] – Alexander Blum
The systemic risk is what you were speaking to before is these people using 50X, 100X leverage is insane. You have these little moves down and they’re completely liquidated.
[00:45:54.080] – Alexander Blum
And that’s when you see these big moves down. That’s what is happening, is this cascade of liquidations where you have a lot of retail people super leverage, the price goes down a little bit or bigger institutions do a sell-off to instigate this whole sell-off.
[00:46:08.900] – Alexander Blum
Then they have to sell off to liquidate their positions, which means the price goes down lower, which liquidates more positions. Then you have this 10, 20 percent move down in a single day. And it’s because of super irresponsible lending behavior in this gambling mindset or, I don’t know, irresponsible but high risk [inaudible 00:46:25] .
[00:46:25.850] – Mike
Yeah, high risk. So I’m curious, what do you think drives the returns? If I had a stable coin like a Tether or something and I’m getting 10, 11 percent returns through a retail option like Nexo or Celsius, what are they doing behind the hood?
[00:46:43.520] – Mike
They’re lending that out to larger hedge funds and then they’re doing what with it? Because interest rates are so low in the US. That’s why… It doesn’t seem to add up. I don’t see why anyone would not just get a cheaper rate.
[00:47:01.760] – Alexander Blum
Yeah, so the best thing right now that a lot of people do is this like spot carry trade.
[00:47:07.940] – Alexander Blum
So I’m not familiar with financial markets, but Bitcoin futures like a month out sell one or two percent above the current price.
[00:47:19.460] – Alexander Blum
So I could buy a Bitcoin today, sell it for two percent more in a month. And there’s absolutely no risk. And if I could do that every month, I can earn 15-25 percent just doing that trade with there’s no risk. Like the whole position, I bought the bitcoin, I’ve sold the exact same amount of bitcoin for two percent more and my position is done.
[00:47:38.600] – Alexander Blum
So there are a lot of institutions doing that trades. If I can get it, I can pretty productively make 20, 25 percent doing that trade, at least for now. It’ll go away and get compressed over time.
[00:47:49.460] – Alexander Blum
But yeah, I’ll borrow money at 10 percent, sure, because it’s literally a risk-free trade. And that’s a lot of groups ask us if we do that, which it’s not really worth our time on a day-to-day basis compared to other stuff we’re doing. But that’s where a lot of the money is going today.
[00:48:04.910] – Alexander Blum
And then I think the other major aspect, which is the advantage in crypto, if you understand it, is regular people just don’t understand if any of it works. It just seems like another word for risk is just information I don’t have or something I don’t understand.
[00:48:18.230] – Alexander Blum
And so that is different for different people. If I never do understand how a blockchain works or how the having cycle and bitcoin works, yeah, it seems like crazy behavior.
[00:48:28.220] – Alexander Blum
But if you do, then it’s a different risk profile. And so for those that lend money, it just seems high risk. And so they’re not willing to lend at reasonable rates. So just pushes the rate up all across the board.
[00:48:43.950] – Mike
Yeah, it’s a good explanation. It’s almost like the way to think about it is the high rate of return for the interest on a stable coin is powered by the limited supply of Bitcoin in the market and the high confidence that people have that Bitcoin is going to be higher in the future, maybe push out fiat become like a central currency that we all use, that seems like it’s fairly likely at some point in the future.
[00:49:16.230] – Mike
Yeah, it’s interesting. And do you guys or do you think about running these trades frequently? I guess, one of the things I want to ask you is, what do you think if there’s a Nassim Taleb Black Swan event in the crypto space, what do you think triggers that?
[00:49:36.450] – Mike
We saw in India recently said that they’re punishing people who even own Bitcoin. That seems to have some effect, but it certainly wasn’t monstrous. India is a large company or a large country, I don’t see the US.
[00:49:50.070] – Mike
I mean, government regulation maybe has some short term, but it’s not like a black swan effect, like solar flares or something like that. Is there anything that you ponder about that you’re existentially concerned about?
[00:50:08.700] – Alexander Blum
Not really. I mean, I think, historically, Bitcoin will do these 10, 20X moves up and then revert 70-80 percent, which I don’t know if it’s a black swan. If it happens periodically on a predictable cycle, we expect that to happen.
[00:50:26.310] – Alexander Blum
I mean, I don’t know how familiar with the Bitcoin-like having a cycle, but roughly every four years or specifically every 210,000 bought my blocks of Bitcoin, the rate of production of new bitcoin is cut in half.
[00:50:38.490] – Alexander Blum
And so your reward for being a Bitcoin miner cut in half. And it tends to be the first 14-18 months after that is when you see these exponential moves up.
[00:50:47.790] – Alexander Blum
Right now, we’re 10 months into that cycle since the last cut and almost exactly. On schedule, we’ve seen the moves start to begin. Right now we’re tracing somewhere between the last two cycles, just a 20X move, and a 12X move or somewhere around a 16X from the last previous all-time high.
[00:51:03.510] – Alexander Blum
And so I think what happens is, one, you have this cut and supply and so there’s just less available to be bought. You have the rise in price, which gets a lot of people excited, they want to buy on it and it becomes a local bubble or I think about it as waves, like it’s a bubble, but it’s not permanently burst. It’s riding upwards over time.
[00:51:23.250] – Alexander Blum
And then because Bitcoin, unlike a lot of financial products that are limited to a specific jurisdiction or are limited to a specific class of investor like credit [inaudible 00:51:32], you have this ability for retail mass buying and FOMO to flourish.
[00:51:37.140] – Alexander Blum
And then it goes up. You have this crazy leverage and risk-taking and this kind of euphoria and then it pops and everyone tells you it’s dead and then it starts over.
[00:51:45.750] – Alexander Blum
So I’ve been through that cycle. This will be the third time I’m going through that as the actual owner of Bitcoin. And it becomes actually comfortingly predictable. So it’s not really a black swan event. We expect it to happen in our fund.
[00:51:59.280] – Alexander Blum
The whole [inaudible 00:52:00] fund is that that will happen and we are going to not write it down along with everybody else because we expect it to happen. So yeah, I don’t…. I think [crosstalk 00:52:09] and that’s [crosstalk 00:52:10].
[00:52:11.010] – Mike
Good answer. [crosstalk 00:52:11].
[00:52:11.550] – Alexander Blum
And one open question, [crosstalk 00:52:13] like you have these institutions making major positions in Bitcoin and they’re not going to get scared, they’re not going to sell off when… They’re expecting that they’re aware of these cycles. Same with Tesla, these groups, don’t need… this isn’t their life savings. It’s small fractions of their whole asset base.
[00:52:29.490] – Alexander Blum
And so you might not see the same degree of the ride back down because like Michael Saylor of MicroStrategy, who’s been buying billions for his company, they’re not selling.
[00:52:41.330] – Alexander Blum
They bought in at 40, 50, 60,000, they’re going to hold it. And so it creates a new floor that’s maybe a little bit robust.
[00:52:48.150] – Alexander Blum
We don’t know how high Bitcoin is going to go to know how far from the top that floor is right now. But I think you might start to see less volatility, a little bit smoother buying behavior over time, as well as the rise of the derivatives markets, kind of take out some of that downside risk and smooth that curve.
[00:53:04.410] – Alexander Blum
And historically, we’ve seen the realized volatility of Bitcoin diminish over time, but it’s still pretty significant.
[00:53:13.160] – Mike
Yeah. Well thought out, man. I can tell you think a lot about this and read a lot, which I really appreciate and enjoy talking to you.
[00:53:21.110] – Mike
Is there anything that you want to send out there into the world, anything that would help you or things you’re looking for?
[00:53:30.820] – Alexander Blum
Our website is twoprimestage.wpengine.com. And our Twitter is two_prime. And you can get in touch with us. They’re always looking to speak with mindful and intelligent investors. So that’s the goal. And always open to new ideas and new people.
[00:53:49.690] – Mike
Yeah, that’s awesome. And do you do any writing or pod posting or writing down your thoughts anywhere?
[00:53:58.190] – Alexander Blum
I’m not [crosstalk 00:53:58] as I would have liked. I have written stuff for Forbes, and we write blog posts on our website and stuff, but right now not much. But you’re making me think maybe it’ll be nice [crosstalk 00:54:09].
[00:54:09.490] – Mike
Yeah. And you should. Well, I’ll do the show again at some point. I really enjoyed it. And where can people reach you? Are you Twitter accessible?
[00:54:18.890] – Alexander Blum
Twitter my email is [email protected]
[00:54:23.630] – Mike
Awesome. Well, Alex, it was a real pleasure to chat with you, man. And congrats on all the progress and wish you the best.
[00:54:29.150] – Alexander Blum
Likewise. Thank you.
[00:54:31.820] – Mike
Thank you for listening to Around the Coin. If you enjoyed the show today, consider giving us a quick review. Wherever you listen to podcasts, tweet about it, or text it to a friend. We really appreciate all the support and growth that we can.
[00:54:44.510] – Mike
If you have any guests you’d like us to bring on or feedback for us, don’t hesitate to reach out. We would love to hear from you.