Crypto Net-Nets

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In their recent episode of the VALUE: After Hours Podcast, Braziel, Hoffstein, and Carlisle discussed Crypto Net-Nets. Here’s an excerpt from the episode:

Tobias: You want to talk about crypto for a little bit? Because the crowd want some crypto net-net commentary.

Thomas: Ooh.

Corey: That one piqued my interest.

Tobias: [laughs]

Thomas: Oh, yeah. There are a number of crypto net-net situations. Sometimes, they’re not necessarily net-net, but they’re pretty dang close. When I say net-net, it’s not fiat cash, it’ll be like Bitcoin, net-net, Ethereum –[crosstalk]

Tobias: It’s real money.

Thomas: Yeah, the real money. Real hard money. It’s interesting because Corey, you and I were talking before we started about [unintelligible [00:29:32] that. I assume all you factor guys, I assume you’re starting to put crypto in your models. I hope.

Corey: You really can’t.

Thomas: Because there’s not enough data.

Corey: Well, it’s not just that there’s not enough data. From a regulatory perspective, it’s very hard to get even just spot crypto into a client account–

Thomas: Oh, you can’t build on your system as well right now.

Corey: Yeah, for example right now, I can mess with a lot of the offshore exchanges, because I’m a Cayman resident. Once I come back to being a US resident, I’ll get shut out of all those systems. I’ll also say, talking to other institutional managers–

Thomas: It’s called VPN, Corey. [laughs]

Corey: Yeah, well, the problem is the KYC, to be honest. It’s the VPN to get you access. But systems like, ftx.com, if you don’t go through the KYC, the most you can take off per day is between $2000 and $9,000. You’re certainly not going to manage an institutional account only being able to withdraw $9,000 a day.

Tobias: [giggles]

Corey: Look, from an institutional perspective, you have adverse incentives here. What’s the upside to adding a little crypto in the portfolio, some excess return? Great, what’s the downside? You lose all the money, because you mishandled the crypto or there was an exchange hack or you didn’t hard wallet it correctly. There’s so many things that institutions feel uncomfortable with right now that there isn’t a good onramp and don’t get me wrong there are, if you start to look for them, very good solutions. But until the regulatory environment loosens up and really allows people to invest in these offshore exchanges, or the onshore exchanges become as attractive as the offshore exchanges, I think it remains a non-US endeavor.

Thomas: Oh, okay. I was thinking that you were saying more like when you build them into your factor models, or any risk parity models or tactical asset allocation models, it’s impossible, because the data is not deep enough and–[crosstalk]

Corey: No, you can definitely get the data for sure. You can definitely get the data [crosstalk] and look, in certain– if you’re running a hedge fund, there are ways in which you can get access. There are funds now that are including the CME bitcoin futures, and there are the mini-futures now, give you better access. But you’ve got to put up a lot of collateral. It’s not a cheap trade.

Thomas: Yeah, that’s the thing, is I hate those things, because the collateral is enormous. I, of course, test all these things out just for fun and I’m just amazed at the collateral. We kind of stepped into crypto through distressed stuff and it’s worked out incredibly well, not just because of the stress, but really because of the [unintelligible [00:32:23]. But in terms of crypto, then that there’s stuff out there, I think I mentioned it recently on another podcast.

Tobias: The interns are getting younger and younger.

Corey: [giggles]

Thomas: For those interns, they need a lot of ice cream. Anyway, but let’s see. Yeah, so Nexus Mutual is one that I think is super, super interesting. So, let me explain what it is. It’s basically insurance for DeFi contracts. That sounds like gobbly-goob. But it’s basically insurance for the distributed finance or decentralized finance, excuse me, protocol like lending and basically trades close to book value. You get a company that’s growing at 300% quarter over quarter, which, in any stretch of the imagination– I think I was using at one point I was saying, “Okay, so Lemonade–” I can’t remember what Lemonade’s trading at but it’s trading at, I don’t know, 10, who knows what multiple revenue is trading at and yet you’re buying this thing around net-net now.

It’s hard because you have to get into crypto, so you have to buy Ethereum and then convert into I think it’s called NRX. I can’t remember what Nexus Mutual. We can post it in the comments. Actually, I can look it up real quick. But then you have to like, if you want to join the mutual, you have to go through– not KYC, but there are some requirements you have to do. I love trades like that. I love trades that require actually work.

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