Highlights

Polychain:

Leading crypto asset fund Polychain Capital was the subject of an unflattering Wall Street Journal profile this week.

Having realized over 2,000% returns in 2017, Polychain’s assets under management (AUM) have now shrunk by 40%, the result of a combination of investment losses and investor redemptions.

Olaf Carlson-Wee, Polychain’s founder and Managing Partner, has been criticized for his decisions to take fees every year on paper gains and move LP funds into a side-pocket, which removes the possibility of full investor redemption moving forward.

To be fair to Olaf, the article's author does seem to be tipsy, if not drunk, on schadenfreude: as Joshua Hannah of Matrix Partners notes, its rather unlikely that LPs with 23x return in 2017 are too disappointed with Polychain's strategy.

My unstructured thoughts:

1. Achieving irregularly high returns in the 2017 bull market was not difficult. 2,000% doesn’t even seem particularly impressive considering a) long-only exposure to Ether would have netted somewhere close to 20,000% over the course of the year b) risk adjusted returns. I encourage industry participants to tone down the unadulterated veneration for Olaf and his colleagues.

Conversely, Polychain's future should not be dismissed for shedding 40% of AUM in 2018 – its venture-type structure means that its performance can only be meaningfully judged on a 5-10 year time horizon.

2. The WSJ piece cites Polychain’s strategy as ‘long-term, thesis-driven investing’, which does little to shed light on Olaf’s and co.’s approach.

What we do know is that Polychain participates in a deal on an almost weekly basis, and has hedged its bets across various protocols and applications. This approach reminds me of a line from Warren Buffett: “diversification is protection against ignorance. It makes little sense if you know what you’re doing.”

As participants in a rapidly emerging industry, we are all ignorant, and thus merely recognizing that ignorance and protecting against it may be the optimal strategy. But considering the nature of these protocol level projects —which are all ultimately competing to be money —I cannot help but feel that Polychain is pursuing a misguided approach, .

Yes, Polychain has to justify its generous fee structure and cannot simply pile funds into Bitcoin and Ether, but it seems erroneous to ignore the network effects that these two pre-existing crypto assets have built and the almost insurmountable first mover advantages that they have established.

3. The Shakespearean irony of Polychain and the 100 copycat funds that have emerged in the shadows of their success is that they are likely to be the cause of their own demise.

I wrote about Dfinity’s latest raise several weeks ago, arguing that a $2bn pre-mainnet valuation will act as a formidable barrier to the kind of community building that is necessary to achieve the memetic qualities that any successful money candidate will have.

The same applies to every other VC-led deal: restricting early round access to the Polychains, a16z’s, and Pantera’s will ultimately isolate a project from retail investors, who are eventually offered significantly reduced risk-reward opportunities and will be highly conscious of the fact that their buy orders are directly enriching insiders.

I think entrepreneur Alexander Liegl put it best: “Nothing builds a community like making money together.”

Malta:

A fascinating long-read on Malta, the tiny European island on a mission to position itself as a global crypto hub while simultaneously fighting off accusations of corruption and money laundering.

Malta’s initiatives have undoubtedly been forward thinking. We must recognize that some of these policy decisions have attracted unscrupulous characters but they should nevertheless be celebrated for their contrarian embrace of markets — gambling, crypto etc. — that have historically been shunned, often for ideologically puritanical reasons.

Indeed, the recent ruling from the Supreme Court regarding sports betting illustrates how forward-thinking the Maltese government has been in welcoming gambling outfits for years.

The passport initiative, whereby Maltese passports are sold to foreign nationals, is justifiably controversial and evidence from the article suggests that thus far it has been abused by nefarious actors. However, I am nevertheless fascinated by the concept of nationality as a marketplace, which should catalyze global competition at the regulatory and legislative level.

Thanks to Abacus’ David Beiner for additional insight.

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