I was featured on Artemis’ Analyst of the Month. My conversation with Jon Ma, Artemis’ founder, spans personal, investing and crypto topics. Our discussion provides more insight into my background, which several Crypto Clarity readers have asked about.
I explain my journey into crypto. I share the frameworks I apply to crypto from my hedge fund experience. I outline what most tradfi investors get wrong about crypto. I share more thoughts on the importance of fundamentals in crypto. We close with interesting themes and general advice.
The following is from my interview with Jon Ma as featured in Artemis’ Analyst of the Month.
What is your story? What was your journey into investing and into crypto?
I grew up in Toronto, Canada. My grandfather introduced me to financial markets and investing in my early teens. He was a WW2 veteran who worked most of his life in factory jobs and taught himself investing later in life. I was hooked! The idea that I could place educated bets and make money was thrilling. Simultaneously, I realized I wasn’t going to become a pro hockey player; so better find something else I thought!
My interest in investing and financial markets led me to investment banking. I worked at Credit Suisse in London, England. Banking served as a stepping stone onto the buy-side. I joined the hedge fund BlueMountain Capital at the end of my two year banking analyst program. I spent over 8 years at BlueMountain. I spent three years in London with the firm primarily investing in credit. I then relocated to the firm’s head office in New York, where I spent over 5 years as part of the firm’s long-short equity strategy. I was fortunate to join a great firm in the early innings. The firm grew from $3 billion of capital under management to $22 billion.
My first foray into crypto was in 2017. Bitcoin’s potential of seamless peer-to-peer money exchange and Ethereum’s programmability resonated with me. From my vantage point, there were many potential financial markets use cases. I bought my first BTC and ETH. I rode the bull and subsequent crash. Crypto remained an interest to feed my curiosity for several years. But it took a few more years before I went full time into crypto.
My conviction to devote all my time to crypto was driven by personal and professional motivations. Personally, the draw to be part of a fast growing disruptive industry, where I could play a leading role and help develop a potentially revolutionary technology was too great to ignore. Professionally, crypto is the most fertile investing ground. It’s the only market that is both inefficient and liquid. It harkens to the stock market of decades past when investing legends cut their teeth.
You were a hedge fund analyst at BlueMountain for over 8 years – what frameworks and learnings did you have from the buy side do you use today when evaluating crypto assets?
There are four learnings from my hedge fund experience that are applicable to crypto investing:
1. Time management: The most important skill as an investor is effective time management. There is an endless amount of research that can be done. Return on time is as important as return on capital. An ability to quickly determine what is interesting and why is critical. Hone in on what will drive an asset price. Focus the research on that.
2. The source of returns: Excess returns, commonly referred to as alpha, are a product of your and the market’s expectation converging. Most investors get this wrong. Investors need to believe in one outcome when the market believes in another. If and when the market comes around to believing your outcome, that’s what will move the asset price and drive excess returns.
3. Thesis driven investing: An investment thesis is rooted in in-depth independent research that surfaces 3 to 5 tenets that the market is unaware of that will change the markets view of the asset toward your view. The outcome of thesis driven investing is a differentiated view.
4. Risk management: An exceptionally good investor is right only slightly more than they’re wrong. The real driver of portfolio returns is in position sizing. The ones you got right you had bigger positions in. Manage position sizes accordingly. An investor needs to balance the courage of their conviction with the humility of being wrong.
What do you think most traditional finance investors who are looking into crypto get wrong?
There are four general buckets of things traditional investors don’t understand when looking at crypto:
1. Business model: Crypto protocols and applications sell a product for a fee and incur costs doing so. That foundational principle is no different than any other business. Non-crypto investors get hung up on i) the term ‘cryptocurrency,’ ii) non-fiat based units, and iii) value accrual. Most tokens are not currencies. Conflating tokens with currencies is unnecessarily confusing. Introducing a new unit of account is a paradigm shift. People struggle to wrap their heads around it. It undermines their existing view that fiat is the only barometer of value. Value accrual in crypto is not as straightforward as owning an equity. The difference is mostly due to regulation. I expect crypto value accrual to become standardized.
2. Operating leverage: Crypto protocols are and have the potential to become highly profitable. They have, what tradfi investors call, operating leverage. Their costs do not increase proportionally with their revenues. Tradfi investors misunderstand the profitability potential if / when revenues grow.
3. Staying power: A company’s staying power, also known as its competitive advantage or moat, comes from its intellectual property, brand, network effects or regulatory capture. Yet in crypto, there is no ownership of intellectual property. Crypto is open source. Code is copied and used to create a new version of an existing protocol. As a result, the staying power businesses enjoy, doesn’t apply to crypto. Tradfi investors shy away because of the lack of moat. They misunderstand that a moat can still exist without owned intellectual property. The moat resides in a protocol’s network effect.
4. Valuation: Valuing crypto assets is difficult. There is no commonly accepted way to value tokens. As a result, tradfi investors incorrectly assume crypto is mostly speculation. There are ways to triangulate valuation. I believe most protocols will be valued as productive assets with token-equivalent cash flows. A small subset of tokens will also have attributes of store of value assets.
We are big fans of your research on Crypto Clarity. We loved hosting the Twitter spaces on “Crypto Fundamental Investing” and your piece Crypto Fundamentals Don't Matter...or do they?. So do fundamentals matter in crypto? When do you think fundamentals will matter more?
The importance of fundamentals mirrors an adoption curve. Fundamentals didn’t matter in the early days of crypto. They matter more now. They’ll matter a whole lot more in the future.
Fundamentals are playing an increasingly important role because:
1. Metrics exist: DeFi summer birthed many applications and resulting metrics to track including developer activity, network usage, fees and costs. These metrics previously didn’t exist. Without metrics there is no fundamental analysis.
2. Capital formation: Crypto is becoming more important globally. Capital is required to grow the industry and adoption. Investors are more willing to deploy capital when they can tangibly value what they’re investing in and can forecast what it could be worth.
3. Historical analogues: The crypto market is similar to the stock market of decades past. Fundamental analysis of stocks gained popularity in recent decades. As markets mature, become more sophisticated, understood and regulated fundamentals become more important. Equity, credit and commodity markets followed a similar arch. Crypto will as well.
I think regulation could be a watershed moment for crypto fundamentals. Improving the confidence and integrity of crypto markets will pave the way for more investors to enter. They will apply what they know best; fundamental analysis.
What are some themes in crypto that you’re currently researching or excited about?
Catalysts are critical in a low trading volume post FTX market. Fundamental thesis underwrite the investment and catalyst drive position sizing. I think the two biggest catalysts, outside of macro, in the next year are EIP-4844 and the Bitcoin halvening. I’m spending a lot of time on the two of those.
What is some advice you would share with investors newer to crypto who want to get into crypto fundamental investing in 2023?
Be useful. That goes far beyond fundamental investing in 2023. Crypto is not an industry of experts. The fact that you have not spent the last ten years in crypto doesn’t matter, no one has. Things change so quickly that insights from two years ago are less applicable today. So you’re not that far behind those already in the industry.
I started writing Crypto Clarity with three goals in mind: i) advance my knowledge, ii) share that knowledge with others, and iii) leverage my knowledge and value to others into crypto investing. If you provide value to others, it’ll come back around in spades.
How have you been able to use Artemis in your fundamental research?
Artemis is the tool I use the most. Go and look at my 50+ articles published in the last year. Artemis is the most widely sourced. Artemis is my go to for pulling on chain data and easily comparing metrics across protocols. I also use it to build dashboards and models in Excel and Google Sheets that update with a click of a button. Check out the Ethereum template I built on Artemis sample templates.
Stay curious.
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Didn't know we are CS alumni! Cabot Sq?