Alex Sunnarborg is a founding partner of Tetras Capital, a New York City-based cryptocurrency hedge fund Forbes estimates to have $30 million in assets under management. Tetras is well known for a recent bearish bet it made: It shorted ether in May 2018, a month when the digital currency’s average price was nearly $700. Today, ether hovers around $100. Before Tetras, Sunnarborg did a stint in investment banking and founded crypto exchange and research app Lawnmower, which was acquired by CoinDesk in 2017.
Forbes: How would you describe your investment strategy?
Sunnarborg: In a bull market when everything is going up, especially when bitcoin is going up, altcoins generally will return more than bitcoin. In 2017 when we launched, we were looking to make altcoin trades. [Altcoins are generally considered any crypto asset other than bitcoin.] They historically have more volatility and higher betas.
In a bear market, altcoins are still trading at a higher beta, but to the downside. In 2018, bitcoin fell about 75%, but altcoins fell 95%. It’s funny how strongly they’re still correlated, yet altcoins have a higher beta. Today, if we’re trying to hedge our exposure to this space, before we short bitcoin we look at something with a higher beta.
Forbes: You shorted ether in May 2018, when it was trading above $500. Now ether is at $100. Obviously, that went well. Was it your biggest win for 2018?
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Sunnarborg: I would say so, yeah.
Forbes: Where’s the bottom for ether?
Sunnarborg: It’s funny, these cryptos don’t have a good way to come to a fundamental value. I can’t tell you ether is fundamentally going to bottom at $50. It was at $10 two years ago, right? These assets trade so much relatively to each other, so I think ether’s short-term bottom would be in line with bitcoin starting to turn. If bitcoin turned tomorrow and rallied, I think ether would, too.
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Forbes: Over the past few months, we’ve seen issues with ConsenSys struggling and doing layoffs. Do you think that’s a bad sign for the future of Ethereum?
Sunnarborg: Yeah. ConsenSys is an integral piece of the Ethereum ecosystem. All the Ethereum decentralized applications and products it supports have had minimal user growth. A lot of them still haven’t launched and are still pretty difficult to use, and the daily active user counts are less than 100.
Augur has about $40,000 of money at stake across all its prediction markets, but the investors behind Augur have put up tens of millions. It has a market cap of hundreds of millions. There’s this massive disconnect between how much money is still tied up in these projects and how much people actually use them.
I’ve also noticed some Ethereum developers basically talking about building on some competing blockchains. People are talking about launching on Dfinity or Polkadot. At least at a high level, it does not look or feel good. It looks like a drop in momentum and steam.
Forbes: Are you currently short ether?
Sunnarborg: I don’t think I should comment on that right now. We have not held ether since we first published our short thesis in July 2018. We then went short ether, and we have taken that position off three or four times in 2018.
Forbes: Has bitcoin bottomed yet?
Sunnarborg: I don’t think so, and I think calling that is very difficult. That’s part of the reason I’m really thankful that we’re in the position we are right now. We can hedge ourselves, remain more neutral and not have to call that exact price or timing bottom. I’m not confident right now. Our portfolio is relatively neutral—we have cash and short positions.
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Forbes: What are you buying and holding?
Sunnarborg: Obviously, I’m a huge proponent of bitcoin. And if the market were to turn right now, what liquid altcoin sector would we even look at? We’re very biased against anything that did an ICO, because we think they’re pretty much all illegal securities offerings. Just by cutting that out, you are left with a very small handful of assets. A use case I still find interesting, because bitcoin doesn’t have that functionality yet, is private transactions.
Forbes: Among privacy coins, which do you like best?
Sunnarborg: I think Mimblewimble and Grin are pretty interesting—the fair launch process, the focus on privacy and the inflation. I think zcash and monero are both still interesting.
Forbes: Can you explain what Grin did to create a fair launch?
Sunnarborg: There’s only so many projects that don’t launch their blockchain or token without an ICO or some initial funding. Grin tried to use the ethos of bitcoin of saying there’s going to be a genesis block, and people are going to start mining the coin. There’s no way you can buy it or get access to this coin ahead of time. That’s very similar to how monero launched, and both of those attract a lot of interest from people in bitcoin, largely for that reason.
Forbes: What other factors do you look at?
Sunnarborg: Another huge thing for me is the security. So, things like that recent Ethereum Classic 51% attack (when users attacked the blockchain with computing power to spend the same coins twice, undermining the primary function of the blockchain). These blockchains where it’s possible to rewrite the blockchain for not that much money relative to how much you could make by double-spending—those are immediately not attractive. Unfortunately, in the crypto space, security and price are generally very correlated. So, as the price of ether falls, it gets less secure.
Forbes: I’ve seen you tweet about the virtual reality Ethereum-based platform Decentraland. Do you like that project?
Sunnarborg: I find the concept of digital land very interesting, because of its scarcity. I like the concept of digital scarcity. This land asset seems interesting as something I could own and build on, and maybe charge players a fee for. I could sell it to someone else in the future. The value actually makes sense to me. But there’s this other token in Decentraland called mana, which was created via an ICO. You have to use mana to buy land. I absolutely hate this token; it’s totally unnecessary. I think the ICO was just done to raise money. They sold these tokens, and then essentially, they’re backing into what to do with them.
Forbes: I’ve also seen you tweet about EOS and its growing number of transactions. Are you bullish on it?
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Sunnarborg: No. The one-year long, $4 billion-dollar ICO seems a little excessive to me. The whole governance system, with 21 block producers that can essentially make, vote, or deny everything, is a weird concept to me.
Forbes: What should investors be monitoring for signals about where the market is headed?
Sunnarborg: One of the big, fundamental things I want to see is whether the Fidelity crypto trading product actually rolls out in March. And do people actually start to use it? A very similar question: What’s the status of trading platform Bakkt? Will it get approved, and are people going to use it?
And how does the composition of global exchange volume start to shape up from here? Does volume increase on regulated, brand-name platforms—platforms that the next wave of institutions would actually trust?
What I’m really looking for in all these comments: Will this market actually clean up? Can we start to trust crypto data more, like trading volume numbers? We need more regulated, trusted players to improve the trading venues, because I think right now the SEC and many people are scared of manipulation, hacks and very shady venues for trading.
What would be really good for a market bottom to happen would be for every potential bad thing to happen immediately. I would love to see the SEC come down on people really hard. One of the biggest problems in this space is there are so many bad actors, and so many were related to ICOs. The SEC just has such a massive task ahead of them.
One way to think about the bottom is that it happens when all the bad news gets washed out. At that point the only thing to do is go up, and you can’t really talk about any negative catalysts anymore, because they’ve all happened.
Basically, I think we’re pretty close to the bottom, and what would help is if some more of that clarity and action came out. It probably would have been helpful for the bottom if the VanEck exchange-traded fund would have gotten totally rejected; if the SEC slapped some more of these people around and essentially maximum pain came onto the market. At that point we would see where, if any, buyers jumped in.
Excerpted from the February 2019 issue of Forbes CryptoAsset And Blockchain Advisor.
-Jeff Kauflin; Forbes Staff