Olaf Carlson-Wee , a 27-year-old has raised $10 million for an unusual hedge fund - with the support of venture capitalists like Andreessen Horowitz and Union Square Ventures.
Olaf Carlson-Wee is launching a strategy that invests in cryptocurrencies. To be clear, the $10 million managed by Carlson-Wee's Polychain Capital is peanuts in the hedge fund world. But Polychain's strategy is rare, with few other funds trading in cryptocurrencies. Most hedge funds trade stocks, bonds, and currencies, with variations of different strategies.
It's all about Cryptocurrency
A cryptocurrency is basically a digital, encrypted currency that is decentralized, so no one power oversees its value. Bitcoin is the most famous of cryptocurrencies - nobody knows who created it - and it's divorced from any government. It's considered a secure, private currency, drawing the attention of antigovernment and privacy-minded folks.
But it's not the only one - several other cryptocurrencies exist and are being developed.
Transactions for these currencies are recorded in blockchain, a private and encrypted ledger.
Carlson-Wee is betting that he can choose the cryptocurrencies that will increase in value - and he expects hundreds of them to enter the market.
Polychain, based in San Francisco, will be small, hiring only a handful of people. And Carlson-Wee is not looking for traditional Wall Street types.
"An amateur trader in the cryptocurrency market may have a more relevant background than someone who has had a traditional background on Wall Street," Carlson-Wee said.
Carlson-Wee, a Vassar College grad, wrote his undergrad thesis on bitcoin.
"I was immediately enamored and sort of obsessed," he said. "I thought the prospect of [bitcoin] had massive implications."
He then went to Coinbase, a digital asset exchange, and headed risk, overseeing things like fraud prevention and account security, he said.
Not only is his background unusual for hedge funds - so is his strategy. For instance, the normal research avenues for common hedge fund trades are unavailable, though there are some parallels.
Qualitative research
Instead of talking with sell-side researchers or looking at credit agencies (there are none), Carlson-Wee spends his time reading through the white papers that describe the protocols, interviewing the lead developers, and looking at a protocol's machinations in the GitHub repository.
He also embeds himself within the groups that are using the protocols to get a sense of how they are interacting with them, he said.
That model is similar to other funds that have launched in the space. MetaStable, another small hedge fund based in San Francisco, launched in 2014 with a handful of employees. The firm manages a few million, said Lucas Ryan, one of MetaStable's staffers.
Ryan, who has a programming background, says his job is to evaluate the protocols that people are developing and the problems they are trying to solve.
Still, like with Polychain's strategy, there are parallels. Ryan meets with protocol developers and tries to get a sense of how serious they are and whether their source coding is legit.
To be sure, this world of funds is very young. Until recently, Ryan was working on the fund part time, he said.
And it's unlikely these kinds of funds would grow to be large. Bitcoin, the most popular cryptocurrency, has about a $13.7 billion market cap.
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