Current Market Overview of Digital Assets

Almost a year ago I began writing some articles for Family Offices, highlighting the overall
investable ecosystem of digital assets and providing some of the potential rationales for the
initial review and potential investment in the emerging asset class. In addition to my work at
Arca beginning in 2019, I have now recorded over 100 ​podcasts with some of the most
influential investors and founders in digital assets, having learned much from them. As the
overall technology and asset class has matured in these past eleven months, it’s necessary to
review the landscape again and provide some material updates.

A note to readers: this is for educational purposes only; the content provided in this guidebook
should not be viewed as investment advice; please consult with the proper professionals
internally or externally.
Table of Contents:

1. The State of Bitcoin

a. Institutional Development
b. Bitcoin is still alive
i. Network uptime
ii. Is Bitcoin de-risked yet?
iii. What is the Bitcoin “halving” and why is it important
c. And in that same time period…
i. A discussion on traditional venture and public markets
d. Key Takeaways
2. Going Beyond Bitcoin
a. #defi (Decentralized Finance)
b. Security Tokens (STO’s)
c. The total addressable market of “Going Beyond Bitcoin”
d. Key Takeaways
3. Methods to Invest In Digital Assets
a. Digital Asset Fund Landscape
i. Questions and Guidelines in diligence of funds
ii. Key Takeaways
b. Direct Investments
i. Key Takeaways
4. Regulation
a. Bitcoin, Ethereum, ETFs and Wyoming
b. Key Takeaways
5. Conclusion

The State of Bitcoin

Institutional Development

Over the last year, in multiple discussions with Institutions such as Fidelity and TD Ameritrade
that have come on my podcast one thing became apparent to me: they began exploring and
experimenting with Bitcoin 5+ years ago. This was not driven by observation of Bitcoin reaching
$21,000 in Q4 of 2017, this process began long before that, in many cases 2014-2015. Whether
it was defensive or offensive posturing, these Institutions recognized the potential of Bitcoin
and the technology underpinning it and provided resources internally to investigate it. Lastly,
what is also important in my opinion is that this exploration was mandated from the top - from
the C-suite.

One of the major obstacles to overcome in regards to Bitcoin and other digital assets is custody;
as of today, as opposed to 2 years ago, there are now multiple legitimate, regulated service
providers. The user experience has come very far in a short amount of time; you do not need to
be a cryptography expert to use them, just like you don’t need to be an HTTP expert to invest in
internet stocks. With this in mind, 2019 has been a very busy year in terms of platforms coming
to market to support Bitcoin; some of those include:

● Fidelity successfully launched Fidelity Digital Assets in late March of this year; a qualified
custodian providing offline, vaulted deep-cold storage and multi-venue trade execution
capabilities, powered by a proven order routing and matching technology.
● Anchorage​, an institutional-caliber platform for custody, raised $40M in a Series B; it’s
notable that Visa invested in this round. On July 12, Anchorage Trust Company received
its trust company charter from the South Dakota Division of Banking, allowing it to
exercise fiduciary powers pursuant to state law. As a state-chartered trust company
with fiduciary powers, Anchorage Trust Company is a Qualified Custodian that can help
SEC-registered investment advisers meet their obligations under federal law.
● Gemini​, through the Gemini Trust Company, a regulated custodian overseen by the New
York Department of Financial Services (NYDFS) just announced their entrance into the
custody game.
● TD Ameritrade also entered into the space this year, offering it’s 11M retail clients and
thousands of investment professionals the ability to invest in Bitcoin futures through its
partnership with ErisX.
● Bakkt​, a company backed by NYSE/ICE went live in late September of this year, bringing
federally regulated price discovery to bitcoin markets, fueled by the same technology
and expertise that powers ICE’s global markets.
● Professional, Institutional caliber tools needed to manage the investment into digital
assets also took a major step forward in 2019 with firms such as ​Digital Asset Data​,
providing data and analytics, melding the likes of Bloomberg with GitHub. In addition
asset managers in digital assets need front end systems instead of the patchwork that
many were reliant on pre-2019; firms like ​Lumina​ came to market to meet those needs.
 ● And then finally companies like ​Tagomi​, which has received it’s BitLicense, makes it easy
to navigate the extremely fragmented global digital asset landscape with advanced
tooling and liquidity aggregation empowering institutional investors and active traders
to trade in size across markets.

Bitcoin Has Not Died

A common theme in mainstream media over the last few years has been trying to call “the
death of Bitcoin”. The site ​99 Bitcoin’s catalogs the number of times traditional media and
those on social media have put the proverbial “nail in the coffin” of Bitcoin.

At the time of writing this piece, Bitcoin was trading above $8,300. In November 2018, Bitcoin’s
price was around $6,400 before pricing down to $3,100 in mid-December. If you had invested in
Bitcoin in December 2018 to today you would have seen a ~+2.7x return on your investment.

It is also noteworthy that the types and sizes of addresses holding Bitcoin has changed over the
last few years. In the chart below provided by ​Glassnode​, an on-chain market intelligence
platform, we see the number of wallets that hold more than 1000 Bitcoin each dramatically
increase over the last year.
In addition to price accretion and the amount of investors allocating more capital to Bitcoin,
other data points are worth mentioning in overview of Bitcoin:

1. Bitcoin maintains a 99.99% uptime of its network since Jan 3rd, 2009.
a. In relation to legacy counterparts such as Visa, which in June 2018 had
“service disruptions” throughout its network
b. In February of 2019 Wells Fargo also experienced a “service disruption”
that prevented customers from withdrawing funds.
2. Hacks; this has been a questions many Family Offices and Institutional Investors
ask; the response from Coinbase speaks to this: “Though there have been
Bitcoin-related compromises in the past, this does not reflect upon the security
of the Bitcoin network itself. Bitcoin-related thefts are usually the result of
improper security or negligence on the part of the person or service holding the
bitcoins.”
3. Bitcoin Halving: This is an important concept but can be somewhat complicated
for those not familiar with Bitcoin. I will try to simplify:
a. Bitcoin has a hard cap supply of 21M Bitcoin;
b. A good, easy review of Bitcoin mining and the process involved can be
found in this short ​video​ here
c. As of this writing there has been ~85% of all Bitcoins mined;
d. New Bitcoins come into the world as a reward for miners whenever they
mine a Bitcoin block.
e. There is a mathematical process embedded since the inception of Bitcoin
which programmatically alters the amount of Bitcoin rewarded after
certain thresholds are met. This process, call the halving, basically cuts
the supply of new Bitcoins in half. Understanding classical economics of
 supply & demand this could result in many industry observers minds a
catalyst for future price accretion.

Key Takeaway​: Institutional caliber firms, such as Fidelity, TD Ameritrade and others have spent
the last 5 years or more reviewing Bitcoin and other digital assets. What is important to note is
that five years ago Bitcoin was trading around $380, so in my opinion and others this was not in
response to Bitcoin reaching an all-time high of $21,000, this work was happening way before
that. During this course of time these same firms began spending considerable time and
money, moving from learning about digital assets to the development of platforms to support
this new emerging asset class. While many in the current ecosystem have wanted these
systems and pieces of key infrastructure to come overnight, these larger, legacy institutions
must follow guidelines and procedures to ensure they meet the standards of their investors and
regulators. In 2019 we saw many of these platforms come online; one could anticipate that
with further education and adoption of Bitcoin and digital assets that these first adopters will
see their competitors try and move fast to meet the increasing needs for this emerging asset
class. Additionally, in terms of Bitcoin being further “de-risked”, in 10 years the network has
been up 99.99% of the time and “hacks” have been associated primarily to user or exchange
fault.

In the same time period...

As Kate Rooney, reporter for CNBC, ​reported​: “Companies going public this year are expected
to produce the lowest profits of any year since the Dotcom bubble, according to analysis from
Goldman Sachs.”

Just 24% of companies going public in 2019 will report positive net income this year — the
lowest level since the tech boom and bust two decades ago, Goldman’s chief U.S. equity
strategist David Kostin told clients recently.

We have also witnessed some potentially damaging private market deaths by valuation;
WeWork, once valued at $47 billion dollars on paper has, as of last week, fired 5000 people and
there is a discussion of a new valuation at or below ​$10B​. This is all in addition to the news last
week that WeWork also recently had their debt downgraded to ​CCC+​. Juul, after the Altria deal
for 35% of the company, was valued close to $40B; recently an investor in Juul, Darsana Capital
Partners, ​downgraded their valuation to $24B. This is all in addition to the regulatory pressure
Juul is now under from the Trump Administration and about their product line leading to their
CEO recently “​stepped down​”. Lastly, as of October 8th, as Teddy Schleifer from Recode writes,
in the latest example of this new reality, ​Postmates​, the food-delivery startup valued at over $2
billion that was expected to go public in 2019, recently told its IPO advisers that it is delaying its
initial public offering due to market conditions, according to people familiar with the matter.

In late 2015 Square had its IPO range cut to about $3.9 billion, down from $6 billion. From WSJ
in 2015:

“Square’s pricing could serve as a reality check for the more than 120 tech companies
with valuations of at least $1 billion, a club that has ballooned this year.”

I recall many family office investors signaling this was the sign...the sign that valuations would
finally start to come in line and normalize again...and it didn’t. Why?

From Pitchbook in Q1 ‘18: “Well over $1,000,000,000,000 in committed capital sits in

the coffers of private equity and venture capital funds worldwide. To be precise, as of
the end of June 2017, nearly $1.107 trillion in commitments were available for
drawdown by fund managers—$145.4 billion allotted to VC, $961.5 billion to PE.”

Short answer - too much cash chasing deals; GP’s who raised big funds needed to put that
capital to work; Vision Fund and their $100B funds had a distorted effect felt from Seed to later
stage. And this brings us to the present: will WeWork, Juul, Postmates and the poor
performance of IPOs in 2019 cause a reset in asset allocation to traditional venture? Time will
tell; with ​$3T in US Corporate debt on the fringes of being downgraded to yield inversions, the
traditional fixed income market may not be the best “cover” or risk off bet either. Can Bitcoin,
with it’s uncorrelated history to traditional markets be the answer?
Key Takeaway​: While Bitcoin and other digital assets have provided investors outsized returns,
traditional ventures is beginning to see compression and structural issues going forward. With
new IPO freezes, down rounds, debt downgrades and poor performance from the current 2019
crop of tech companies, investors may begin to recalibrate their exposure to this asset class. In
addition, the multitude of global macroeconomic factors such as repo market liquidity needs in
the US, China-US trade war, Brexit, German recession and ECB QE all should signal to investors
that the search for an uncorrelated asset would be prudent for a fiduciary of investors capital to
review.

Going Beyond Bitcoin

It is my opinion, shared by others, that there is a bifurcation and developing taxonomy in digital
assets; aside from Proof of Work vs Proof of Stake, there are assets like Bitcoin which are
programmable money and a replacement for legacy stores of value such as Gold, with an
approximate market cap of $7T. Then there are assets like Ethereum and other protocols
rebuilding the Internet to form Web 3.0; learning from mistakes made in the past the new Web
30.0 is being built on a distributed and decentralized stack, enabling new applications that are
not centrally owned by the likes of Google to take form.

My friends at ​Outlier Ventures​ call this the Convergence Stack and it looks like this:
When we search for the latest Mets or Liverpool score or the best brownie recipe on Google
many of us do not realize the layers and processes that go behind the screen; the stored data,
the handshakes, the index, the query and much more. The above graph does a great job
showing the work needed to replace Web 1.0-2.0, moving it to a decentralized one. Each one of
these layers has projects moving from what we refer to as testnet to mainnet, but what does
that mean? I like the explanation from OKEx:

“As the name suggests, a testnet is a sandbox environment for developers to

experiment and test-run the functionality of a project claimed in the white paper.
Developers can carry out all kinds of tests in a safe, separate network without risking
breaking the main blockchain. Opposite to the testnet, a mainnet is the main blockchain
network for a project to run on after rounds of testing on the testnet. It is deemed as
the final product of a project and the realization of the promise made in the white
paper.”

To make things simple, I like to think of the sports analogy of going from the Farm Team to the
Majors. Why is this so important? Many projects, during what the media called “crypto winter”
i.e. the time period when Bitcoin went from $21000 to $3100, were in testnet. They were
working out kinks, getting more validators on their networks and much more. When 2019 hit
we began seeing projects like ​Cosmos (a project focused on interoperability, among other
things) launch mainnet. Essentially what we have been witnessing in 2019 is moving from
theoretical “ideas” to live systems.

What began to take shape in 2019 is that many of these substrate layers that are effectively
rebuilding to Web 3.0 also began streamlining their consensus methods, many of which are
proof of stake. These systems use an incentive program i.e. native token; in PoS-based public
blockchains a set of validators take turns proposing and voting on the next block, and the
weight of each validator's vote depends on the size of its deposit (i.e. stake). We have seen
Ethereum begin to change it’s consensus methodology from Proof of Work (what Bitcoin uses)
to Proof of Stake this year.

Another field that is critical to having distributed and decentralized systems work to rebuild
Web 3.0 is governance. As Ryan Zurer (formerly of Polychain Capital) writes:

“crypto-governance will spawn novel ways of achieving social consensus, accelerate the
development of crypto-networks, and allow us to leverage the wisdom of the crowd to
allocate capital, make network upgrades, and organize online communities.”

To put it in another way, if you have a distributed, decentralizes system of validators out in the
world, getting them to all agree on things is not an easy task. Firms like ​Aragon are getting a lot
of attention for creating governance models that many digital asset projects are beginning to
look to.

#defi (Decentralized Finance)

Much of the energy and drive in Bitcoin and digital assets has been to remove as many
“middlemen” or rent seekers as possible. This has become ever so apparent in the explosion of
Decentralized (or “Open”) Finance in 2019; but some may question: what is Decentralized
Finance?

Brendan Forster, co-founder and COO at ​Dharma​, a crypto lending service, explained DeFi to
Quartz as “the idea that financial services can be 10x better than they are today. DeFi is more
global, more accessible, and more transparent than traditional financial services,” he wrote.
“Whereas Wall Street [provides] financial services where the ultimate ‘settlement layer’ is
courts and legal proceedings, DeFi [provides] financial services where the ultimate settlement
layer is code.”

There is a vast ecosystem, powered by Ethereum, that has erupted in #defi in 2019. From
lending platforms like Dharma, Compound, BlockFi to Decentralized Exchanges called “DEX’s”
and everything in between. Here is a great visual of the ecosystem from The Block:

I tested a majority of these platforms to see how they work; here’s an example: I went to
Dharma earlier this year, used a small amount of Ethereum to put it into a loan (30 days+) and
received interest for doing so (this varies depending on time and platform). Someone on the
other side picked up my Ethereum in less than 5 minutes and we were off to the races. No
banks, no brokers and no, you did not need to be a technology wiz to figure it out either.

What we have seen manifest in Decentralized Finance might resemble collateralized, asset
backed products in more traditional finance. As an example, MakerDAO is a decentralized credit
platform on Ethereum that supports Dai, a stablecoin whose value is pegged to USD. Anyone
can use Maker to open a ​Collateralized Debt Position (CDP), lock ETH as collateral, and generate
Dai as debt against that collateral. As of this writing there are approximately $303M locked in
these CDP’s.
Security Tokens (STO’s)

About a year ago a famous hotel in New York entertained a group of foreign investors looking
to buy the iconic location; part of the investment was theoretically going to be made available
to additional investors a security token. This got people talking...what is a security token?

Definitions around security tokens vary, but most focus on them as any blockchain based
representation of value (on the Ethereum blockchain using smart contracts) that are subject to
regulation under security laws. That includes tokens representing traditional assets like equity,
debt, derivatives, and real estate. A question may arise from reading this: why would I want to
tokenize an asset like a piece of real estate?

Traditionally an investor places capital in a GP to purchase a hotel, a sports team or other

variables; that capital is then locked up for years. If the investor wanted or needed to gain
liquidity from that position they would go to a Secondary Broker who would find a buyer for the
piece of investment you own - all for a hefty price. Tokenizing that investment provides the
investor the ability to gain that liquidity without that Secondary Broker. If this sounds alarming
there are configurations within tokenized products that are placed in the “smart contract”;
prevent the investor selling their position on the open market before a designated time frame.

In 2019 firms like ​Tokensoft​, which enables issuers, financial institutions, broker-dealers, real
estate companies and funds to meet compliance requirements for digital securities on the
blockchain at issuance, distribution, and transfer started to gain much traction.

Additionally, firms like ​Harbor recently announced that it will work with the real estate
company iCap Equity to create ERC-20 tokens (Ethereum) that represent iCap's over $100
million real estate funds. According to a company statement, this move will allow iCap's 1,100
investors and 17 placement agents to conveniently trade the real estate funds.

With firms making it easier to create compliant, functional security tokens the possibilities of
seeing more iCap Equity deals is quite possible into 2020 and beyond if the market becomes
more aware of the benefits of tokenization.
The total addressable market of going Beyond Bitcoin

If we review the total addressable market of the Internet we see that as of June 30th, 2019 over
4 Billion people are “online”. Some stats about the internet in helping to determine the value of
the internet:

1. The Internet influenced retail sales to the tune of $2.84 trillion in 2018 and is expected
to influence retail sales to the tune of $3.45 trillion in 2019.
2. An estimated 1.92 billion people are expected to purchase something online in 2019
3. Over 5 billion Google searches are made every day

With a market cap north of $820B and over 70% of the search market share, Google is
undoubtedly the most popular search engine. Of those 4B users many are using Google
powered products daily, from email to video (YouTube). Here is a breakdown of the most
common user activities on the internet from 2 years ago:
It goes without saying that Google is the 800lb Gorilla of the internet; AWS is most certainly
another major cog in the system but let’s focus on Google here because an interesting
phenomenon has recently begun which could signal some cracks on our dependency of it:

As of the last few weeks approximately 40 attorneys generals announced their plan to
investigate Google. The states seek to probe allegations that the tech industry stifles startups,
delivers pricier or worse service for web users and ​siphons too much personal information​,
enriching their record-breaking revenue at the cost of consumer privacy.

This compounded with the adoption of GDPR, The General Data Protection Regulation law on
data protection and privacy for all individual citizens of the European Union and the European
Economic Area, which also addresses the transfer of personal data outside the EU and EEA
areas that went into effect May 2018, presents a narrative to watch in regards to personal data
privacy becoming key issues among citizens around the world. Distributed, decentralized
systems that are meant to protect user privacy and also provide incentive for those very same
users in helping to build the very networks they are using, could begin to resonate with larger
clusters of the public when they become aware of them and if regulation continues to crack
down of their legacy counterparts.
Key Takeaways: ​There is a divide in digital assets that has become more apparent this year;
Bitcoin as a new store of value, a programmable money to hedge against macroeconomic issues
such as the ones recently seen in the last ten years likes in Cyprus, to Ethereum and it’s
counterparts who are looking to build a new Web 3.0; one built on a decentralized, distributed
network. It is becoming more apparent to people and regulators throughout the world that
large centralized services do not safeguard our digital self, our privacy. The “free” services we
have been using come at a cost. The addressable market for solving these issues is in the
trillions of dollars and the work needed to do so in a decentralized manner is Goliathian. A stack
of projects and protocols have been moving from theoretical to testnet to mainnet over “crypto
winter”; in 2019 we began to see some early evidence of these launches but much work is
needed to be done. Evolutions and adaptations of what can be done on Ethereum and other
chains saw the emergence of Decentralized “Open” Finance to the tokenization of real assets,
providing much excitement about the future of finance.

Methods to Invest in Digital Assets

Digital Asset Fund Landscape

You may be asking yourself “Ok, so do I just invest a little in Bitcoin, maybe this new
internet/Web 3.0 idea?” You may ask yourself: How do I do that? If I google “buy bitcoin” I see
Coinbase, Robinhood...do I just do that? This all depends on a few variables:

1. Do you want to self custody these assets? What does that even mean?
2. What type of risk & reward profile do you have?
3. Is diversification or concentration of assets better for you?
4. How much time do you want to allocate to monitor these assets?

These questions should be answered before evaluating digital asset funds; if you want to size a
smaller position into Bitcoin and Bitcoin only and you feel comfortable purchasing them on a
centralized exchange like Coinbase and setting up a wallet, first make sure to do enough
research on your own to feel comfortable with the asset; my firm ​Arca produces a weekly
commentary on the asset class as do many others like friends at ​Castle Island Ventures​.
Second, you’ll need to purchase a wallet the likes of a ​Trezor or ​Ledger​. The user experience has
gotten much better over the last few years; writing down a 24 word seed phrase may feel a
little alien to you at first but it’s for your security. If you want to have a more sizable position in
Bitcoin only then resources like Fidelity, Anchorage and others are probably better suited for
you since they are qualified custodians and can help you with the administration of those
assets.

Additionally, if your answer to #4 is >10% of your time that’s also an important factor; digital
assets or “crypto” is a fast moving asset class. There is constant news flow regarding new
projects, regulations and much more. What happened a month ago is essentially 6 months old
in the news cycle of this asset. Case in point; this guide was started two weeks ago and had to
go through a dozen, if not more, iterations and additions with new information coming out on
the ecosystem.

Now if you do not want to self custody these assets and also believe in diversification of risk,
then funds should be considered, and there’s lots of them now.

The overall number of funds in the market is debated; there is research done by ​PwC and
Elwood Asset Management (a firm backed by Alan Howard from Brevan Howard) which states
approximately 150 funds in crypto; then there’s research from CryptoFundResearch which
shows this:

How to Diligence Funds in Digital Assets

The first question that comes to mind is: do I want exposure to the liquid markets in digital
assets (those that trade everyday) or do I want more venture style exposure (equity in
companies in the overall ecosystem). As we see above there is a split in the overall fund
landscape; I happen to believe, based on conversations with some of the Fund of Funds in
Digital Assets like ​Vision Hill and ​Hutt Capital​, that the total fund # should actually show 80%
that trade the liquid market and 20% that do “pure” VC style investing.

In terms of the overall liquid token investment landscape it is my opinion, shared by many, that
the 2957 tokens listed on CoinMarketCap are majoritively uninvestable. Most funds operate in
the world of the “top 50 or 100” on CMC; as I wrote last year the reasons for this are:

1. Liquidity Risk; if your coin is not on one of the more ​established exchanges than you
potentially face liquidity and counterparty risk issues
2. Research, analysis and development of those projects; most coins listed in the top 100
have had development that has been monitored & analyzed.
a. Services like ​Messari and ​Delphi Digital have popped up in the market over the
last 2 years to provide deeper research akin to what traditional markets would
see from Institutions.
b. Coins beyond the top 100 get much less coverage and thus the quality of
research and analysis suffers.

There are pros and cons to both sides of the aisle here; most liquid funds provide the ability to
call your capital in a shorter time frame and do not have the traditional venture style lock up
periods of 5-7 years (and more in some cases). The con in some minds is the volatility - these
assets are still relatively new, held by few and thus do maintain a level of volatility that isn’t for
everyone. As Howard Marks opines:

“while volatility is quantifiable and machinable... it falls far short as 'the' definition of
investment risk." In fact, "I don't think most investors fear volatility. I've never heard
anyone say, 'The prospective return isn't high enough to warrant bearing all that
volatility. What they fear is the possibility of permanent loss.”

Permanent loss; this leads me to discuss risk management. When diligencing fund managers in
the space I would recommend asking for a DDQ; all managers should have one at the ready to
discuss their investment management, risk management and equally as important, their
operational risk management. Operational risk management is critical in digital assets; where
are the assets custodied? If not via Fidelity, Anchorage, Coinbase or others, where? Who has
access to the assets if you’re using self custody in the form of cold storage? There are a bevy of
questions to ask a digital asset manager that are not the same as a traditional asset manager.

Other questions to ask:

1. What exchange/s do you trade with?

 a. Does the fund maintain a maximum allocation sizing permitted to each
exchange? Does the fund also trade with OTC’s? Ask for a list.
b. Idea generation: what’s the process of generating new ideas and reviewing those
specific projects from a technical standpoint?
c. Use of leverage; a number of funds out there trade with Bitmex; BitMEX is a
trading platform that offers investors access to the global financial markets using
only Bitcoin and provides up to 100x leverage on its Perpetual Bitcoin / USD
Perpetual Contract.
d. Shorting and use of derivatives;

In terms of the remaining percentage of funds in digital assets that do pure venture capital,
questions to ask are focused around access and diligence on networks. Some could include:

1. What areas are you focused on? If “infrastructure” (which has been a hot button
keyword for the last year) what specifically in infrastructure? Key management?
Interoperability? Zero Knowledge Proofs? Scaling? Governance? Privacy Layers?
a. Do you have someone more technical (ex-engineer, developer) to help you
determine the validity of the network being created?
2. Deal origination; are you connected to any incubators like ​IDEO CoLab​? How are you
generating your deal flow?
3. Valuations: Are you leading the round and if so, how did you come up with the valuation
you set? How are you sizing your allocations?
4. Do any of these projects have conversion to tokens once their networks go live? How
would you store them?

Key Takeaways​: Every day, every month and now for the last few years there are more ways for
Institutional Investors to participate in Digital Assets. Whether an investor opts to self custody
Bitcoin to using the hundreds of fund managers who are at the ready, the landscape is changing
dynamically. There are key questions to ask managers focused on the Liquid markets when
reviewing an investment in their fund; questions that are not the same you would ask a
traditional hedge fund manager that encompass custody of assets and exchange
counterparties, to name a few. Questions to ask the smaller percentage of pure venture capital
firms in digital assets vary as well, including discussion on valuation of specific projects they are
reviewing and opportunities that may yield conversion of equity to liquid tokens. Like the
entirety of digital assets, the fund landscape is evolving and changing rapidly, with more
institutional caliber teams who are now more than 1 year into a track record in this asset class.
Direct Investments

There have been family offices and Institutional Investors getting involved in Direct Investments
throughout the digital asset ecosystem. This past March, the ​Witter Family invested in
Silvergate, one of the only banks that provide service to the digital asset ecosystem. ​Horizon
Ventures​, the family office for Li Ka-shing invested in Bakkt which recently raised approximately
$182M dollars. There are other family offices who have quietly been investing in this space,
relying on lead investors of some of the more prominent venture capital investors out there like
a16z, Pantera and others.

Performing diligence on an early stage opportunity in digital assets is a formidable task; one of
the biggest obstacles is that valuation metrics are still not agreed on in principle and this hasn’t
changed since my last writing on this. Newer debates that are ongoing focus around using stock
to flow models that many are now trying to apply to Bitcoin and Bitcoin related platforms.
Should we use use ​Metcalfe's law which characterizes many of the network effects of
communication technologies and networks such as the Internet, social networking and the
World Wide Web? The debate rages on in real-time.

As opposed to more traditional venture deals, a majority of companies in the digital asset
ecosystem are still revenue negative; this is not to say all of them are, but as adoption and
product market fit are still pieces of the puzzle in flux, so too is revenue. There are new
companies like ​Lolli​, now working with over 800 retailers the likes of Walmart, Bloomingdales,
Casper and more - providing a way for those purchasing goods online to be rewarded in Bitcoin.
Other companies like ​Bitpay allow holders to use their Bitcoin to pay for things such as their
AT&T bill.

There are also companies like ​Flexa which introduced it’s ‘SPEDN’ app this year, enabling
Bitcoin holders to use their Bitcoin in traditional retail commerce locations like Dunkin Donuts
and retailers like Gamestop. More bridges in the forms of on-ramps and off-ramps from digital
assets to traditional commerce and lifestyle are popping up; many in the ecosystem are excited
about 2020 and beyond, but make no mistake, LTV, user retention, CAC and other metrics that
are used to evaluate traditional venture deals are difficult to use in digital asset platforms right
now.

Key Takeaways​: Direct Investments in Digital Assets is complex; one of my favorite quotes from
a family office I know that makes a lot of earlier stage direct investments in traditional venture
applies to digital assets: “it’s more of an art than science currently.” Valuation models are being
evaluated daily and consensus around them is still not there. Traditional metrics like LTV, CAC
etc do not reside in digital asset platforms yet. Most firms are not generating revenues in these
early days, but some are working to build bridges to traditional retail and commerce to do so.
Institutional Investors are taking the leap and finding opportunities to help build the overall
ecosystem of this asset class.

Regulation

There has been a significant amount of activity as it relates to the regulation of digital assets;
from Institutions working to see passage of an ETF, to states like Wyoming passing blockchain
pro-laws to the most recent ruling from the SEC which I will highlight first:

“Among other things, we do not believe that current purchasers of Bitcoin are relying on
the essential managerial and entrepreneurial efforts of others to produce a profit.”

In a letter to Cipher Technologies Bitcoin Fund dated Oct. 1 the SEC declined the investment
company’s registration statement on the grounds (among others) that ​Bitcoin is not a security​.

This is potentially incredibly important as SEC Chairman Clayton, during the first few months of
2019, mentioned this as it relates to Ethereum:

“I agree with Director Hinman’s explanation of how a digital asset transaction may no
longer represent an investment contract. If, for example, purchasers would no longer
reasonably expect a person or group to carry out the essential managerial or
entrepreneurial efforts. Under those circumstances, the digital asset may not represent
an investment contract under the Howey framework.”

And just this week at the Yahoo Finance Summit, CFTC chair Heath Tarbert said he believes that
ETH falls under the oversight of the CFTC and anticipated the CFTC allowing ether derivatives to
trade on the U.S. market in the near future.

“We've been very clear on bitcoin: bitcoin is a commodity. We haven't said anything
about ether—until now. It is my view as chairman of the CFTC that ether is a
commodity.”
While these comments come directly from the Chairman of the SEC and CFTC regarding Bitcoin
and Ethereum this should not be construed as legal investment advice. In true form, the speed
of transformation of the landscape of digital assets is awe inspiring at times. Information from
the Cipher ruling, comments from Chairman Clayton and Chairman Tarbert should signal to the
reader that the digital asset ecosystem is starting to receive some sense of clarity and guideline,
which, up until the last few weeks, was a missing element in the minds of many Institutional
Investors.

Other areas of regulation that many have been watching closely is the ETF; numerous
Institutions have worked to try and get one approved by the SEC, from ​VanEck to ​Bitwise​. Over
the last few days since this writing Bitwise felt they were close to good news:

“The Securities and Exchange Commission has set an Oct. 13 deadline for approving a
bitcoin-based exchange-traded fund from Bitwise Investments, a move that could mark
a meaningful milestone in bitcoin’s long-term growth story. We’re closer than we’ve
ever been before to getting a bitcoin ETF approved,” Matt Hougan, former CEO of Inside
ETFs, said Monday on CNBC’s “ETF Edge.”

Many in digital assets feel that an ETF would further bolster the potential investment and
audience of Bitcoin and other digital assets. As Hougan mentions: “What the bitcoin ETF would
allow everyday investors to do is have safe, simple, secure access to the wealth generation
taking place in bitcoin and crypto. It would let financial advisors give it to their clients easily
instead of them going rogue.”

However, again representing the speed of news and information in digital assets, the Bitwise
ETF was not approved this week (notes provided by Nikhilesh De from Coindesk):

“The U.S. Securities and Exchange Commission (SEC) has rejected the latest attempt at
creating a bitcoin exchange-traded fund (ETF). The SEC announced Wednesday (Oct 9th)
that the ETF proposal, filed by Bitwise Asset Management in conjunction with NYSE
Arca, did not meet legal requirements to prevent market manipulation or other illicit
activities. The SEC placed the burden on NYSE Arca, rather than Bitwise’s proposal
itself.”

In what has been a very busy few weeks during the remainder of 2019 for regulators as it
relates to digital assets, the IRS was also involved in providing some additional clarity in issuing
new guidance in the form of a Revenue Ruling that addresses the tax implications of a
cryptocurrency "hard fork" to the owner of the existing cryptocurrency. Revenue Ruling
2019-24 asks two questions at the outset that it then seeks to answer in the text of a six page
analysis; as ​The Block​ reports:

“According to the guidance, the answer to the first question is "no", given the fact that
the taxpayer did not "receive" the cryptocurrency and so does not have "an accession to
wealth" and attributable gross income. The answer to the second question is "yes"
where the taxpayer did in fact "receive" the cryptocurrency. This guidance raises many
questions that are not clearly answered, including what it actually means to "receive"
cryptocurrency. It also may create a risk of tax liability for "phantom income" on
cryptocurrency neither actually received or easily liquidated.”

Lastly, this year Wyoming passed 13 new laws making it the "Delaware of digital asset law," a
reference to Delaware’s lead in corporate law according to Caitlin Long. More than a dozen
other US states and Congress are now following Wyoming’s lead by enacting our bills (usually
just one or two of Wyoming’s bills). These 13 laws provide a comprehensive, welcoming legal
framework that enables blockchain technology to flourish, both for individuals and companies.
A full ​breakdown of the laws and their importance was provided by Caitlin who led those
efforts.

Key Takeaways​: Regulation of Digital Assets is a moving target; one that may not move for
months and then all of a sudden move 85mph down the Pacific Coast Highway. We have seen
the Chairs of both the SEC and CFTC recently opine on the classification of both Bitcoin and
Ethereum, both stating they do not believe they are securities. We have seen regulators work
with members of the current digital asset ecosystem to try and approve an ETF, which in many
minds would enable more investors to access these assets in a fair and regulated manner. This
has not happened as of this writing, but we being provided more guidelines to follow to have
that happen one day in the near future. In 2019 we have also seen states such as Wyoming
taking the lead, and subsequently being emulated by other states, on passing blockchain based
laws, providing the ability of businesses to be opened offering services to customers
throughout the country.
In Conclusion

Bitcoin has been in existence now for over 10 years; Representative McHenry, during the Libra
Congressional testimonies this year, called Bitcoin “an unstoppable force”; digital assets have
entered the everyday lexicon of millions of everyday, non-technocrats. The overall digital asset
ecosystem has grown from a crawling toddler to a pre-teen who is starting to wonder who they
are and what their future will be. Day in, day out, this pre-teen is being surrounded by good
friends with years of wisdom and experience behind them. There will continue to be lessons
learned, but the more people want to see it succeed, the better chances it has.

Regulators are beginning to provide additional clarity, providing Institutional Investors

guidelines to use when reviewing investment. It has seen large, legacy institutions come to the
table in order to help it grow and provide services to those who want to participate. While the
ETF is still not approved, we are being provided more clarity as to why and how it can be
approved in the distant future.

There is a growing bifurcation in programmable money, meant to provide a hedge or insurance

in the chances off the next Cyprus type event versus those projects working to create the next
Web. We are learning that the process of building the next week, in a distributed and
decentralized manner, is not easy, but not impossible.

Institutional caliber funds have begun to generate 1 year track records and find their niche in
this marketplace. Back-office and administrative services to help power those funds have come
online this year, providing more institutional caliber services that many investors are
accustomed to.

Ethereum has been working with ​Microsoft​; firms like ​Chainlink are working with Google.
Corporations have been reviewing and testing blockchains for the last few years and finally
starting to find real use cases for them.

There’s a lot to be excited about, but investors reviewing and thinking of entering this asset
class need to do their homework, develop their own thesis (whether driven by global
macroeconomics or by interest in the technological innovation occurring, or more), ask a lot of
questions and eventually determine if the risk merits the reward. Many in this space are ready
and willing to assist in answering those questions pragmatically and reasonably.