Editor’s Note: Alex Green is chief investment officer at Digital Portfolio Advisors, a hedge fund focused on creating an institutional vehicle for investment in crypto. Digital Portfolio Advisors partnered with Miramontes Capital of Newport Beach to launch the fund this year. Green also works as chief solutions officer at his family-owned EōS Organization, a developer of sustainable energy infrastructure.The Business Journal’s annual special report on small businesses starts on page 19.
The first time I heard about bitcoin, I was 14 years old and had just started at a new school late in the year. In one class, I sat next to a kid who explained to me why he wanted me to bike with him to Starbucks to buy a thumb drive from a random person—the thumb drive had something called bitcoin on it.
When I got home that day, I dove into a rabbit hole to try to understand what bitcoin was as well as Merkle trees, double-spending, inflation. Most of it went over my head at 14, but three things resonated:
• This was the first way to exchange money without anyone knowing who transacted.
• It wasn’t controlled by anyone; it was controlled by everyone who used it.
• Everyone who understood it believed to some degree it was the most impactful thing ever created.
Since then, I’ve been buying, selling, trading and thinking about bitcoin, blockchains and crypto.
Computer Scientists Versus Activists
Originally it was just bitcoin. There was no cryptocurrency market. In those days, it was a mix of computer science geeks and political idealogues all coming at it from different angles which was a crazy cool mix to watch in real time. The computer scientist guys saw the technology applications, and the activists saw the real-world change a global, decentralized currency could bring.
For many years I kept a healthy arms-length away from this community, which seemed to be a lot of sitting around the virtual campfire declaring how things should run, rather than how they do run.
Cryptocurrency is the digitization of currency as a ledger; all transactions are recorded and unchangeable. Bitcoin was just the first widely adopted cryptocurrency, which is a type of blockchain.
A blockchain is simply a ledger that records and stores data in sets called blocks that are linked together using computer science and mathematics, the “chain.” As new data is added to the ledger, computers run a math equation (SHA-256 is used in bitcoin) to verify that the previous blocks have not been altered. SHA-256 was created by the NSA (yes, the U.S. government) to secure data.
When people talk about bitcoin miners, they are talking about people who get paid in bitcoin to run these math equations on their computers. Electricity use is such a large piece of blockchain that the bitcoin network can use as much energy as a country like Colombia, and this usage will continue to grow.
The unique thing about a blockchain, as opposed to a paper ledger, is because of the fancy math, you can only write new transactions. You cannot change a previous data point in a blockchain. Any ledger modification is the modern-day equivalent of writing in stone—any attempted changes to previous data aren’t possible.
The Risks
Crypto is a way to make—or lose—huge sums of money with little work. It’s viewed as a casino, which it certainly can be.
Unfortunately like any industry, there are bad people. Last month, a cryptocurrency startup called Axie Infinity reported that hackers stole more than $500 million worth of their cryptocurrency. They had created their own crypto, and didn’t secure it properly. It’s why we focus on the highly regulated bitcoin and work with traditional institutional banking guard rails.
Price appreciation tends to bring certain money-motivated individuals who have no interest in building sustainable products or services.
Many people are launching projects and coins with no roadmap and no product and raising tens or hundreds of millions of dollars. It feels very scummy compared to where the scene was pre-2017 before building your own project was easy.
If you don’t understand a crypto-currency’s technology or what it’s trying to solve for, you can absolutely get your face ripped off. I advise people to stay away from small-cap or new crypto projects just because they generally are project “use case” based—think of them as venture investments, high risk.
I think it’s a cycle, when the market is up, people will look to make quick money; when it’s down, those people will go elsewhere. That’s why at Digital Portfolio Advisors we have a complex strategy built around hedging our downside because the highs are much higher in crypto, but the lows are much lower—and we want a sustainable option for serious investors who want exposure to the asset but don’t want to take the rollercoaster ride that is investing in crypto.
The Opportunities
It is extraordinarily easy to start a cryptocurrency if you know some programming language. Most crypto projects are open source so you can copy/paste someone else’s code and call it your own. Such actions are encouraged in the space and people apply the same technology stacks to different problems and potential solutions.
A huge watershed in crypto was the deployment of Ethereum, a tech breakthrough focused on smart contracts. Basically, you can program transactions to run secondary code automatically—people call it “programmable money.” Since Ethereum, many thousands of crypto projects have been launched, however; none have been as impactful as Bitcoin or Ethereum.
Other well-known cryptocurrencies include Tether, which acts as a peg to the U.S. dollar meaning you can redeem 1 USDT for 1 U.S. Dollar, and Dogecoin, which is known for its dog mascot.
While Orange County doesn’t yet have a well-known bitcoin community like Miami or San Francisco, I believe some locals will have big impacts long term. Three prominent local evangelists that I’ve had the pleasure of knowing are Bryan Harrington, who runs OC Bitcoin Network, an OC based Bitcoin community; Newport Beach’s Cailen Sullivan, co-founder of National Bitcoin ATM, one of the largest Bitcoin ATM networks globally; and Rich Swisher, founder of the nonprofit Motiv that focuses on empowerment through entrepreneurship.
From a technology perspective, there are hundreds of truly revolutionary applications of blockchain technology. AAVE, a decentralized finance (DeFi) platform running on Ethereum, had 18 employees who processed $19.4 billion in loan originations in 2020. By contrast, LendingClub Corp. has more than 1,300 employees who originated $10.4 billion in loans in 2021. AAVE can achieve its operational miracle by automating away most of the work via smart contracts.
DeFi is a new emerging term for a group of cryptocurrencies in the financial space and may become a massive blueprint on how you can automate very complex financial systems. It involves leveraging smart contracts to automate many financial transactions.
From an investment perspective, there are also many opportunities. The financial return of bitcoin is just absurd, about 8 million percent since it began trading on a market in 2010. It is now regulated by the CFTC as a commodity and as such can now be traded like oil or gold.
Bigger players are moving into not just mining but the broader space that is going to see some big shifts. Two of the biggest bitcoin miners in North America are headquartered out of state but have their top executives working in Orange County: Riot Blockchain Inc. (Nasdaq: RIOT) and Marathon Digital Holdings Inc. (Nasdaq: MARA).
Blockchain-enabled tech is going to be the next tech wave. I think an interesting one to watch is BWS (Bitcoin Web Services), a decentralized cloud computing platform run on a blockchain. Think Amazon Web Services, but more efficient, faster, cheaper, etc. Full disclosure: I’m a contributor to BWS.
To take a saying from Marc Andreesen, I see blockchain “eating the world” in the next 50 years.
