The Deep Value Manager that Started a Crypto Fund

Years ago, I followed and read everything written by an esoteric, deep value manager named Murray Stahl of Horizon Kinetics. I found his contrarian and independent voice refreshing in the sea of closet-indexers paying to play on the wirehouse platform. In the summer of 2008, just before the carnage of the Great Financial Crisis, I attended a small meeting with Stahl’s partner, Steven Bregman at their Park Avenue South offices. I took a group of brokers there to learn about their core value strategy.

I remember Bregman defending large positions in financial firms. His theory was that the mortgage market was not big enough to take down the banks. He was dead wrong of course. Banks levered mortgages 30-to-1 and repackaged them in to collateralized debt obligations. Their capital structure relied heavily on overnight paper, meaning a loss of confidence spelled bankruptcy.  Shortly thereafter, I left the brokerage world and haven’t thought much about Stahl or Bregman since.

Despite the bad call on the banks, Bregman and Stahl are two active managers I respect. They are not afraid to take big positions and have conviction in their decisions. So, I was pleasantly surprised when the CFA Society of Louisiana booked a speaker from Horizon Kinetics, Peter Doyle, a third co-founder of the firm, to talk about cryptocurrency.  Why did a deep value asset manager launch a crypto fund?

It turns out, Steven Bregman read Satoshi Nakamoto’s white paper on Bitcoin in 2010 and was immediately convinced it was a revolutionary idea, with implications far greater even than the creation of the internet. He walked across the hall, and explained the white paper in plain English to his partner Peter Doyle, who bought his first Bitcoin that very day. His immediate, visceral reaction to Bitcoin, sparked my interest.

If you’re a crypto-novice, I highly recommend listening to Patrick O’Shaughnessy’s three-part podcast series. It is a thorough and decent introduction. I don’t claim to know more than the basics on cryptocurrencies, and I’m sure some of you will reach out to me to tell me what I got wrong in this post. But I do know that investment professionals need to be aware of what is going in on this space. Look no further than the CFA Institute adding crypto to their exam curriculum for proof.

Here are a few key takeaways from Doyle’s presentation. He never got to the formal presentation because after a brief introduction he took questions from the audience for over an hour. It was an engaging and informative session.

  • Doyle views the core use for blockchain as removing the middleman from financial transactions. Since transactions on the blockchain are publicly stored on millions of computers, there will be no need to confirm the ownership of assets. One example he gave is title insurance for real estate. There would be no need for title insurance if real estate transactions are recorded on the blockchain. I see an opportunity to create massive efficiencies in recording the ownership of financial securities. It takes 3-5 business days to transfer securities from one financial firm to another. With blockchain, this could happen instantaneously.
  • Doyle’s investment case for Bitcoin is scarcity. There will be only 21 million Bitcoin once they are all mined. Once the applications for its blockchain technology start to move the needle, demand will be high. Of course, there is no guarantee Bitcoin will be the cryptocurrency we all use.
    • An estimated 4 million Bitcoin are probably lost forever. Early miners discarded their old computers or other electronic storage devices or lost the passkeys. These can never be recovered.
  • 98% of Coinbase’s Bitcoin is stored offline, so only 2% is at risk to a hack of their platform. They store the majority of their Bitcoin and other cryptocurrencies in “cold storage” –  removed from the network with the two passkeys in separate vaults. The Bitcoin blockchain has never been hacked, but exchange services and personal devices have.
  • Remember when JPMorgan CEO Jamie Dimon labeled Bitcoin a fraud? Last month, the back announced the rollout of its own cryptocurrency. The big banks see the implication of their removal as middleman from financial transactions, so they are creating competing technology that will move money faster to avoid customer attrition.
  • Doyle believes we are in the pre-game, not early innings. He compares where we are today to the creation of the first email program in 1972. It took 25 years for email to become a ubiquitous. Technology moves much faster today.

This is a quote from a Horizon research brief:

It is so rare in one’s lifetime to be a conscious observer at or somewhere near the tipping point of an incipient technology that has already demonstrated proof of concept, is being used in practice by the public, but which has yet to truly become a public phenomenon. Similarly, there might today be about 4 million people in the world who use cryptocurrency. In practical economic and market impact terms that number is irrelevant from the point of view of global currency transfers – as irrelevant as the fact that 4 million people were using the internet was to the world of accessing and sharing information in 1994.

Doyle’s case is compelling, but it is worth noting that there is no place to custody cryptocurrency assets. The risk is akin to holding physical cash in safe in your home. Someone could steal the safe. This is a major barrier for fiduciary advisors recommending Bitcoin to their clients. Doyle’s plea to us at lunch – take an amount of money you would be willing to lose and buy a little Bitcoin. Personally, I’m still on the sidelines.




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