The possibilities surrounding cryptocurrency have become an irresistible attraction for Silicon Valley entrepreneurs. In an age where it can seem like everything has been done, it’s a fertile field to sow new ideas and innovation. The excitement of planting the seeds for the next generation of technology and growing new investments drew serial entrepreneur Rick Marini into the world of cryptocurrency.
Marini started his career in finance and investment banking, but his time at Harvard Business School earning an MBA changed his perspective. Soon after graduating, he and classmate James Currier started tickle.com, which became the largest personality testing site in the world. The company survived the 2K dot-com bust and was acquired by Monster Worldwide. This ingrained the taste for entrepreneurship in Marini, who went on to found companies like BranchOut and Talk.co and brought them to successful exits.
With cryptocurrencies and related technologies poised to shake up Silicon Valley, Marini started Protocol Ventures, the first “fund of funds” focused on crypto assets.
With over 1,300 cryptoassets in a rapidly growing market, there’s no doubt that it’s going to be big. To learn why Marini got involved and to get a feel for what the 2018 cryptocurrency market holds, we interviewed Marini as part of VSC’s Freestyle Series. Here’s the best of what we talked about—you can also watch the full interview here.
Vijay Chattha: What got you so interested in the cryptocurrency industry that you started this fund?
Rick Marini: About four years ago, I was exposed to crypto for the first time. I was having dinner with Naval Ravikant from MetaStable and Tim Chang, a partner at Mayfield, and they were talking about this new crypto thing. I found all the applications of blockchain technology that could disrupt countless industries to be fascinating, as was the trading and tokenization. At that point, Naval was starting MetaStable and I wanted to back him, so I became an investor there. Some of us also did a separate fund called Binary Financial, which has also done very well. That’s where I started, but crypto didn’t become my full-time focus until I launched Protocol Ventures six months ago.
VC: What is Protocol Ventures, and what does it do?
RM: Protocol Ventures is the first “fund of funds” in crypto. There are about 200 crypto asset funds out there, so we take money in from investors and invest that into the funds. We do this to allow an investor to get diversified while bringing better access and prices. Of the 200 funds, we’ll invest in what I believe will be the top 10.
The funds that we invest in are only focused on what I say are “the coins,” not the company. The coin side is made up of highly liquid ICOs and especially the tokens—think Bitcoin or Ethereum. Right now crypto trades range from $50 to $60 billion a day.
VC: So why start Protocol Ventures?
RM: I initially invested in MetaStable and then Neural Capital. They were new funds that did 60x return last year when the S&P did 20%. I realized that they and larger family offices wanted exposure to this asset class, but might not have the knowledge of the space or relationships with crypto hedge fund managers. From there, the decision to start Protocol seemed like an intuitive next step.
VC: How are the funds performing since you’ve been getting involved in them?
RM: We launched in October 2017 as a new fund, and in the first month of our full deployment into the market, we were up over 40%. This past month, of the funds that have reported so far, one is up 58% and the other is up 85% for the month—they almost doubled the entire fund in a month.
If a VC firm can do 3x over a 10-year period, they’re a top-tier firm. These guys are getting 50 to 80 percent returns in a month. It may not be sustainable, but that’s the reason for our approach to diversification.
VC: Now that we’re able to trade 24/7, is it time to automate a hedge fund manager?
RM: Not yet. The information advantages that these hedge fund managers have is better than almost anyone else. When you have information advantages, you are going to blow away any kind of return that a robo-advisor could do.
VC: When you hear these kinds of numbers, how are VC’s and these 10-year funds feeling right now? How is it impacting the entrepreneur scene in San Francisco?
RM: On the VC side, they’re trying to understand blockchain technology, how to win on both the token side and the equity side so they don’t get left on the sidelines. They’re obviously very interested, but many don’t have the ability to invest in funds or tokens because of Limited Partner Agreements (LPAs) that dictate what they can and can’t invest in.
On the entrepreneur side, many are asking themselves, “Maybe I should just trade and do this.” Or, “Should our companies enter the blockchain area? Should I do an ICO, or traditional fundraising?”
VC: In terms of startup ICOs, it feels like I hear founders mention raising an ICO almost as often as saying they want to raise a venture round.
RM: I think 97% of ICOs are garbage. The problem with ICOs is that mom and pop now are putting in $100,000 because their neighbor made a bunch of money. The FOMO builds when people are expecting a big return.
Think about it this way: if you have a hundred entrepreneurs in a room, every one of them thinks they should raise venture money. The reality is, maybe 3% should—the other 97% never should be funded. My problem is, the 97% that are being funded right now by mom and pop are going to end badly. This is why we need regulation.
A lot of entrepreneurs want an ICO because you can raise massive amounts without getting diluted. By contrast, when you raise venture capital, you’re getting 25-35% diluted in a single round. Also, all you need for an ICO is a whitepaper that says, “This is what I want to build. I didn’t build it yet. Can you give me money?” It’s like a glorified Kickstarter.
There are special cases: two and a half years ago, Ethereum raised $18 million in its ICO, and today it’s worth $100 billion. That, to me, is like investing in a Google or Facebook—something that comes along once every five years. It’s exceedingly rare, but it also plays a vital role in the ecosystem.
VC: Banks are now getting behind certain types of crypto. Will the market go to where this money goes? Or will that money go to where people are investing today?
RM: It’s both. Right now, there are about 1,300 crypto assets. I would argue that only the top 100 matter. That number will expand to what matters, and the top hundred will also shift on which are the most important. Bitcoin and Ethereum aren’t going anywhere, and the top 10 are going to be there for a while.
This is very much like the internet in 1994-95. You’ve got some big names that are no longer around, and you have some like Amazon that became one of the biggest companies out there. It’s still very early days, just to be clear. That said, just because you do an ICO, or just because you start to use blockchain technology, does not mean you’re going to win. You’ve got to have everything lined up as if you were out there raising a series-A round.
VC: There’s a lot of people discussing the potential for blockchain and cryptocurrency in developing markets where inflation is rampant. What do you think about that?
RM: A lot of the use cases that I see crypto being really important and valuable for don’t necessarily affect a lot of us in the U.S. In areas of hyperinflation or extreme political unrest where they don’t even believe in their currency anymore, crypto is a really interesting alternative.
When Bitcoin was trading at about $7,000 here, it was trading at $10,000 in Zimbabwe. That’s because they were trying to take their money, whatever it was worth, and move it into crypto as a store of value. Bitcoin is not very stable, but it’s more stable than the currency in hyperinflated markets.
VC: Many governments must feel threatened by the number of cross-border transactions happening and its potentially nefarious uses, not to mention that they don’t get a cut. How do you predict governments will react to crypto’s rise?
RM: Governments want to control their own currency. Bitcoin or any other cryptocurrency is not owned by any government, by any company, by any person; no government can control it.
Now that crypto’s viability is no longer in question, I think most governments are figuring out how to adapt. This includes regulation and taxation. The U.S. government just came out with clarification on tax: every transaction with crypto is going to be taxed. I believe we need more regulation. It will hurt in the short term, but I believe it will eventually add a zero to the market cap.
VC: Why do you believe there’s a need for regulation?
RM: There’s a lot of big money—pension funds, endowments, institutional money—that is sitting on the sidelines, waiting for clarification. They don’t want to put the Harvard Endowment or the Stanford Endowment at risk if they don’t have enough answers. Right now, they don’t have enough answers around regulation. I believe there’s a lot of money that will come into the crypto market once we have clarity on that.
VC: Do you think governments will issue their own sort of cryptocurrency in the future, or favor more of an oversight role for cryptocurrency transactions?
RM: One of the things that I’ve heard is that a government could either have a gate that says “everything that goes in, you’re going to have to buy our crypto in order to be able to go in, and buy our crypto to go out,” or just operate from the tax side.
The reality is that the crypto market doesn’t need a U.S.-backed crypto unless there’s a utility reason for that. I think it would probably do pretty well because people would feel some comfort level that it’s the U.S. government backing it, but I don’t think that’s going to happen. I think they’re going to focus on if this is a security or a commodity. Right now, crypto is classified under what’s called the CFPC, which means it’s a commodity. The governments just have to give more clarity and more regulation.
VC: What do you think the chances are of the government actually taking regulatory action in its current anti-regulatory environment?
RM: We have some clarification on taxation that in 2018, all crypto transactions are going to be taxed as if you’re selling your stock. I have friends who are on an SEC-type of commission where they’re trying to understand what people in the industry do. I love that they’re taking a more measured approach, and didn’t just jump into regulation before they fully understood the market.
At some point this year, they are going to have to come out with solid clarification on if crypto is a security or a commodity. The weird thing about cryptocurrencies is that it’s actually both. This is why it’s taken so long to determine because there are aspects that are both, so the agencies are left figuring out who is going to regulate this.
VC: What do you think about China’s crackdown on crypto?
RM: China was the number one crypto country in terms of trading six months ago, but they wanted to clamp down on currency outflows, so they regulated it to abruptly stop all trading. They went from $4 trillion of reserves down to $3 trillion over a two-year period.
The day that China had come out with news around banning ICOs, Bitcoin went from $4,000 to $3,000. That was September 15, 2017. Today, Bitcoin’s at $16,000 or so. That demand just got sucked up by Japan, Korea, and the U.S.
VC: If you had a thousand dollars, a hundred thousand dollars, or a million dollars, where would you place your bets right now?
RM: Investing in crypto on Coinbase is the easy way to start. It has a $5,000 limit on day one, so you’re going to be kind of limited from the get-go, which is probably a good thing for most people.
Coinbase only has four currencies: Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. I’m not giving investment advice, but I think it’s hard to bet against Bitcoin and Ethereum, and I say that because they have two different use cases: a store of value and smart contracts. If you believe that I’m correct and that a lot of capital is going to enter the market and it’s going to go through those two, it’s hard to bet against them.
There are more investment opportunities coming, too. The Winklevoss twins have been trying to get their ETF approval for a couple of years now, like buying a stock that’s the equivalent of an index of cryptocurrencies. I think that would be a good way for people to dip their toe in the water and have liquidity as well.
VC: What do you and your fund managers think is going to happen with crypto in 2018?
RM: Right now, all the fund managers we’re invested in are long, meaning everyone believes 2018 is gonna be another big year. It won’t be 2017, where the entire market grew 40x in one year, but I can give you three reasons why I think 2018 will good.
One is the retail investors coming in. Over Thanksgiving weekend 2017, over 300,000 new accounts were started at Coinbase. Everyone is trying to get money into crypto. I opened up a Coinbase account for my father-in-law over Thanksgiving. He’s a 72-year-old with a Ph.D. in chemistry. He’s not a techy kind of guy. Now, mom and pop are coming in.
Number two, Wall Street infrastructure is coming into play. Both CME and CDLE launched Bitcoin derivatives for trading in December. Then NASDAQ and others are going to be launching in Q1 and beyond.
Number three is that Wall Street money really hasn’t come into crypto yet. Even [JPMorgan CEO] Jamie Dimon has changed his tune on Bitcoin, though he always said he’s a believer in blockchain technology. As Wall Street money comes in on a limited supply in a fairly small market cap— $750 billion today—I believe 2018 will another big year, and so do the hedge fund managers we invested in.
As for actually using cryptocurrency to make purchases, I don’t think you’re going to be buying a cup of coffee with crypto in the next year or two. And when you can, it’s probably not going to be with Bitcoin, which is more of a store of value. It could with some other currencies, like Bitcoin Cash, or Litecoin, or some others that are trying to be highly scalable.
Any final thoughts on the future of cryptocurrency?
I think everybody wants crypto to be fully functional. To bring back the internet example, we’re in the dial-up days. You could look at that and be like, “This is stupid.” But we’ll probably get to high-speed DSL in three or four years, so I would say to be patient because there’s so much potential and it’s going to be awesome!