Today we welcome Jason Choi, Head of Research at Spartan Group and host of the Blockcrunch Podcast. Jason has a thoughtful and measured take on the crypto investing landscape, shaped by his professional investing experience and conversations with top minds in the space. We hope you enjoy the conversation as much as we did!
Interview date 21 January 2020
Jay Bowles: Hey Jason, great to meet you. Let’s start with you walking us through your background.
Jason Choi: I grew up here in Hong Kong like you, and then I basically got really into the startup culture when I went to the U.S to study. I studied at Wharton, I studied business, really got into the startup scene there and started interviewing a lot of entrepreneurs and sort of writing my own blog. I actually cold emailed The Huffington Post and asked them to let me write for free so that I can interview founders. Eventually I wanted to invest.
I wasn't really aware of crypto at that point. But at some point, I wanted to invest in some of the founders I started to talk to. So I helped start this investment fund called Contrary Capital.
It’s like a decentralized fund with pockets all over the U.S. I invested in one company, wrote a very small nominal check through the fund. That was my first investing experience.
Then I interned at Bridgewater, and that was a really eye-opening experience for me. That turned me on to the idea of investing, but not just in startups but looking at macro.
The thing that really brought all of these together was crypto. You have the financial implications, you have the technological implications. Ray Dalio wrote about an economic paradigm shift happening every 10 years, and we're at that cusp right now. Chris Dixon from a16z wrote about a computing paradigm shift that happens every 15 or 20 years. And that we are at the cusp of that right now as well. So I thought crypto seems to be the cross-section of both, and this seems like a great thing to do. So I started doing a podcast called Blockcrunch, where I interviewed different folks in the space, basically just to learn more. And I was trading shitcoins at night and was doing consulting in New York. Eventually I came back to Hong Kong, decided to do it full time. So I joined these guys at Spartan and have been here for a year and four months now.
JB: Very cool. What do you do day-to-day at Spartan Group?
JC: Spartan has two arms. We have an advisory arm that helps any kind of Western projects who are trying to break into Asia because we realize how Balkanized the Asia market is. Korea and Japan are completely different regulation-wise and retail sentiment-wise. So we really want on-the-ground people to guide them through it. We helped with projects like Blockstack, after I joined. We’re also helping Solana, Dapper Labs and more.
But I'm actually spending 99% of my time with the investment side of the business. So the investment side is structured as a long short hedge fund, just to give ourselves the flexibility of resizing our conviction in a new asset class.
So my job is really to lead research, both in the private space or investing in projects early on and helping the founders, and also leading investment ideas in the secondary market. Looking at trade ideas about, okay, what are some plays we can do?
And the bulk of our analysis is very fundamental driven. So we're not like an algo fund or anything. We basically do a lot of deep-dive research into how projects work, try to understand where there might be value mismatches and invest accordingly.
There are actually a lot of quant funds out here in Hong Kong and they do a lot of cross-exchange arbitrage, stat arbs and things like that. We don't do that. We're mostly research driven.
I’d say probably 60-70% of our research is fundamentals and then 30% of that is supplemented by on-chain data and, of course, market data as well. So it's a combination of both, for sure.
JB: Interesting, so tell me the story of your podcast, Blockcrunch.
JC: Blockcrunch was actually started early 2018. I had the idea around the beginning of 2018 to really start this podcast. And I started it with another friend who was really into startups and venture. He since moved on to working in the SaaS field, so he's not as interested in crypto, but I stuck with it. I somehow really caught the crypto bug. So I thought this was going to be a six month thing, but it's been going on for two years now.
Blockcrunch was actually one of the earlier podcasts. So there is a wave of really early podcasts with like, Marty Bent’s, Tales from the Crypt and Epicenter, all the early guys. And then there's, I think, a second wave, which is myself and Chain Reaction by Tom Shaughnessy, a great guy. And then after that, there's a new wave of just everybody coming out podcasts. So now we're in podcast saturation.
There are a lot of very technical podcasts. So I wanted to make it more accessible and also want to, as an investor, position the podcast as a resource for investors. So we can really look at projects from the perspective of the opportunity they can create. So that's the angle that I take to interviewing developers, founders, and also other fund managers.
Because I speak Chinese I can also bring perspective from this side of the world, too. I think not enough people are paying attention to what's going on in Asia, so I really want to bring that point of view.
JB: I see, so that diversity of perspective is super valuable.
JC: Exactly, exactly. So I think my time at Bridgewater helped me understand how to really navigate conversations a little more effectively.
JB: That's really interesting. Actually, this reminds me of the show you did with Jill Carlson and Yaniv Tal. It was actually your tweet afterwards, which we really sort of like solidified it for me. It’s often really difficult to factor in peoples’ worldviews in crypto. To triangulate where they're actually agreeing and where it's just a lack of common terminology. It's super difficult and kind of frustrating sometimes, but really, really interesting.
JC: Yeah, it's interesting because people disagree on, you know, first of all, the different topics. And they could be both right, just on different time horizons.
They both could be right in that Bitcoin is the killer use case. The only use case for maybe three, five years. But in 3 years an entire Web3 ecosystem could be emerging. It’s just matter of time horizon. It's a matter of to what degree they are right as well. Which, I think, that level of nuance is something that I tried to bring to the podcast.
JB: Yeah. Yeah. Definitely came across. I must admit I very much seeing it more from Yaniv’s side, but I do see where Jill is coming from. Switching gears now to cross-chain infrastructure. It seems like something that's just heating up at the moment, particularly over the next six months or so. You've got the likes of tBTC and Ren. Then you've got liquidity provision with THORChain and all that sort of stuff. So do you agree that this space is heating up what do you see as the implications of it?
JC: Yeah, I think I would agree that it seems to be heating up, at least on the builder's side. More people seem to be focusing on this. And like you said, I think at the beginning there was wrapped BTC, and of course it’s custodied by BitGo, not a trustless solution.
But ever since then we have Cosmos proposing peg zones and Polkadot proposing their version of the bridges. And then, like I said, tBTC, Ren, Thor, I think Kyber’s trying to do something there too. So yeah, it does seem like there's more builder interest and it seems like the unspoken consensus is there has to be some sort of a multi-chain ecosystem in the future.
But on the demand side, it's interesting because I can't think of a compelling mass adoption use case besides maybe Bitcoin and Ethereum as a collateral for DeFi. And you know, we haven't seen material adoption on a lot of Dappsoutside of Ethereum.
I think even something like Kyber, I was checking on DappRadar. I know it's a flawed metric, but I think it's under a thousand daily active users. We haven't seen material adoption on multiple chains, so it seems a bit early for me to be talking about cross-chain.
But yeah, I'm excited to see what happens with things like tBTC.
JB: Yeah. Yeah. I mean, as you say, if there is one thing which seems like a concrete use case, it's all this BTC sitting in people's wallets doing very little, which could be earning a return. What are you particularly excited about over the next 6 months?
JC: Yeah, so there are few things we're excited about. I think the biggest thing for me is going back to the basics. When a lot of people talk about adoption use cases for crypto, they often struggle to think of, what are the use cases out there, right? What are the use cases that could be picked for crypto and generally the narrative diverges two ways. One way is people talk about how crypto can disrupt Web2 industries, and they talk about decentralized Twitter, like Peepeth a while back. About decentralized Airbnb and all that.
I don't see most of those use cases working out in the next six months or even the next three to five years, just because the inherent efficiencies of these siloed tech companies who can collect your data and make a more tailored experience for you. They’re so much further ahead than the UX crypto can offer. So I don't think that's the path to go.
The other path is creating completely new markets based on the unique value proposition of crypto. And I think that basic value proposition is transferring value trustlessly across the internet. And of course, the lowest hanging fruit is money, like Bitcoin.
And the logical extension of that is DeFI, right?
Once you can transmit value, what can you do with the value? You can do credit with it, you can exchange trustlessly. So this doesn't just have to be exchanging of money. It could be exchanging of unbundled value.
So it could be things like, you can easily package different types of financial products. A friend was bringing up an interesting example of maybe a professional gamer in the future who was a young kid trying to go to college, they could, you know, put up a valuable NFT they earn on a game and use as a collateral to take out a loan.
There are a lot of interesting things then you can unbundle on the internet. But rather than speculating on what these specific use cases will be, I'd rather invest at the picks and shovels layer, to me that’s kind of the DEX layer. One of the examples that I'm quite optimistic about is Kyber. They've been around for a while. They're trading multiples of 0x’s volume, but that’s not reflected in their price.
I think a huge part of that is because 0x trades at such high volumes that, a lot of funds were piling in and a lot of funds were shilling it back in 2017 whereas Kyber is kind of thinly traded. So more of the funds don't really participate in the trading. The price discovery is a little off there.
So from a price perspective and an adoption perspective, I'm quite bullish for many projects in the DeFi ecosystem, which I see as a testing ground for many of the ideas that can then extend beyond DeFi. Some of the investments we made last year included Synthetix and Maker.
Generally, I don't want to be another DeFi guy who's just riding the hype train. But to me intuitively, it makes sense.
JB: Absolutely – apart from anything else, it's working. There's a real community around it and people that are making money. I recently spoke with Alex Svanevik and he mentioned that Kyber Network Token has been progressively moving off exchanges, out of circulating supply.
JC: What Kyber is doing is they're introducing staking and proportionately distributing exchange fees to the stakers. So that should limit the exchange flow. But what's more interesting is also we're starting to see examples of projects that are distributing value based on more monetary assets. So the underlying token of the protocol itself is used as some sort of a coordinator to decide how much value each holder, or each staker, is entitled to. But the actual value is paid out in more what I’d call monetary assets. So what I mean by that is for Kyber, their fees will be paid out in Ether instead of the KNC token.
Similar to Synthetix, where part of the trading fees are actually paid out in a stable coin, sUSD, rather than the SNX Token. So the economics represent more of an actual cash dividend compared to a stock dividend, and I think there are valuation implications there. Another example, more recently, I think literally like four days ago, was Blockstack, and they announced that their staking yield would be paid out in Bitcoin rather than the Stacks token.
JB: Oh. I thought App Mining rewards were always paid out in BTC?
JC: So there are two different things. One of them is App Mining. They're basically paying out Bitcoin and Stacks token to incentivize developers to bootstrap the initial community. The other part is actually the consensus part. Their consensus mechanism for now is called ‘proof of transactions’. Miners instead of expanding computing power, they're indirectly expanding computing power by burning Bitcoin, initially.
They’ll use Bitcoin to secure the network. So initially the plan was to burn the Bitcoin to show that, okay, there's a proof that this miner has committed a certain economic value to secure the chain. They thought, okay, this could be more effectively used. So instead of burning the Bitcoin and now distributing that Bitcoin, which is paid by miners to stakers of stacks.
That's how the Stacks stakers get a Bitcoin yield. It's very interesting to me.
JB: Super cool – a mechanism to watch out for. So I've got to ask about the halvening. That's one of the main things I've read by, Kelvin [Koh, CIO of Spartan Group]. What's your personal take?
JC: Yeah. We had a lot of discussions about this. I mean, a lot of people were talking about the efficient market hypothesis, right?
The basic idea being that everything should be priced in, without getting too much in to the nitty gritty. I think that’s an understandable sentiment. But I think the biggest point here is that there is no commonly agreed upon valuation model for Bitcoin.
We don't know what pricing actually means, and if anything, I don't think it's binary, right? It's not whether it's pricing or not, it's how much of it is priced in.
Who are we to say today that Bitcoin shouldn't be $1 million, $100,000 or $40,000 – everybody has a different market to anchor it to. Even the total addressable market is not agreed upon. People say it could be gold, which is $7 trillion, or it could involve some other sort of value assets, which could include real estate or fine arts, and that would add another trillion to that.
So people don't even agree on what the market is, let alone what the market value should be. I think it's a cop out answer to say that it's fully priced-in.
But that being said, I'm quite bullish on a couple of supply-side and demand-side factors. So supply-side, we have the huge Plustoken scam, basically slowing down their selling right now. And on the demand-side, we essentially have the Chinese government endorsing blockchain, and while they're not endorsing crypto, I think it does help bring a lot of eyeballs to what crypto is.
The ETF efforts haven't really come into fruition in the US, but I do think that will go somewhere. Institutional investors, in general are not interested in deploying into Bitcoin right now because it's so small. But I do think that's an eventuality, and if so, then Bitcoin will be the prime beneficiary.
So, yeah, a lot of bullish factors for Bitcoin from both sides. I'm pretty excited for the halvening.
JB: Yeah, nice – great to get your take there. So your personal stance on investing. Your own time preference, how would you place it? You mentioned trading earlier, but you also talked a lot about longer-term strategies. How would you position your time preference?
JC: Personally, I don't think this is something that can happen overnight. I think the expectations that were set in in 2017 were a little overblown.
There’s two things happening. There's the monetary revolution, which is kind of challenging our conventional ideas of what money is. And if you think about it, the history of money or even the history of something like gold, right? There's like 6,000 years since the beginning of gold. So if Bitcoin is to be the new gold or a new type of universally agreed upon store value. It might not need to take 6,000 years just because now we have the internet and memes travel faster, but it's also not going to happen in a decade, in my opinion. And, this is a long-term play, definitely. And on the tech side, if we were to really revamp the majority of the infrastructure of the internet into some sort of distributed computing system, that's also not gonna take, you know, a month or two.
I think there are a lot of big pieces that need to be solved from the UX front. Especially if you want a significant amount of value to be locked in there.
JB: Yeah. I totally agree. I've grown to accept holding my own keys, but I just can't see the vast majority of people doing that. As you say, services have got to come in and solutions have got to come in to change that.
Often crypto funds sit on either the side of tokens or equity. What’s Spartan’s take on that?
JC: Yeah. So our fund is actually structured as a crypto asset-only long short hedge fund. Our advisory could facilitate fundraising and ecosystem development and is a MAS exempt business in Singapore.
For investing, we only do tokens. But I think the two will converge eventually. Like we were saying before, economically, for the investor a token represents a capital asset, a stock that's paying dividends.
But mechanically it's not a stock because there's no common enterprise. It's a decentralized network and you have to contribute to the network to get that payout. So it's not a stock. But it's not exactly just a utility token that's kind of a Dave and Buster's token. So I think the two are kind of converging.
JB: Yeah. Yeah. This reminds me a lot of Joel Monegro’s writing. He talks a lot about the convergence of capital and currency in cryptoassets. It's interesting to see where this goes.
JC: Yeah, his writing is pretty seminal. The Fat Protocol thesis.
People like Jake Brukhman from CoinFund are staunch opponents to that proposition. And I have found myself more and more sceptical of the Fat Protocols thesis over the past years as well, just because I think it's an overgeneralization and it actually probably led to overvaluation of a lot of protocols. So we saw a lot of excessesin the markets, who are basically trying to justify their own valuations by saying, okay, we are fat protocol, so we can raise crazy valuations. And we did see a reckoning of that back in 2018. So that's something that I'm still wrestling with a bit.
JB: What do you think are the main risks to crypto investors that people are not talking enough about?
JC: I think that's kind of the scary and exciting thing about crypto or investing in general. The very definition of hidden risk is, I can't possibly predict them.
I was actually reading this book called Fooled by Randomness by Nassim Nicolas Taleb.It talks a lot about this, kind of like the risk of blow up. And so I'm really fascinated by this topic as well. I think part of the hidden risk, is how much the trading volume is manipulated.
Centralized exchanges have been known to carry fake volumes, run risky fractional reserve businesses, and even run away with user money; some derivatives exchanges also had their own issues regarding how resilient their price feeds are. I think we're maturing, but on the decentralized exchange front we also see similar risks regarding oracles, even if the custodial risk is addressed. For investors or traders these are some of the risks that if you came over from the traditional finance side you may not expect to run into.
So it's entirely possible that the winning exchange might not be anyone that exists today as well. So I think the infrastructural risk is something that we're very, very keenly aware of. We kind of categorize that broadly as counterparty risk. Whatever exchange we're trading on, whoever we're dealing with, whatever project we're investing in, because it's not equity, it doesn't entitle you to anything.
That's a big part of risk that we're trying to watch out for. But then the bigger group of risks I think is just a risk of this thesis being wrong. Of course, my fear of that is low. Otherwise I wouldn't be in this space.
But there's always a chance that, most of the experiments today just end up being experiments. I think that's the biggest risk. If Bitcoin doesn't become the risk-off asset people think that it is, by the time the next recession comes, then, Bitcoin could take a hit, set us back a few years by pulling away interest in this space. Likewise for crypto, we're seeing signs of increasing surveillance systems being built around the world. If those advance much faster than crypto is able to counter, then you know that that's another risk as well.
JB: Yeah, that's a really interesting way of looking at it. The existential risk. Is there anything else in terms of your research that you think is really interesting that you’d like to discuss?
JC: Yeah, I mean, I'm mostly honestly trying to learn from this space. I think, everyone wants to act like they have the answers, but to be honest, no one, I was going to put up this joke tweet about how, the typical fund analyst that these crypto funds out there are trying to hire for has cryptography experience, software engineering experience, trading experience, financial modelling experience, speaks Chinese, can write medium posts in English. It’s like you need all these skills to be a complete investor in something like crypto, and it's almost impossible.I've never met anyone who fulfills all the criteria perfectly, but that doesn't mean they can't be profitable investors/traders. We just play to our strengths and watch out for blindspots by being collaborative with as many people as possible to try to find out the truth
So yeah, there's always something to learn from other people, so I'm always just trying to learn.
JB: Thanks Jason, these have been really great answers. I often get to hear you interviewing other people so it’s interesting to hear what you yourself think.
JC: Thanks Jay!
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