Investor Discussion Series: Clay Collins of Nomics

In an effort to better understand cryptocurrency investing, I had the chance for a conversation with serial entrepreneur and very active crypto investor Clay Collins.  Clay is extremely active in the blockchain and crypto community as an investor, host of the excellent podcast The Flippening, and co-founder of startup Nomics.

How did you first discover cryptocurrency and become fascinated enough by it to devote your career to it?

I first got into cryptocurrency in 2013.  At the time I was CEO of a marketing startup called Leadpages.  I found the crypto world to be the intersection of a number of my passions - game theory, computers, money and economics.  I immediately put a large amount of my personal net worth into the space as I was a firm believer in the technology changing the world.  I certainly foresee the world becoming tokenized. I was fortunate enough to get involved with Ethereum right after its initial crowd sale.

Do you invest solely in crypto tokens today?

I have a barbell shaped investment approach.  One one hand I have a large percentage of assets in relatively safe investments such as cash, precious metals and real estate.  The remainder of my assets are on the extremely high risk end of the spectrum invested in direct crypto currencies crypto hedge funds, and crypto index funds.

Buy, Sell, or Hold Bitcoin/Ethereum?

Buy Bitcoin.  Buy Ethereum.

Do you think fiat money be replaced by cryptocurrencies in the next 10-30 years?

It could happen but that would be the last aspect of money that would be disrupted.  Store of value is the first use case of cryptocurrency that is real today (i.e. gold substitute).  Another use case you see emerging is court judgement resistance. Remittances aren’t there yet but will be coming when the infrastructure is in place.  

I foresee various use cases gradually eating away at and supplementing fiat currencies.  For example, there is an uptick in Bitcoin every time a local government currency collapses such as you saw with Venezuela and Zimbabwe.  Ironically, it will most likely be the poor and middle class in developed countries like the US that will be the last adapters and therefore benefit the least from crypto.  It’s easy for people in Venezuela to understand the use case behind something like Bitcoin.

What are some under the radar coins you think people should be watching?

I’m a big believer in Monero as it develops network effects over time.  Monero doesn’t allow anyone to opt out of the anonymity unlike any other anonymous crypto.  A great use case you see is in some countries purchasing certain books over the internet is a high risk activity.  Also the Monero team is very strong technically and they don’t promote marketing. I see it as presently undervalued.

Others include 0x (pronounced Zero X) which is a protocol for a decentralized exchange.  There is a growing network effect around it that could be very powerful.

Also the Dharma protocol which is a protocol for debt instruments as crypto tokens.

What are your thoughts on investing in ICOs?

I’m not comfortable doing as it requires a very different skillset.  You need to be incredibly networked in the space and be able to buy in during the SAFT phase (Simple Agreement for Future Tokens).  Networking and access to deal flow requires you to spend full time doing this and travelling to meet the teams. Crypto hedge funds do this better.

What are your thoughts around Bitcoin and its scaling challenges?

I am still a big believer in bitcoin.  There is so much capital and capital allocation around the bitcoin network that scaling is bound to happen one way or another.  For the next 1-2 years it will be slightly behind the curve but will catch up.

Another way to think about Bitcoin is the fact that it hasn’t been hacked is a huge value indicator.  Every single month that goes by without Bitcoin being hacked increases its proof as a store of value despite daily hack attempts.

Can you speak about how you invest your own crypto portfolio?

I am highly diversified across the whole of the asset class via direct investments, index holdings and crypto hedge funds.

Best resources to stay up to date on what’s happening in Crypto?

• Eric Meltzer over at INBlockchain has a good newsletter called Proof of Work

• Token Economy newsletter

• My Crypto List that is public on my Twitter account @ClayCollins.  Twitter is probably the best place to really monitor the space in real time

Predictions for 2018-2019 crypto?

Obviously this is not investing advice and for entertainment purposes only but I think crypto will rally toward the end of 2018 and we will see Bitcoin back around $20k a coin in the next couple of years.  

Anything else you think crypto investors, new and experienced, should know?

• I am a big believer in index funds such as the Bitwise Hold 10 and Coventures index fund.

• Also just a 50-50 split between bitcoin and ethereum isn’t a bad way to invest.

• In general when considering a crypto token the most important indicator is quote currency dominance.  For example you see Ethereum inching up there with 2nd order network effects being built on the token.

BlockFi

Overview

BlockFi is a fintech startup offering personal loans backed by cryptoassets.  The company's flagship product is a standardized loan at a flat interest rate for up to 12 months, at a 35% LTV ratio.  As collateral for the loan BlockFi holds a customer's Bitcoin or Ether at a registered custodian.  To manage the risk of such a volatile asset class, the firm has triggers at cryptocurrency price drops where the borrower has to put up more collateral or they begin selling the borrowers cryptoasset.

Unlike a traditional lender, BlockFi does not look at FICO or credit scores.  They generate revenue via loan interest as well as servicing the loan when they sell it off to other investors.  They are growing fast expecting to originate $100M worth of cryptoasset backed loans by end of the year, with more customer demand than they can currently support.

The team is based in New York City and has under 10 employees.

Why I like Them

Blockchain technology and the cryptoasset class it has given rise to, continues to grow as a part of the global financial system.  No matter if cryptoassets are a bubble or not, it seems unlikely they will ever go away, with a real possibility they will be part of any well balanced portfolio in the future.  BlockFi is helping build out a modern financial system around an emerging asset class.  They have huge amounts of growth ahead with their current offering as just a first step, with the team one day hoping to offer lines of credit and a credit card backed by crypto.  

Disclosure:  I have spoken to members of the team.

What I Find Interesting in Kleiner Perkins 2017 FinTech Trends Presentation

Venture Capital firm Kleiner Perkins recently put out a presentation looking at the current state of FinTech and where it is headed.  You can find the full deck here.

Below are some points that I found interesting:

• The rise in the last few years of FinTech startups globally, not just in the old finance centers of the US and London with Asian FinTech seeing the most growth in the shortest amount of time.
• No surprise, in the last two years the biggest area of FinTech investment has been Crypto related startups with consumer and enterprise lending coming in as a close second and third.
• They make an interesting point that the seemingly endless scandals from traditional financial services companies (Equifax breach, Wells Fargo fake accounts, etc.) leaves sector incumbents unusually vulnerable to startups.  
• Software is  eating the sector with the number of new APIs multiples higher in Finance (~2,000) than other sectors being disrupted by software.
• The most interesting trend Kleiner calls out is the disappearance of payment friction both online and offline, making the point that the App economy has been driven largely by this trend.  The end game of all this is FinTech completely disappears from the customer's perspective as illustrated by shopping at the Amazon Go store with no lines or check out required, payment is ambient with zero friction.
• Initial Coin Offerings (ICOs) have truly exploded raising $2.9B USD in September 2017 alone.  With the explosion in crypto currencies we are seeing a complete ecosystem emerge around them including financial media (Coindesk, Bitcoin Magazine), hedge funds (Polychain Capital, MetaStable), exchanges (GDAX, Kraken) , and consumer services (Coinbase, Ledger).

Coinbase

Overview

Coinbase is a fintech startup focused on allowing retail consumers to buy and sell a number of cryptocurrencies using standard payment methods such as credit card, direct bank deposit, etc.  For those new to Cryptocurrencies and blockchain technologies XEXR has an excellent beginner primer series here.  Coinbase started off with Bitcoin but continues to add other cryptocurrencies such as Etherium to their digital exchange which is called GDAX for Global Digital Asset Exchange.  GDAX is a professional trading platform that complements their retail facing Coinbase platform.  The other side of their business is providing developer APIs and working with merchants to allow consumers to purchase products using cryptocurrencies.

For good reason cryptocurrency exchanges are infamous for being insecure and prone to hacking resulting in massive thefts. Coinbase tries to counter this by  offering insurance coverage for all its customers as well as enhanced security with offline storage for consumer protection.  Many others in the space have since followed their lead and offer similar protections.

The company was founded in June 2012 in Y Combinator's summer 2012 batch and is based in San Francisco.  It was founded by a former Goldman Sachs trader named Fred Ehrsam and Brian Armstrong, an engineer.

Why I like Them

I like them because they are successfully making cryptocurrency purchases easily accessible by the average consumer. When someone is looking to buy their first cryptocurrency in the US, 9 times out of 10 times they are directed to Coinbase by non-affiliated cryptocurrency enthusiasts showing they've developed a respectable brand in the industry.  Coinbase is noticeable among other cryptocurrency exchanges for their ease of use, fast sign up, simplicity, and great user interface.  I've detailed my thoughts on the blockchain in other posts and in general I am bullish on the technology in general, even if I'm not particularly excited about the cryptocurrency application.  However, it is easy to see Coinbase becoming the dominant online exchange and broker for cryptocurrencies that platforms like e*Trade did for stock investing in the 90s.  There are a number of likely exits for the company with acquisition by a larger traditional consumer brokerage firm not at all out of the question if cryptocurrencies continue to become more mainstream.

Disclosure:  All information is from publicly available sources, I have not had any contact with a member of the company or its investors.