Investing Billions - E259: The Institutional Way to Invest in Crypto w/Rennick Palley

Episode Date: December 10, 2025

What does it take to build four top-decile crypto funds in one of the most volatile asset classes on earth? In this episode, I talk with Rennick Palley, Founder of Stratos, about how he approaches crypto investing with a disciplined, mathematically grounded framework. We break down how Stratos constructs top-performing venture and liquid portfolios, why crypto is shifting from momentum-driven trends to fundamentals, how to size positions without blowing up, and why Bitcoin and gold are behaving the way they are in today’s macro environment. Rennick also shares his philosophy on decisiveness, conviction, and avoiding the costly mistakes investors make when they hesitate.

So you have four crypto funds and top decimal DPI. Have you been able to accomplish this? I think, well, the main thing is really just keeping the main thing in focus in the sense of asking ourselves, how do we generate consistent high IRAs in our funds and saying, you know, our objective as a firm is to generate returns, not to necessarily raise the biggest funds we can. And then back into how do we actually construct. a portfolio to do that. And so on the venture side,

one of the things that really has helped us is just thinking through portfolio construction in a way that I think has really helped us. And then similarly on the liquid side, just framing our strategy in a way that enables us to achieve the results that we set out for. So it's really two different tracks, and I can speak to both of them,

but you tell me which direct you want to go. Yeah, let's start on the venture side. So how do you construct a venture portfolio in crypto specifically? And how does that differ than traditional venture? So the first thing that we looked at when we thought about portfolio construction is, what is the distribution of outcomes in terms of exit values, essentially the total market cap value that you can expect to exit at in a venture-backed crypto deal.

And looking at that and saying, what is my base rate assumption probabilistically for a top desile outcome and how much capital in dollars can I actually expect to return from an investment like that. And then backing into, well, assuming that I'm good at picking and assuming that I can get access to the deal that I want, what does the portfolio need to look like overall and what does the fund size need to be in order for that particular investment to be able to return the fund or to return multiples of the fund? And, you know, there's this rule of thumb and venture that each core position in the fund has to have the ability to return the fund. And so if you think that way, then in crypto, especially at the time when we first started

investing in crypto, there were very, very few multi-billion dollar liquid tokens. This is back in 2020. And so if you assume that you, the only way that you could raise a large fund and then write kind of typical seed stage check sizes, 250K, 500K, and assume that you were going to be able to return, the fund with those investments. It was almost mathematically impossible at the time unless you made a huge assumption around how more prevalent these multibillion dollar outcomes would be. So it was just very basic math, but it occurred to us that if we set the math up in such a way where it was going to make it much more probable for us to be able to return the fund or return multiples of the fund, then the rest of our job was going to be made a lot easier. So you made your fund size smaller

or you incorporated different predictions on the market. What was it that was different about how you went about constructing a portfolio? It was three things. The first one is constraining fund size. So under $50 million for all of the funds. And some of them were smaller than that. The second was having high conviction bets at the early stage. Because in crypto, what had been happening is the seed stage would be at a seed stage valuation.

But oftentimes, once the Series A came along, the valuation was almost equivalent to like a pre-IPO valuation and traditional venture because the company was going to launch a token very shortly thereafter that second race. Because the timeline to liquidity in crypto venture is much, much shorter than traditional venture. And so the market was sort of giving them that price bump, even though the company itself was not nearly as mature as a typical pre-IPO company would be in traditional venture. So the second thing was sizing up at the seed round and having conviction and having large enough positions in these core companies that once they watched a token, it had the ability to return the fund. And then the third thing was really focusing on the subsector of crypto venture that was clustering around these large outcomes. So if you looked at the data, you could see that a certain subset of the space was disproportionately represented in those large outcomes. It's almost like, you know, in traditional venture, there is a certain subset of companies like B2B SaaS, for example, that statistically is most likely to generate 10 billion plus IPOs. And the same is true in Crypto Venture. Most of that were the platforms and networks that were being created. So, you know, the new versions of Solana or Ethereum, if you will. So there was a whole, there's a time period where there was a lot of experimentation around new platforms and new network technologies. And, And that was a very fertile place for us to be investing while also trying to generate these

outsized returns. Looking back at some of your biggest wins, have they been momentum trades in that you knew that was going to be popular? You essentially were early and other people were trading them up. Were they fundamental contrarian bets? And how do you think about the crypto market specifically around momentum versus value or growth investing? That's a really interesting framing.

And I think it's instructive about. what has transpired in the market over the last, let's call it, five to ten years in crypto venture. I think crypto ventures really only existed in an institutional format for six or seven years. For context, my background is as a value investor. Before I started Stratos, I was working at a large global equity fund that's value focused. So I was trained to identify investment opportunities based on statistical value. What is the PE ratio and what is the expected growth and how does that compare to the rest of the market and is this appealing for that reason. So I know how to think of the world in that way. Crypto does not work in that way.

It absolutely has been a momentum trait. And there's a few reasons for that. The first one is one of the key insights that I had to drive me to want to do crypto venture was there's a period of time where you could invest at a seed stage valuation and essentially not. know that once that company launched a token, as long as the company was viable and had a compelling narrative and had a good team and, you know, a good investor set, that it was very likely that that token was going to be worth 10 times what the C round was, or more. So you could invest that $10 million, fully diluted value, and the token would launch and it would be worth $100 million to a billion. There was just a very clear arbitrage available there, but that

arbitrage was clear to me, and it became clear to everyone else, too. and eventually the crypto venture space got really big. And what happened was, is too much capital went into seed and early stage deals. And then there was a proliferation of new token launches that then saturated the space in addition to everything that we've seen in mean coins. And essentially people realizing that there's zero marginal cost to launch a token. So I say it was very momentum driven in the sense that you had to catch that timing correctly.

Because if you didn't, now you're stuck with a bunch of investments that basically are upside down, especially if you didn't invest at the seed stage. And so crypto today is in a bit of a transition where it's moving away from entirely hype-driven, momentum-driven investments and tokens to becoming more of a fundamental value play. And that comes along with the transition of the technology in general, where you go from something that has a lot of promise and people kind of vaguely understand how it's going to impact the world to becoming something that actually has demonstrable value creation, whether that's through revenues or profits or whatever. you can identify that in a number of different ways, but that's the transition that we're undergoing crypto, and it's not just similar to what we saw, I think, in the late 90s, early 2000s with internet companies. It's kind of like momentum plus value or plus growth, meaning that you still need the network

effect. You need people to adopt the technology, but there's intrinsic value in the technology. The value in the technology is not that you could just flip it. It's that there's a good thesis, good team around it, good institutional investors, and also a path to actually having a sustainable business. if and when it works. Yes. I mean, there's a joke in the crypto space that like the token is the product.

You know, there is something to be said for the creation of trading volume in early stage assets that crypto has achieved uniquely and brings a lot of attention to the space. You know, meme coins, I think are an interesting subcategory of that to discuss. But going forward, now that more people are using crypto, and there's real, let's call them, on-chain businesses, there is going to become an expectation that there is some fundamental value. And I think what will happen is people who have invested in things that had no value, those things are slowly kind of bleeding to zero.

And the capital is transitioning towards things that are more value-oriented. Not necessarily value in the, you know, it's trading at five times earnings sense, but at least value in the sense that this company has real use. and generates revenue. One of the ways you look at Stratos your fund is exposure to the future of information. What does that mean exactly, and how does your fund invest in the future of information? The way that we view crypto as an asset class is it really does two things. One is it acts as a hedge against debasement, which is really the major use case of crypto today.

And you can see that because the total market cap of crypto today is about $4 trillion. Almost 60% of that is Bitcoin. So Bitcoin's, you know, call it $2.2 trillion, something like that today. Bitcoin really is digital gold. Most people understand that now. It's a hedge against the basement. It is a sound money alternative to fiat. And because that is almost 60% of the market, you can see that all the other use cases of crypto are currently either underappreciated, still in development, or just essentially taking a backseat to Bitcoin and the debasement idea.

But Bitcoin, the reason why Bitcoin is a debasement hedge is because it stores information on chain, which is the ledger of who owns what Bitcoins. and that information is immutable. And so the same fundamental technology that enables that immutability about who owns which coins and the fact that there's only going to be 21 million of them applies to every form of information. And in some ways, that's kind of a key inside of things like Ethereum and Solano, which is to say we can take the same technology and use it for a touring complete computing system that enables you to run any kind of computation, not just the simple ledger that Bitcoin has, And so that eventually extends to all kinds of information, whether it's creating a financial market, asset ownership, or the provenance of information. Most people today would agree that we have an issue around what is true and what people said and what actually happens. And we even have this issue all the way up at the federal government just with employment data and GDP data. And there's a reason why they are moving that on chain. Or there's an initiative.

to move that on chain because there's a becomes a source of truth that one political party whichever side you're on doesn't have the ability to manipulate there's always the raw data there now there still is going to be some kind of narrative

that people spin and add to that but the actual fundamental data will be there and the same thing doesn't exist this is what the chain says is the number of employment this month. This is what the GDP growth is. That's factual. Why that's happening, you could argue who's causing what and, you know, whether it's causation, correlation, but the underlying data itself is, is a source of truth. So last time we chatted, we talked about

what happened to gold when it was confiscated in 1930s. History doesn't always repeat, but it rhymes. Tell me about what happened in 1930s to gold and how you tie that in to Bitcoin today. Yeah. So there's a lot of factors there just for a brief history review. So the late 20s, the U.S. is in Great Depression. This was the first time that there was a heavily debt-based society that had built up. It was the Industrial Revolution. People had, you know, the country had urbanized considerably. There was a lot of debt raised for the railroads, etc. Great Depression, you have basically a deflationary. period. And what the federal government realized was we need to reflate the economy. And one of the issues in doing that was the country was on a gold standard. So dollars were exchangeable for gold directly. And individual civilians could own gold at the time. And they basically said, you know what, we can't have people owning gold directly because that becomes something that they potentially would use as an alternative to Fiat, as an alternative to U.S. dollars.

And we can't reflate the economy essentially by printing money if people have this alternative. This is 100 years ago. This is a different time in terms of dollar dominance and the value of greenbacks. So they had to be sure that there was no alternative that was easily usable. So essentially the government said it's illegal to own gold. You have to basically turn in your gold. And if we catch you with gold, there's going to be all of these ramifications and there's going to be fines and possibly jail time. So by and large, everyone turned in their gold. So the U.S. gold stock increased considerably. Now, the U.S. had to pay greenbacks for the gold. There's something like $28 an ounce or something, if I remember it correctly, which means, you know,

the dollar in a per ounce term has lost 95% of its value since then because gold's now, you know, almost $4,200 an ounce today. And so everyone received greenback. and then the government turned around and said, okay, gold is now worth basically double the price per ounce. It's $40 an ounce now. So what does that mean? That means the 2x that you would have received if you had been holding gold was taken from you because you got greenbacks and they may double the value of the thing that they had. But the way that the government balance sheet worked on the gold standard was they can only issue

as many dollars as gold they had to back it. So if you took in a bunch of gold and then you double the dollar value of the gold, Now you can issue twice as much dollars. And so that's what they did. They issued a bunch of money. And that's what helped really reflect the economy and bring it out of the depression. And that basically ended up becoming the precursor to everything we know now in terms of monetary economics and how the Fed works and all the money printing that has followed since then. Now, there was World War II, then there was a Bretton Woods agreement.

Then there was finally the U.S. fully going off the gold standard in 1971. But arguably, that was sort of the beginning of the process. And so there's a lot of similarities to Bitcoin. Now, obviously we can own gold again today, but most people don't own physical gold, which is an important nuance there. But I think it tells a story that good money eventually drives out bad money, which is to say if you have two different monies that you can use,

and one is inflating and being printed and the other one is not, if the frictions aren't too high to adopt the other money that's not being printed, people will move into that currency. And so we're seeing that happen today in a couple of different places. One is dollars, people moving from dollars into gold. Another is people moving from dollars into Bitcoin. And then actually in foreign countries, it's people moving from their local currency into dollars.

And all of this is to some degree being facilitated by crypto. So dollars going to Bitcoin, obviously, has been a trade that a lot of people have made over the last 15 years. But stable coins are enabling people in foreign countries who otherwise couldn't access dollars to start accessing dollars basically on their smartphone. And, you know, I also think that we're eventually going to see some trickle over from people investing in gold back into Bitcoin. So, you know, historically, if you lived in a foreign country, let's say, Benetian, Venezuela, Argentina, Turkey, whatever, that has very high Brazil, very high inflation, you physically could not get dollars. The only way to get dollars was essentially on some black market. And that was the government's way of forcing you to transact in their fiat money. And so there's

190 fiat currencies in the world. All of them are bad. The dollar is just the least bad of them all. And so once you think about the world in that way, you know, the dollar looks okay because every other country is printing money too. But if you look at real assets like gold, equities, real estate, Bitcoin, you can see that they all go up and value, you know, they drift upwards. And that upwards drift is really a function of money printing, more so arguably than productivity growth, although that's a component of it. But if you look at the data, it's money printing that is a more powerful driver of asset price appreciation than productivity growth is. Fast forward five to 10 years. We have a crypto administration that's hellbent.

on getting people off of Bitcoin. How would the U.S. government institute that? And what are some ways to prepare for Bitcoin's seizure? And what does that even practically look like? When back in time, in 1931, when government said you can't own gold anymore, you had to physically take the gold into some government office and exchange it for dollars. That's because gold in its pure form is a bearer asset. It's you hold it.

It's yours. today, most of the financial gold, just as an example, is owned through ETFs. It's a financialized thing. So you never hold it. It's in some vault somewhere and you get some depository receipt against it. Bitcoin is unique in that in the early days, it was also a bearer asset. You had to hold it in a self-custody wallet. And it was only yours if you were holding it and you had the private keys. You lost your private keys. You lost the Bitcoin, which obviously is a very treacherous thing. But it's similar to holding a gold in a vault in your house. There are lots of issues around trying to hold gold in a vault in your house. You have to defend it if someone

wants to come take it from you. If your house burns down, if you forget the vault code, whatever. There's a reason why most things are financial assets have moved away from being bare assets because it's, it's challenging to do this, right? You want to just have a third party custodian hold it for you. The problem with that is it's like the turkey on Thanksgiving, right? Every Thanksgiving, the turkey until it's a certain number of years old has a great Thanksgiving and then, you know, it's dead. And same with, you know, not. And same with, you know, bare assets. We're trusting a third party. We think that our, you know, property rights are sacred in the U.S. and 99.9% of the time they are until it becomes very inconvenient for the central

government to allow that. And we saw that with gold in 1931. And I think we could see a situation where that becomes true for Bitcoin too. And the problem is Bitcoin today is the growth and ownership of Bitcoin is disproportionately away from it being a bearer asset where people hold it in wallets to something where it's held in an ETF, and that ETF sits in your Fidelity or Schwab account or through micro strategy or one of these other digital asset treasury companies. And it would be very easy for the government to say, you don't know this anymore. You just wake up one day and you have dollars in your fidelity account instead of either, or whatever.

You know, they go to Michael Saylor and say, we're taking your 600,000 Bitcoin and you're getting dollars for it. And the government can choose what the price is and then say, okay, you get dollar, and then they can turn around and say, well, actually, the price is X if they want to do. Now, it's harder to do than gold because there's a global market for Bitcoin. But there's a reason why a certain subset of the Bitcoin community is very focused on self-custody. I don't think it would be that hard for the government to do it. Do I think it's a likely outcome?

No. I think it's an edge case. But I think it's interesting to think about this because I think what it ends up doing is increasing your conviction in where the price of Bitcoin is going long term. because this is something that is going to really threaten dollar dominance eventually. I'm not saying next year, but maybe over 10 years or 20 years because of what I was saying earlier. Good, money drives out the bad. I mean, my business partner, Curtis, we had this internal argument discussion about this.

Here's where I stand. Let's say that there's even a 20% chance that the U.S. government would seize Bitcoin in 10 to 20 years. At that point, what's likely to happen is, unless it's some kind of UN-type partition, which is unlikely to coordinate every single country. But let's say it's even a NAFTA-type agreement. Immediately after seizure of the Bitcoin, which I agree with you would be a forced sale into the market. So you have $100,000 in a Bitcoin ETF, it gets put into dollars. There'd be somewhere between a 15 to 20% increase in the price of Bitcoin. Why? Because it's more scarcer and it has more value. And so you

would be spending, you know, 10 to 20 years at the 20% chance of not getting that 10 to 20% increase at that time. Because of course, at that point, you could still get the cold storage. You could argue that cold storage would be the thing that's actually more valuable than the actual cold storage of the Bitcoin assets. But in the meantime, by having it in products like ETFs, you're able to lever against it. You're able to have it on your balance sheet. Obviously, you have to pay taxes on it. But you have the benefit of owning it as part of your, estate and as part of your private assets. Where's the fly my thinking and why is holding it in cold storage more important than it's kind of call it 20% increase in this hypothetical future? In the scenario where the U.S. government ceases Bitcoin, I actually think you would initially see price go down because I think a lot of people would be scared in other countries that their governments were going to do the same thing and maybe they want to sell it now. but I think long term it ends up just driving the price up and you basically have this small subset of holdouts as you said

who still have cold storage and art said oh I'm sorry I lost my private keys in a boating accident which is what people say you know when they want to pretend like they don't have their Bitcoin anymore and you know there's a large percentage of the network today something like 15 20% of the network is in terms of the number of Bitcoin so you know let's call it 2 to 4 million Bitcoin are lost or have been claimed to have been lost, right? And so no one can go after those people to try and get those coins because you say, I just don't have the keys. And I think that will, that percentage will grow. It's, it naturally grows over time. People lose her keys and

whatever. Now that Bitcoin is so valuable, it's really declining. You know, it's not like people just accidentally throwing out hard drives with private keys on them like they were like 10 years ago and Bitcoin is worth 100 bucks. But I do think that it, it's, it's a lot of, it's It's interesting to look at what happens when you take supply off the market because that's a really important driver of why Bitcoin has performed so well over time. And I think eventually more supply will come off the market for reasons like we're discussing now, whether it's government's seizing it or governments buying it themselves. Because if you look at the reason why Bitcoin is underperforming gold this year, it's not because enough people aren't buying Bitcoin. This is the biggest year in terms

of Bitcoin, dollars flowing into Bitcoin of any year in history for Bitcoin. What's happening is a lot of holders that have held Bitcoin for five or ten years, long-term holders, are selling. And they're selling, not necessarily all the Bitcoin they own, but they're selling on the margin because, you know, if you bought Bitcoin at $1,000 and now it's $120, you're like, okay, I've made an incredible trade or the thesis that I had has played out and I'm going to trim my position on the margin. If you look at gold, very few people are selling gold, because a lot of the buyers of gold today are actually central banks and large corporates because they see what's coming down the road

and they're long-term holders. And so the supply demand balance actually is better right now for gold than it is for Bitcoin, which is why gold is outperforming. When I say that, obviously, it sounds obvious, but it's quite remarkable when you consider the total market cap of gold.

Gold is up almost 50% in the last 12 months. So gold's gone from a $20 trillion total market cap asset to a $30 trillion total market cap asset, which is, like, I think really worth talking about. Not enough people are talking about basically the oldest asset in human history, which is also the largest one from a total market cap perspective as a single asset, is up 50% in a year. What's actually going on?

Why do you think it's up 50%? Yeah, the reason why I just said, I mean, people look at government balance sheets and what they're saying they're going to do, and they say, okay, it's very obvious that a lot of money is going to be printed in the next few decades. Tens of trillions more than what we've seen. You know, the COVID situation was a very extreme example of this money printing where trillions of dollars were printed almost instantaneously and dropped into the market and then you saw inflation, all these things happen. We're going to see that a much higher magnitude of money printing, but it's going to happen more slowly and it's

going to be distributed in a way that's a bit more sophisticated so that we don't create that kind of consumer inflation, which is very different from financial asset inflation. And we're already seeing the financial asset inflation and people are front running it. The other thing is just the geopolitical situation we're in central banks are saying we don't really want to own treasuries anymore. We don't want to own dollars. We want to own something else. And they're kind of looking at gold and saying this is sort of a chosen hard money. Bitcoin, central banks aren't buying yet. But I believe that they will at some point in the future. And I think we'll be surprised how soon that comes. because I think if you look at, again, just to look at gold being up $10 trillion this year,

the total market cap of Bitcoin is $2.2 trillion. So if you had just a sliver of the profits that have been made in gold this year transfer into Bitcoin, you could see Bitcoin at $200,000, $300,000 a coin, no problem. Because there's some research that's been done, and we've done ourselves that basically every dollar that goes into Bitcoin on average drives the price $3 to $5. So there's a $3 to $5 multiple on the dollars that go into Bitcoin. So if you just had a small rotation out of gold into Bitcoin, which typically happens. Bitcoin has a tendency to follow gold on a lag for that reason. You can see extremely high Bitcoin prices in the next 12 months. On that note, let's talk about your liquid strategy. So you have a venture fund, you have a liquid fund. How would you categorize the strategy for your liquid fund? Honestly, the strategy is don't fix this up. And just to, I'll put that in different terms if you don't want to use that. But The insight that we had was a lot of the things that I've been saying, which is in crypto, you had an asset that was worth zero 15 years ago. It was nothing. It didn't exist. Now the total market cap of crypto is $4 trillion. So went from zero to $4 trillion in 15 years. That's the most significant wealth creation event from a standing start that humanity has ever seen. Just looking at it at a high level. More than Apple,

more than NVIDIA, more than any one of these MagS7 companies you can look at. You know, the total market capital is $4 trillion, but it started decades before crypto did. So the cagor of crypto since inception is about 50% per year.

5-0. So, you know, you asked me the question like, what happens if crypto gets to $10 trillion? Well, to go from $4 trillion to $10 trillion out of 50% CAGERS is only like two and a half years. So it's, we don't have to think anything is going to change for bitcoin or for crypto to get to 10 trillion or even 20 trillion like it's just

status quo now obviously it's a law of large numbers and the cagger comes down so it may be 25 or 30 but within that our view was if you can just capture that beta that market growth it's going to be the best trade of our lifetimes there's not anything else that you can invest in at scale in a liquid form that has that level of compounded growth now the mag 7 10 years ago that, but it's not going to do it going forward. Again, Bitcoin's 2.2 trillion. Half the Mag 7 is bigger than that now. So

and as a whole, it's obviously multiples of that. So Bitcoin still is relatively small, but it also is the most network affected asset in the world in our view. The more people who understand it, the more people who hold it, the more valuable it becomes. It's just like fiat. And

it has the ability to actually be useful globally, which is not really the case for any other fiat. And so the view was, well, how do we get exposure to this over a very long time horizon without screwing it up? Because what we've seen a lot of the other crypto funds that we know and we know the GPs of is they took too much idiosyncratic risk. They had very large exposures to individual protocols, which works really well on the way up and then just crushes your returns on the way down and you're down 80, 90%. That's been common for liquid crypto funds. And we basically said,

well, how do we add alpha to owning crypto on a broad basis without introducing significant additional idiosyncratic risk? Because there's enough volatility in crypto as it is. You don't need to add risk. And so we looked at it and said, well, let's, there's no crypto index. There's no S&P 500 of crypto. There's no easy way of doing that. Part of the reason why is you have one asset that's 60% or so of the market, which is Bitcoin. So how do you have a, you know, people complain about how much the Mag 7 is in the S&P 500. well, that's 30%, give or take, you know, Bitcoin 60%. So you have to be able to get exposure to the key themes in crypto

without having exposure, being overexposed to any one thing other than really Bitcoin. In our view, like if you want to invest in crypto, you have to be bullish on Bitcoin. And Bitcoin is kind of like our base asset. So essentially, we look at the market weightings in each one of the subsectors and the major protocols like Ethereum and Solana, you know, you can go down the list. and then we take a view on how we think each one of these things is going to outperform or underperform on a long time horizon and kind of set that as our strategic portfolio allocation and then we tactically move around those strategic allocations based on where we think we are

in the crypto cycle, what liquidity is doing, where we think narratives are moving around. But by a large, we try not to skew too far away from those things because, again, we want to make sure that 10 or 20 years from now, we can look back and say, we got close to, if not outperformed that crypto beta, that 25, 30% CAGRA, whatever it ends up being, without creating this risk that we massively underperformed it, because that's really the biggest risk is not getting that exposure. Ever wanted to explore the world of online trading, but haven't dared to try? The futures market is more active now than ever, and plus 500 futures is the perfect place

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Is that similar to how endowment might look at the public markets? They might have a bias towards value, but they still might be 20 or 30 percent long value, 20, 30 percent short growth. They're not taking this kind of. ideological or they're not taking a binary approach to their portfolio. Is that how you not f*** up to use your language? Essentially, yeah. It's modeled after a few different money managers that I've learned from in the past that I really liked that I thought was very long-term sustainable given an asset class with this level of volatility, which is

really the key thing to look at. So where I started my career, 85, billion dollar, give or take, global equity fund, had kind of a similar approach to portfolio construction. There is another firm that I know of that has a really interesting strategy where basically they hold everything at, it's an S&P 500 hedge fund, where they hold the sector weights in the fund equal to whatever the market sector weights are. And then within those sector weights, they have specialists in each sector. that runs a long, short strategy inside of that.

But the net exposure in each one of those sleeves is the same as the net exposure in the index. So basically they're taking no sector view. They're only taking an alpha view within those subsectors. Give me an example of that. What are the sectors in crypto? Give me an example of what the sectors are in crypto. So obviously there's digital gold.

What are the other sectors? Yeah, so there's Bitcoin, which is digital gold. Then they're the smart contract platforms. So Ethereum, Solana, Cardano. avalanche, you can go down the list. Yeah, the only two today that really matter are Ethereum and Salon, in terms of actual on-chain usage, but there are a few up-incomeers that we're watching. Arguably, hyperliquid is going to become its own independent smart contract platform.

Today, it's a layer two on Ethereum, but that has had the most rapid growth in on-chain activity of any of the smart contract platform so far this year. Double-clicking on that. So you're within your smart contracts, so you're not trying to overweight or underweight smart contracts in terms of the overall crypto crypto market cap. But within there you have this view, Ethereum, and Solana are the ones that matter. How do you play the rest of the tokens, double click on how you operationalize your strategy? Yeah.

So we don't always stick to a specific sector weighting like I was describing from that other fund. But we generally try to stay within the market weight of Bitcoin plus or minus 1,000 basis points. So, for example, if we want to express a risk on view, if the market weight of Bitcoin is 60, we'll be at 50% Bitcoin, or if you want to be risk off, will be 70% Bitcoin when the market weight is 60, just as an example. And then within the remaining allocation of the fund, we'll have specific subsectors that we have exposure to or we don't have exposure to. And then within that, we'll choose how we can generate alpha within that subsector. So for example, we'd be overweight Solana underweight Ethereum, but combined close to the same weight. of the two in the index. So, you know, together there may be 16% today. You know, our combined Ethereum and Solon exposure would be also 16% but in a different ratio to the market. And then so on and so forth kind of down the line until you get to, you know, the remaining

5 to 10% exposure of the fund. And the thing is there's a massive, crypto is a massive power law. You know, basically 10 tokens make up 95% of the market cap. So the other 5% is everything else. And so if our goal is, again, to outperform the index without creating a huge risk that we underperform it, we can generate a ton of alpha inside that 5 or 10% additional allocation. And that's not where all of our alpha has been generated by any means, but on a sort of normal basis, there's still a lot of opportunity within that small percentage because you can see these massive sort of compounded outcomes where a meme coin goes, for example, goes from nothing to a billion dollars in market cap in two or three weeks. and we've been fortunate to catch that a couple times. You characterize your strategy as not up and it's paradoxical because you're trying to weigh your alpha and your understanding and in many ways your deserved ego that you've built in researching these platforms talking to all the people, but you also want to hedge that

with not being too precise and not thinking that you know too much so that you miss the next Ethereum or the next line or the next Bitcoin. How do you balance these two things practically? If you look at the crypto charts, not just Bitcoin, but if you looked at, like, for instance, total three, which is essentially the total crypto market cap minus Bitcoin and Ethereum, and you saw how volatile it was, that drives anyone to have a lot of humility as an investor in this space. You know, one thing I was just talking to one of my partners about yesterday was, you know, your mindset in crypto is critical to success here. You cannot be successful in crypto unless you have the right mindset, which, you know, is true for everything, but this is an extreme example of that in the sense that if you look at, you know, a 15-year chart of the S&P 500, you have every three to five years a significant move, one way or the other. And so throughout your career, maybe you have 20 of those that you can capitalize on. I can point out four significant moves in crypto that have happened just this year. We had a huge run-up going into the inauguration.

Then we had a massive crash where everyone thought crypto's dead forever in April. Then July, August, very strong couple months, especially with the digital asset treasury theme that was happening. Now we're back to this kind of like early Q4 doldrums and everyone thinks to cycles over, you know, Bitcoin's dead. Look at how much gold is outperforming Bitcoin. And I'm sure we're going to have a strong end into the era. We're positioned for that or into your end. And so there's four like distinct epics just this year. And, you know, it's kind of understandable because crypto trades 24-7, 365.

So you basically have four times as many trading hours a year in crypto as you do in traditional markets, at least in U.S. equities. So everything is extremely, you know, hyperbolic, everything. And so, you know, a lot of these all coins, especially these days, have a two to three week trading period where they have an extremely strong run up. And, you know, you think it's going to the, going to the moon, it's going to take. 10x, and then it turns around and you know, retraces 80% of that move. And it's, it's happened in a lot of all coins. And, you know, that's the typical behavior. And so you have to have the mindset that you can't be fixated on the last loss or mistake or the last win. You have to be focused on the next opportunity going forward and try to have a lot of emotional equanimity

about how the market is moving. And one thing that comes along with that is being able to have an open mind about whatever's coming down the pipe. Like, for example, example, we've been active in meme coins. And we've made a lot of money in meme coins over the years because we had the view that meme coins were kind of the tip of the spear of the debasement narrative. And we didn't want to have some kind of psychological bias against them because a lot of investors in the space do, which I think is kind of ironic because in order to have gotten into crypto early, you had to be able to look at it from first principles and say, what is this thing and why is this interesting or useful in the world as opposed to just dismissing it offhand, which is what most people did. And now they regret that. And yet a lot of people in crypto dismiss mean coins offhand, whereas we kind of looked at it and said, okay, what is this about? Like, why is this phenomenon happening? And how could this represent an opportunity for our fund? And so I'm glad that we did that because it turned out to be a very good trade. I think the

space has evolved a lot in the last few years, which makes it arguably less appealing than it was. I think that's just an example of how, you know, it's important to keep an open mind when you're operating in a space that evolves so quickly and has so many turns just even within a year. I emailed you last week. I wanted to bring up the interview because I was dying to ask your question. And we spent a day a couple months ago in Connecticut together. One of the things that I observed in you that still boggles my mind is how you gather information so systematically. And then without second thought, once you've gotten enough information, to make a decision, you just act.

And I haven't seen this characteristic in one person of just being so systematic and so OCD about information gathering and then just completely let go and take a Calcutta and bet and just have those two characteristics on one person. Maybe you could tell me, A, is this something that you were just naturally born with or how have you cultivated this ability to gather a lot of information but also know when to pull the trigger? You must have caught me on a really good day.

It's not I could say about that because I don't feel like that. I have the ability to execute that way all the time. But thank you for the compliment. I will do the best I can to execute that way going forward. I think there are some things that I can do there, do consistently like what you just said. Yeah, I haven't really thought about this. That's what we've been talking today.

I thought about maybe that is the consequence of Rennix and Stratus's portfolio construction, meaning if you already have a general sense for the attribution and you're making these kind of at the margin decisions, which could really lead to outside gains, but you're saying I'm going to do 15% between swan and Ethereum, maybe it becomes easier to pull the trigger when the time is needed versus kind of this heroic act of,

okay, I've done enough research, here's 80% of my chips, you know, ride or die, kind of like, you know, aping strategy that's known in a, in crypto as just basically going all in. So is that maybe second order effects of your portfolio construction? And talk to me about how, you know, how you balance research and action, how that fits within your portfolio strategy. So I have a background in engineering.

Engineering kind of teaches you to make decisions in that way where you kind of collect the necessary information. And then, you know, there's a deterministic outcome and you make that decision. The first firm that I worked at was extremely research organization. I would spend a month doing research on something before I would even, you know, be ready to present it. And then I felt that some mistakes were made at that time. And I've made many mistakes of this kind in my personal investing, which I would consider to be acts of omission. When I saw something, it made sense to me. I should have done it. I hesitated, you know, as Warren Buffett would say, I twiddled my thumbs and I didn't do it. And then I just watched the price triple or whatever on me and just the pain of that experience, I think. taught me to err towards being decisive. And also just thinking about it on a meta level,

the more actions you take, the more quickly you learn. And whenever I lose money on investments, I always try and think about it again on my good days. That was tuition for the learning that I'm developing in the market. And so I've tried to err on the side of getting to 80% of what I could know or 80% up the learning curve. And then if, you know, all the lights are green, just to do it. And then to think about it also in terms of position sizing as part of that decision,

because if your position sizing is right, you could withstand being wrong. And then also still get paid if you're right. But if the position sizing is wrong, then that's going to cause you to hesitate or it's going to cause it to not really matter in the context of your portfolio. So once you're 80% of the way there, there's confluencing your ideas. You think that it's time. You know, you've got to kind of just get comfortable pulling the trigger at that point. And then thinking through, okay, integral in thinking about this decision is, well, what's the right position size for this thing?

Because something could feel great as a 10% position and feel horrible as a 50% position. And I think to answer your question, I think it does go back a little bit to the position sizing and portfolio construction discussion we had. it's analogous to venture where you build a pre-seat portfolio and you know you're going to have 30 positions the most important thing is that each one of them is shot on goal to be a potential 100x then you have this kind of portfolio construction math versus somebody that's hemming and hoying about putting in you know 50% of their money into it they're probably they're probably rationally so not taking action because 90% of the time they'll lose all their money. That's not a good outcome, even if the other 10%, they would have gotten 100x,

and it would have been on average. It's like having one foot in ice water, another one, and bolstering hot. It doesn't really help you if on average you're doing fine in certain context. You deal with single-family offices, multifamily offices, but you also understand the institutional game very well as well. How should endowments, single-family offices, pension funds, foundations, how should they think about their, crypto's allocation and their crypto strategy within the context of their entire portfolio. Let's assume a David Twenson-type Yale Endowment model. Historically, the investors who have participated in crypto as LPs predominantly have done so

in venture strategies, which I think actually has created part of the dynamic that I described earlier where there's just too much money in venture and not enough exit liquidity to actually have people buy the token. from the venture investors so that the venture investors can return their funds. And so there's kind of an interesting lopsidedness in crypto

where most of the money is in venture. If you look at the total amount of money that's been raised in venture at something in the $80 billion range. And then the total institutional hedge fund, liquid funds size in crypto is something in the single digit billions.

And it's dominated by a few funds that really just raised capital 10 years ago had massive outsized returns and really just grew the capital, was it actually allocated to them at that size. And so that's going to correct. And that was one of the reasons why we wanted to launch this liquid fund was because we had the view that the space is institutionalizing, the ETFs are going to lead that. That has come true. And now people are looking at the space and saying, well, how do I get Bitcoin Exposure Plus? Because there's literally millions of tokens. And I don't know how to do this and I want to have a manager who can do it for me. And I think the

space is transitioning right now. So we've actually had conversations with investors who've said, we're transitioning our crypto book from venture into liquids. And we're waiting for lockups to come off or get DPI on our existing funds to be able to transition. So that's just starting to happen. And I think people will see that actually most venture funds have not outperformed Bitcoin on a net basis. Very few. And it's actually very similar to what has happened in traditional venture. Most traditional venture funds after fees have not outperformed the NASDAQ in the last 10 and 15 years. And you could say, well, that that pendulum should shift, but I actually don't, I actually think it's more of a fundamental truth of investing,

which is that when you have these very large network affected platform businesses, whether it's Mag 7 or it's Bitcoin Ethereum, Solana, those are very likely to continue to perform. And they're also the direct beneficiaries of money printing. You don't really get the money printing benefit for a venture investment. The company has to first survive and then go become liquid and then be accessible to the broader market in order for it to benefit from that. And so these larger cap assets, these blue chips, if you will, kind of continue to pull away from the rest of the market. And so our view is that crypto venture, liquid crypto versus crypto venture is going to be very similar again in the next 10 years. There will be outliers

and there will be ways to make tremendous amounts of money in crypto venture. I'm not saying there won't. But on average, in aggregate, I think that's what it's going to look like. And so I think the more open-minded institutional investors are going to move into liquid crypto, we're already starting to see that. But I think, you know, to give credit words do, I think one of the reasons why a lot of investors started in crypto venture and not liquid crypto is because liquid crypto has been so tremendously volatile. And they don't want to have a 50 basis point position in a liquid crypto fund with 100% annualized vol being the thing that they talk about at investing committee every month or with their board every quarter saying this thing's up

200% should we sell it or it's down 80% you know crypto venture made it easy you could just invest in this thing that had obfuscated the volatility you just got you know quarterly marks and that was it but now that the space has grown and volatility is coming down it becomes a lot more palatable to invest on the liquid side and again that's one of the reasons why we also think about things from a volatility perspective, because at the end of the day, volatility doesn't necessarily cost you anything in terms of returns, but it costs you a lot psychologically, and it's not something that you can really, like, there's a level between 10 and 20% vol is like kind of palatable, but between 20 and 40% vol, it becomes way harder

to manage. And then between 40 and 100% ball, you basically have to be, you know, you have to be a religious idealist and want to hold an asset that has that level of One of my religious beliefs is I call it the virtue of illiquidity which is an alternative net net There's different pros and cons net Illiquidity is a feature, not a bug for many of the reasons people take the wrong action

at just the wrong People take the wrong action at the worst possible time Do you see any innovation there in terms of Gates and things to kind of protect investors from themselves? It might not be politically correct to talk about but how is liquid crypto funds

looking at this issue of basically the volatility and how to structure the funds in such a way to protect investors. Here's how we thought about it. This is not necessarily the right way to think about it. It's just how we thought about it. So I ceded our liquid fund with my own money. I'm still the largest investor in the fund. My view was, let's make this a liquid fund. No lockups. Quarterly redemptions, we're moving to monthly redemptions, just to make it easier and more investor friendly. If you want to be invested with me, great. Invest with me. If you want your money back, take it back. I don't want to be forcing you to do something that changing the liquidity profile of something

that's otherwise liquid because you could have a daily liquidity asset with IBIT, which is the Bitcoin ETF in your existing brokerage account. I think for us, the lockup or, you know, helping to protect investors from themselves really comes from the relationship that I have with the investors. So I know them all. We have frequent conversation. If they're feeling uncomfortable about the market, we can just talk about it. And, you know, I think in that case, it's my job to say, look, this is what we see. This is why we are positioned the way that we are. This is what we think. This is the confluence of things that leads us to believe X, Y, or Z is going to play out this way. We can't be sure, but, you know, this is why I'm comfortable with a significant

portion of my net worth in this fund. And, you know, if they don't like that, great. You know, it's, I don't want to hold people to it. You know, they can do what they want. But, you know, so far, we haven't really had any redemptions in the fund. So that may be different if the market is down 80%. And now we think it's the best opportunity to be long. You know, we have sometimes had people redeem in prior cycles at that time. But again, you know, sometimes we're happy just to let them go. It goes back to that same sizing question, which is I had the CIO, a bit wise, full transparency. I'm a shareholder. And he talked about that the quote unquote optimal size for Bitcoin and our portfolio. is somewhere between 2 to 5%. Not because he doesn't think the shark ratio is high enough to have more, but most people can't stomach the volatility below above 5%. And the only thing worse than having small allocation is to sell your allocation at the wrong time.

It's actually much worse. So it goes back to self-awareness in that, okay, if it is 20% vol or 40%, how do I make the size small enough that I have the courage to stay in the asset class when things get bad as they have over and over again, in the last, you know, decade or so in crypto. So I think having that self-awareness is one of the keys to success in the space. Agreed. Being a crypto investor is very challenging psychologically.

So you find yourself revisiting your first principles frequently. And, you know, a lot of the crypto tokens, everyone knows that everyone else knows that those tokens are worthless. And so people are just, it's great or fool, you know, turbocharged. It's really just that. And so that makes it a lot harder for most market participants because a lot of people don't in the crypto space, especially the people who are active on crypto Twitter and trading regularly and using these on-chain tools, they don't own much Bitcoin because they

look at Bitcoin and say, the ship has already sailed. It's $110,000 a coin. I'm never going to make generational wealth on this. Like, I'm not going to be able to quit my day job buying Bitcoin. Like, I need to go make it more quickly on meme coins or something else. And that psychologically, I think is very, very challenging, you know, is much more extreme than Bitcoin. In comparison, Bitcoin seems like a totally tame asset. But even still, I agree, you know, that Kelly optimal, based on the Kelly criteria of portfolio sizing, the optimal way for Bitcoin in a portfolio is 50% plus, just based on the sharp ratio. And even, that's even partial Kelly. If you were an AI and you didn't have to deal with questioning yourself or loose hands, you would own 50%.

I think it's even higher. I would say it's higher today, prospectively, just looking at what gold has done. And I think Bitcoin is on the cusp of a very powerful move here in the next few months. So it's even higher than it would normally be. I had the founder and CIO of AQR, Cliff Asnus, and we talked about leverage, and he said, certainly the answer to leverage should never be zero. There's always some room for some leverage, and sometimes you want to be short on NASA class, but just having zero leverage is an arbitrary thing that you shouldn't just apply to every part of your port.

portfolio. That being said, in crypto, it's its own meme, how people get wiped out by, you know, triple levered Bitcoin or I'm sure there's crazier versions of that. Is there any room at all for leverage in crypto? And if so, in what way? This is a great question. Look, I have a tremendous amount of respect for Cliff Asnus. Like, when I was studying finance at MIT, like I was reading all of his papers, you know, a lot of seminal research and thinking about, you know, statistical finance and all of this stuff. That, I think that argument that, that, that You know, leverage, zero leverage is not an arbitrary choice. You have to apply that systematically across the portfolio. The quant in me agrees with that. And it's based on this idea that there's some efficient frontier of assets and you can take some sharp ratio and just risk adjust it up and down based on how much leverage you applied to it. I think one of the reasons why, like what are you trying to do with that? Essentially what you're trying to do is you're trying to adjust risk or volatility as if it were just like a slider in your portfolio and you're just going to move up. Kind of bar the capital capital with your expected return while not burning out, making sure that you don't go, you don't get ruined. Exactly. The risk of ruin is the key issue here because it's an absorbing barrier. If you get margin called and you're blown out, it's over.

If you get liquidated, right, leverage creates this absorbing barrier where if you hit this level, you're done. I think if you were to take a step back and ignore what crypto is as a technology and what it is and you just look at the statistics of how the prices move. you would say this is an ideal asset because it gives you the same volatility and upside as a highly levered asset without actually using leverage. So if you wanted to create a 100 vol NASDAQ, you'd have to go and buy triple Q and lever at 5X. Instead, you can just buy crypto and you basically get those same portfolio characteristics without the leverage.

So that's the reason why when you say, if I've been in crypto for 10 years, you've probably done really well because basically you've got the benefit of all the upside leverage without the risk of the downside, assuming you did sell at the bottom. So it's kind of an interesting way of looking at it. I think from that perspective, you really don't need leverage in crypto, but it's primarily because you're getting it for free. And actually, like what you're saying, this idea of like arbitraging cost of capital and, you know, the return of the underlying asset, that is really where this whole digital asset treasury thing comes into play. Because essentially, you're arbitraging traditional capital markets where, you know, there's a 10% expected return

give or take, depending on the capital structure and all of that. And you're transforming it into an asset that, as we said, had a 50% pattern. So you're making a 40% spread. And so if you can consistently do that, there's this thing called in the Bitcoin world, the speculative attack. Or basically, if you can create a portal to take Fiat money and put it into crypto money, you can basically arve this expected return delta and absorb a lot of Fiat capital into crypto. And that's basically what micro strategy is. That's what all these DATs are. And I think that

actual narrative has a lot of room to run. Because it's the same sort of leverage arbitrage without any absorbing barrier. You don't actually get stopped out. If you could go back, you were at this tens of billions of dollars fund Sanders Capital. And then you went to start status. And you could give yourself one piece of advice, timeless advice for a crypto investor that would either help you increase your returns or help you decrease your mistakes. What would be that one timeless piece of advice? This is going to sound kind of cliche and corny, but when I first, I tried to get the fund I worked at to invest in crypto. And I still have the presentation I did on Bitcoin and Ethereum. And I look at it, I'm like, oh, this is cute. Like, look at all these

things that I thought were going to happen. But the fundamental idea was right. And I am so grateful to myself for having left and pursued crypto on my own. But the part that I got wrong was I didn't believe that I could convince anyone else to invest in a crypto fund at the time. So I did it all with my own money. And actually we launched a little like traditional venture slash asset backed fund at the time because I knew I could raise money for that, even small dollars given where I was in my career. But I didn't believe that I could raise for a crypto fund because it was so new. And everyone thought it was just a scam. and just crazy. And I wish I had just done it, even if it had been $500K,000, a million

dollars. I'd probably have another zero on my net worth right now if I had done it that way. But that's okay. That's not what I'm optimizing for. But I think it's really like a believe in your instincts type of thing. And, you know, the way that I had been taught to look at the world was any global equity with a 10% or higher expected return when you took the PE ratio and added their growth onto it was like an attractive investment. And so that was kind of the lens that I was looking at everything in. And I was also kind of trained that anything where you thought you could make a 30 or 50% cagher was a scam or crazy or just chasing growth. And that was a very risky proposition. And that's true. By and large, even venture

generates the best funds, generates high teens net IRAs. But crypto was an anomaly. And being able to like accept that anomalies can exist and just to go for it is something that I wish that I, you know, if I'd had an older friend or something that told me could come back and tell me that, that's, that's kind of what I wish I had heard because maybe I would have been willing to be a bit more risk-seeking in terms of what I did with other people's money, assuming that they would have bought into it. I did the right thing with my money, so I'm happy about that. But, yeah, it could have been better if I had done it with other people's money and had a little bit of leverage on top of it. Well, Renick, this has been fascinating. I haven't talked to many people that went from value investing to crypto. I knew it was going to be great. Thanks so much for taking time. and look forward to continuing conversation live. Yeah. Thanks very much. Great to be here.

Thanks for having me. That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find a valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.