The Wolf Of All Streets - Crypto Hedge Funds 101 with Matt Stover, CEO of MGStover

Episode Date: September 10, 2020

Matt Stover is the CEO and founder of MGStover, a financial service company with over 130 crypto dedicated funds as clients. Matt began his professional career with a background in taxes and went on to develop a passion for finance and crypto. This passion buoys a firm that today services billions of dollars worth of combined client crypto investments. As crypto tracking and accounting have become increasingly difficult, MGStover has set out to make it simple and has even had regulators come to them for assistance in regulating crypto. Scott Melker and Matt Stover further discuss, the major pitfalls of crypto hedge funds, how nobody is keeping up with the pace of crypto, the natural progression of a successful trader, every trader's dream to open a hedge fund, poker players backed by hedge funds, trading your money vs. your client’s money, offshore vehicle investments, giving the government their piece of the pie, the similarities of crypto and marijuana, the disappearance of the physical dollar, a digital world and more. --- CHOICE IRA by KINGDOM TRUST Don’t be part of the 7.1M Bitcoiners who have bitcoin and a retirement account but don’t have bitcoin in their retirement account. With Choice IRA by Kingdom Trust you can hold bitcoin in your retirement account. The first 1,000 users to open a Choice IRA will receive $62.50 in free BTC - visit RetireWithChoice.com/WOLF to join the waitlist and secure free BTC. --- VOYAGER This episode is brought to you by Voyager, your new favorite crypto broker. Trade crypto fast and commission-free the easy way. Earn up to 6% interest on top coins with no lockups and no limits. Download the Voyager app and use code “SCOTT25” to get $25 in free Bitcoin when you create your account --- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe.This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

Today's episode is brought to you by Choice, by Kingdom Trust, and Voyager. We'll learn more about them later on in the episode. What is up, everybody? I'm Scott Melker, and this is the Wolf of Wall Street's podcast, where two times a week we talk to your favorite personalities in Bitcoin, crypto, finance, art, politics, sports, music, and basically anyone with an interesting story to tell. This show is powered by Blockworks Group, a media company with over 20 podcasts in their network. Check them out at blockworksgroup.io. If you like the podcast and follow me on Twitter, you absolutely need to check out my website, join my newsletter, where I share all my trades, charts, analysis, market thoughts, and lessons on improving your trading and investing. And you can

check that all out at thewolfofallstreets.io. Now that that stuff's out of the way, let's get on to what's important. And that is today's guest who began his career as a CPA where he audited hedge funds, commodity pools, mutual funds, broker dealers, and investment advisors. Matt Stover then went on to found his own company called MG Stover, which is the largest fund administration firm for cryptocurrency funds. Now Matt's an integral part of the evolution of the crypto hedge fund space. So I'm really interested to dig in deep and find out what that means in such a crazy, crazy industry. So Matt, thank you so much for being here, man.

Yeah, thank you for having me. Where does your story begin? You know, obviously, we know where you ended, but how did this start? How did you get into finance? And then how did you get into crypto specifically? Yeah, you know, the finance one is kind of interesting. I went to the University of Wisconsin, and I always wanted to, you know, I had a passion for the capital markets, but I was also kind of curious in accounting more from the stability of the job market. You know,

when I graduated, there weren't a lot of, you know, jobs out there. And a lot of people that were doing dual majors were kind of telling me it's easier to go from accounting to finance and finance to accounting. So long story short, I focused on accounting as my degree. But when I got into the industry, I wanted to make sure I was catering to the finance companies because I thought it was pretty interesting on how they, you know, make money, how they, you know, make or lose money. And that's just kind of how I got into that field. Was accounting something that you were like, actually deeply interested in? Or was it, as you said, sort of just a segue with an idea that you had other plans in the future? Yeah, I'm definitely a numbers guy. But I think the people that know me and my personality,

they're pretty surprised that I went into accounting. You know, I would say, you know, maybe not as sexy, but I think that what we do in our business, it's very rewarding because we're, you know, integral into the alternative space of kind of doing the fund accounting administration, especially what we're doing on kind of the crypto side. Everything is new and exciting. There's not a dull moment. It's definitely challenging. But for me, the evolution that I've taken on my career has been very,

very rewarding for sure. And accounting is one of those backgrounds that if you really get the books and records of any business, you really understand it more than most. Before we get into, I guess, you know, what you're doing now, it's funny. I don't know how much accounting you do for people or have in the crypto space with the ever evolving, I should say, I guess, tax law and situation, but I've been going down the rabbit hole from trying to get ahead of it this year. And what a train wreck trying to calculate your taxes are if you're a crypto

trader is, I mean, how is this system that they have in place at present sustainable? It's not. And I think it's really challenging. And it's funny, I'm a CPA by trade, but I was on the audit side, not taxed. I barely can do my own taxes. And I'm at the point where I'm going to hire someone else. And the bookkeeping, especially on crypto trading, is getting better. But, you know, in the early days, it didn't exist. Most exchanges didn't provide, you know, when you think of traditional brokerage, you get a 1099 with all your realized, unrealized. That doesn't exist. And so it's evolving for sure. You know, even the IRS in the early days didn't know what, how to tax it. Now we're getting a little bit more clarity there, but it's challenging for anyone that wants to enter this space.

Yeah, that clarity is brutal though. I mean, the way that things are defined and the fact that, you know, every single trade between, there's no like kind exchange. So, you know, every single trade between there's no like kind exchange. So, you know, if you buy an altcoin with Bitcoin, you've now sold Bitcoin. And when you go back, you've now bought Bitcoin and you can end up with a profit and then but no money to pay for the taxes if the price of Bitcoin drops as a train wreck. I mean, I literally I'm just happy I'm talking to you today because I was doing this yesterday and I was at like 6,700 transactions so far for the year that all need like a dollar cost basis to calculate what I owe and going back to old wallets and where it came from in 2017. I mean, it's literally impossible. I just don't know if the IRS would ever have the bandwidth to come after people if they do their best, I guess.

But if they ever did, they're going to find that nobody's compliant. In my opinion, there's going to always be some transaction that was missed or, you know, associated wrong for price basis, it seems. Yeah, I think in the favor for the IRS, there's no statute of limitations. So anytime that they want to go back, I guess they can. But, you know, you made a good use case of why we're important in this space and why it's important to make sure you have good record keeping for sure. OK, so you went from accounting, but now you're administering hedge funds, basically. But first, can you tell me how you got into crypto and why? Like, why do you even care about Bitcoin?

What was your foray? Was it, you know, a coincidence? A client came in and got you excited or was it a rabbit hole you went down on your own? Yeah, you know, it's a lot of everything. I guess, you know, the early days when I started the business, which was 2007, you know, um, I was kind of done with public accounting and wanted to shift into fund admin because I felt like one, it was a better, you know, work-life balance. I felt like I can create, you know, um, you know, opportunity for myself, but then also for the industry. But you started, you know, Bitcoin didn't exist in 2007, right? So it wasn't something

that I was starting this firm to go target crypto. You know, I was focused on more, you know, hedge bonds. Eventually we gravitated into some family office work, venture capital, private equity, real estate, you know, so our diversification in asset classes definitely grew over time as opportunities presented itself. And I wouldn't call myself a huge risk taker, but I'm definitely, I see opportunity and I try to capitalize that whenever I can. And when the first cryptocurrency opportunity came to us, which was in 2014, it was actually an election by, which was really early. You know, I knew of Bitcoin, but I actually didn't know how many thousands of coins were actually out there.

I didn't really understand how they were trading. I thought everything was OTC. But I started learning about some of these exchanges. But anyways, this, you know, family office client asked me and said, hey, there's some really smart people in the blockchain protocol and, you know, computer science industry that wants to launch a crypto hedge fund. You should talk to them. Very interesting. So I talked to them and, you know, definitely, you know, kind of one of those emerging managers that has a new idea.

And, you know, as kind of being the nice guy that I was, I said, you know what, we'll take it on. It was very low risk because it's all internal money. And the fund manager actually claimed it, you know, somewhat of a science experiment for them. They just didn't know if they could actually make money if it had legs. So we brought them on. And to be honest, we didn't really have a great way to reconcile all the trades we'd leaned on the client heavily. And, you know, I think six months into it, the client called me and said, Hey, we've got to lower your fees.

We're not doing well. They were down like 60% in hedge fund world. That's kind of, you know, liquidation they're done. You're dead in the hedge fund world. We just call that Tuesday. We just call that Tuesday in crypto. Right. The science experiment is over so right so it wasn't like i was looking into getting into the space it was more of just kind of hey we you know took on an opportunity as kind of a favor and then it kind of morphed into

this um you know crazy asset class and industry that we're involved in but you know to finish the story on the first line you know they they called me back maybe, I don't know, another six or eight months later and said, hey, by the way, you can raise your rates. And it's like, no one's ever called me and said, you can raise your rates. And they're almost like, what's going on? And it's like, well, we made back all the losses plus another 250. And by the way, we've got some pretty prominent venture capital investors coming in. So that's when I started to get really curious about the space and diving in a little bit more and saying, okay, if we're going to have some institutional investors come in, and this is still very early, we got to make sure that we've got the right process from

a portfolio reconciliation standpoint, right? We got to keep track of every buy, sell, transfer, in about a piece of changes out of the wallets. We got to build pricing source. All the things that we do on a traditional hedge fund, we needed to apply to this crypto hedge fund. So that was kind of the genesis of the why. And then over time, people just got to know us and said, Oh, these guys will do, you know, crypto fund admin, we started building technology to automate portfolio reconciliation. And, you know, today, that's why we're the largest, just because we took kind of that opportunity and, you know, made the best of

it. Now, has it been easy? Absolutely not. You know, every, you know, corner, every turn in crypto, it seems like, you know, you take a couple steps forward and then fall back. And then, you know, over time, you look like, wow, we've actually moved it in the right direction. But there's challenges every day, because it's moving so quickly and people can't build to keep up with the evolution. Yeah, it's just basically impossible. But I would love to hear what the process is like for actually starting a crypto hedge fund. Because first, as far as regulation in 2014, 15, 16, nobody even knew what Bitcoin was. So I would assume you had a risk where if you started a hedge fund, they said, Okay, this is fine. But

then a year later, it could say you're not compliant, or like, you don't have proper licensing, or I mean, how much risk was there? And what's the process then? And now, I guess, for starting a crypto hedge fund? Yeah. And kind of from a compliance standpoint, it really kind of depends on which jurisdiction you're, you're registered in as an investment advisor, if you are or where your funds almost out. But when you just talk about like the U S you know, you've got the sec that oversees, you know,

the registered investment advisor. So you have to have a certain, you know, assets under administration to get at that level. Otherwise it's, you know, you're regulated by each state that you're operating in. But that you can get around, you know, if you hire good attorneys, they'll get you on the compliance side. For me, when we talk to prospects and people that want to run a fund, it really is, you know, it's exciting. It is something that, you know, is, you know, can be a great opportunity and has, you know, financial rewards for our clients, but we try to educate them on,

you know, what's your business plan? Do you plan on being in business in three years? What's your working capital? What's your investment strategy? Can you actually raise money? Who are the other service providers that you're bringing on board? You know, we don't want this to be so daunting because, you know, launching a fund is actually very simple if you get all the right supporting cast, but it's really just trying to make sure that they understand what they're getting themselves into. I think, you know, anyone that's actively trading and doing well wants to raise a fund. It's just the natural kind of evolution for themselves. It's like, hey, if I can trade for myself, I should be able to raise some money. And then usually wrong. They're very,

I would say most times are wrong. That's why most hedge funds don't last very long. But I think not just the portfolio side, I think what's really hard is, you know, building the right infrastructure that investors are going to be comfortable investing in. There's just so many things that are challenging in crypto that when you think of, you know, custody didn't exist early in the early days. Today, there are more custody solutions. Reporting is definitely getting better. You know, in the early days, we were the only fund administrator. Now there's a lot more there. You know, I had to convince one of the first audit firms to actually audit one of these. Now there's a lot, you know, so there are, you know, groups that are getting into the space and it's looking and order, but we've got a little bit further to go. But I think when I talk to people that want to launch a fund, obviously, we love the opportunity to work together, but we need them to stay in business.

So we really just kind of make sure that they've got the right business plan. They're thoughtful about how they go about building their fund operations building their, you know, fund operations. But more importantly, can you raise money? If you can't raise money, you're not going to have substantial assets that can support the fund. And everyone thinks that if they can just perform that, you know, money will follow, which sometimes that's the case, but it's hard to raise money, you know, and it takes a very unique skillset to convince someone, oh, go sell those assets and invest in my product that, you know, I've never ran before.

So being a good trader is, you know, 1% of the job and being a good money raiser and manager is the rest. And it's funny. I also think I've had friends who played poker professionally and were backed by hedge funds at a point and found that when they were being forced to perform with someone else's money, that they played differently. They didn't sleep well at night. It was a totally different ballgame. And I would have to imagine, I see all these guys on Twitter that are like, I'm a successful trader. I'm starting a fund. Send me your money. And I have a feeling that when they have to actually scale up, move more money in a market with suboptimal liquidity, and when they have the pressure of customers calling every day, that it's an extremely different experience. Would you say that it's just a different sport than trading your own capital? It definitely is. You know, we don't get into a lot of the psychology with a lot of our clients, but I know that it's stressful, you know, and anytime they have, you know, kind of a poor month, they have no problem waiting for

the statements to go out. Anytime there's a good month, they want to get those statements out as soon as possible. Right. So it's that up and down philosophy and just dealing with, you know, investors and their demands. And, you know, it's, there's no guaranteed performance, but everyone wants to make money, right? No one's investing in your product to lose money, right? So there's definitely pressure to succeed. thing, you know, in this market or even any other market accreditation and all the just kind of strict laws for being able to operate? Do you find that a lot of your American clientele set up offshore in some way, shape or form? The offshore setup is usually more from where your investors are based, right? So if they don't have to pay US taxes, they don't want to invest in a US entitys entity right so there's there's usually that is kind of the driving factor but then there's also a lot of

offshore vehicles being set up just because they can invest in certain um tokens or right so you see some of that you see offshore invest vehicles investing in products that maybe are prohibited in the US. But it really kind of just depends on where the investors are based and where they're, you know, if you're a US taxpayer, you have to pay taxes, right? So no matter what, it doesn't matter where you are, right? Exactly. So it doesn't matter if you're onshore or offshore.

So most people are just investing in onshore vehicles as it passes. So you've clearly been through, if you were here in 2014, you've been through all the ups and downs of this insane, insane market. So I'm assuming take a shot in the dark that come 2017, you had a lot of clients and maybe a few less in 2018. What is what is that trajectory been like and where are we at now? Yeah, just to give you some kind of actual numbers, I think, you know, so our first one is 2014. Our second one was 2016. I think in 2017, we only had maybe 28 or 30 funds. Most of them launched in Q3, Q4, 2017. 2018, I think we onboarded 58, right?

So big, big number of the 58. We only lost about 10%, 5 or 6. We were pretty fortunate with the groups that formed forwardly, but they had enough working capital to keep the doors open and had some pretty staking investors.

Today, I think we have somewhere close to 130 dedicated crypto funds and a little over $2 billion of assets just in crypto. So we've come a long way. I think what the biggest change is the early fund managers were definitely the people, the computer science people, the people that really liked this. They understood the protocols. They were passionate about certain coins or tokens, and they were more long-winded, right? They didn't have many opportunities to really trade. They were getting directional bets. You know, then it moved into a lot more venture-like, you know, products where people were like, well, we really want to invest in this crypto ecosystem. So we'd see some private investments, you know, investing in blockchain companies and then holding

some, you know, coins, tokens, you know, so that moved into kind of more venture. Now what's really interesting, we're seeing some very active traders, you know, people can go, you know, long and short, we're seeing options and derivatives. The high frequency trading is very popular in Asia right now. So we've got a lot of those clients. And then there's been a big shift recently to just tracking vehicles, like just a Bitcoin tracking vehicle and sometimes even more favorable liquidity than monthly. So we've got some weekly funds and even some daily funds on just Bitcoin vehicles. And a lot of this is driven by institutional investors that want some exposure, but they don't want the hassles of self-custody.

The tax reporting that we just talked about is easier for them to invest in a private vehicle because there's no ETF right now. And they want daily liquidity and they can get their K1 and they trust that the firm that they're working with will implement best practices around, you know, holding their keys, custody, pricing, you know, it looks and feel like an institutional product that, you know, these big institutions that have, you know, advisory boards, you know, CIOs, you know know that's their job is you know it's the producer responsibility to invest in you know these types of products it would be way too risky for them to invest um internally so that's been kind of popular lately are these primarily private vehicles or are we talking about the gray scale products and stuff. We do a couple exchange traded products in Switzerland on the 6th.

But most of everything we do in crypto is private, right? Just because there aren't a lot of public vehicles or registered products, I guess. Do you think that the fact that you're seeing so much more trading is just a function of the platforms available? I mean, the fact that like, you know, until 2017, the end of the year, you didn't even have a CME or, you know, a CBOE to you couldn't really do, you know, you couldn't really participate in futures. And now a lot of these exchanges themselves have a lot of liquidity and are trading sort of these like exotic products and derivatives and stuff. Do you think that it's the nature of the market or do you think it's just the products are available now? So that's what you're seeing being traded?

It was definitely driven by the demand, right? So you saw a lot of traditional traders, whether they're trading commodities, FX, equity traders, people that, you know, want to trade crypto, like they're trading what they're used to, right? So they want leverage, right? They want liquidity. They want more products. This wasn't driven by the retail investor, right? These are more institutional type traders and said, Hey, if you guys can create me this product, I can give you X number of volume. The exchangers are making money off volume, right? So that's, you know, they're creating products for these traders and, you know, hedge funds, other institutions. Very similar to how the, you know, the more traditional markets did. I mean, you know, credit default swaps, you know, being created

because someone demanded it, right? And someone was being willing to pay for it, right? So you're seeing that same evolution happen in crypto, which is pretty exciting to see. Yeah, it is exciting. And there's no lack of leverage now. The ability to get a loan on crypto is in a place that certainly didn't exist before with this crazy DeFi boom. I don't know how much you've kept your finger on the pulse of what's going on on that part of the market but uh certainly the talk of the talk of the town i'm curious what you think about it yeah i i don't think i go through a day

now without talking about uh defy with our course it's it's the new challenge right and you know how we're tracking it um you know, how are we getting record keeping? Where is it being custody? The new issue is, you know, our clients doing, you know, KYC on an AML on these transactions, which is, you know, kind of challenged at this point. So it's the new topic. But, you know, just like everything else in crypto, it's something that we embrace, you know, you know, whether it's the regulators, the auditors, tax providers, we want to make sure that we're surrounding ourselves with everyone that we're working with. We collaborate with the fund managers and just say, hey, how are you guys trading this?

What do we need to do? We don't want to be operating in the dark. We send out a couple of notices to our clients and say, hey, if you're anticipating trading this, we need to make sure that we've got a good process in place, that we're ahead of the curve. And that's always hard to do in crypto, but DeFi is the new hot topic that everyone's getting involved in. Don't be a part of the 7.1 million Bitcoiners in the United States who have Bitcoin and a retirement account, but don't have Bitcoin in their retirement account. Seriously, you can hold Bitcoin in your retirement account and not just GBTC. How can you do this? Through a self-directed

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on USDC. Yes, you heard that correctly, 6%. And there are no limits or lockups, which means your funds always stay liquid. Find out why so many people are making the switch to Voyager. Visit investvoyager.com or search for Voyager on the iTunes or Google Play Store and get $25 in free Bitcoin when you use the promo code SCOTT25. That's investvoyager.com, promo code SCOTT25 for $25 in free Bitcoin and start trading today. Yeah. I mean, I could just see at a retail level, some of the techs, like I use all the tech software platforms just to try and get them all, you know, in line. And some of them just aren't there yet. You know, they're still,

they'll track your exchange account, but they can't, you know, attach to your MetaMask or your trust wallet or whatever, you know, and now the ones that are ahead of that curve and, you know, you just import your MetaMask wallet and they, you know, they download all of your transactions, but there is no KYC or AML on any of that. Right. So is that a problem for I mean, if a hedge fund wants to be compliant and, you know, participating in these crazy, you know, Uniswap, DeFi things, is that possible or is it are we completely gray area right now? Yeah, it's pretty gray at this point. You know, most of our clients want to stay in compliance. So they're talking to their attorneys. They're being very thoughtful about how they're approaching this.

It's a challenge. It'll get resolved just like everything else. You know, it's just something that takes sometimes time, right? Some groups will be patient, make sure that they've got their ducks in a row. Other groups will want to move forward because they see opportunity and try to deal with it later. Yeah, I mean, it's definitely a strike while it feels like a strike while the iron is hot sort of situation. I guess I would think at least as long as you report all the transactions and pay your massive tax short term capital gains taxes on on it that you are probably at least somewhat protected i mean at the end of the day i would imagine the government really just wants their

money right yeah yeah they just want their their piece of the pie right and our job is to make sure that we're recording all those transactions we'll provide all the information to the tax provider um and then they they do the tax work but you for us, we just want to make sure that we can record every single transaction in DeFi that can be challenging. I mean, I'm sure you've had plenty, but like, what were some of, if you can talk about them, your biggest sort of like shake your head moments, seeing funds that you've administered, like things that they've tried to do or pitfalls they've fallen into in this space, since there is not so much legal clarity on a lot of a lot of what we all do as traders yeah i mean the common pitfalls are definitely the you know people that really aren't thinking about how they're going to make money themselves right

you know um you got to support your business but that's no different than you know in any you know private fund but when it pertains to crypto i think it's all these new things that come up. You know, the first time a fork happened, how do we transfer the basis? You know, the first time, you know, there was, you know, staking and people wanting to do mining. Now there's lending vehicles, you know, it's just trying to be thoughtful about it. The earlier days when everyone was self-custody, it was, you know, it was kind of who you trusted and making sure that you've got good controls in place that, you know, transact, you know, everything that we're receiving is, you know, the public keys.

We don't want to transact, but when the managers are transacting, it's like, who's in your trust circle that can actually execute on this? So that was kind of interesting to see. You know, there was times where, you know, passwords maybe got lost or, you know, stuff, you know, they were just kind of like, you don't really know where this is and we're trying to figure it out. So there were some pretty scary moments early on. There's even some hacks, but we don't see that much right now. I think, you know, sometimes there's, you know, regulatory stuff that pops up, where it's just having that good record keeping pays tons of dividends. I'm trying to think of

unique cases that, you know, that was just like, oh my gosh, I can't believe this happened. And there's not that many of them. I think what's just hard is we're building process as we go, right? The early days, I know the regulars reached out to us and they were getting our opinion on how we were tracking this. What are the things that they should be looking at when they go in and do an examination? Yeah, you were doing it before they were.

So, I mean, yeah. Yeah, so there was, you know, it's been kind of fun to see this kind of crypto network especially in the alternative space kind of push it forward you know get a lot of good actors that are building best practices um you know we're constantly learning from our our mistakes but um outside of people like losing you know access to their their keys or coins i'm trying to think of other situations where it was just so unique. Right. So I think one of the main barriers to mainstream adoption, and certainly you touched on it is custody, right?

Your average person doesn't want to be their own, their own bank. They don't want to worry about if they lose their funds, not being insured. I have to imagine that that's a huge question mark for funds when you have other people's money and it's a tremendous amount of money. So we've seen this evolution of custody, obviously, Coinbase custody, Gemini. Do you find that most funds go that route or do they like, I can't imagine most of them are self-custodying on like a ledger and they're safe anymore. Are they going down the multi-sig route where it's like a three of five and you have a hardware wallet somewhere and there's one in the safety

deposit box and you know, you need three of five to sign. Is that the route that people are going or is it a total mix? Yeah, it's definitely a mixture, but the route people are moving in is the custodian route, right? The early days people were, you know, self-custodying. They had all their coins on USB drives and put in safety deposit boxes, you know, and then over time, then people built multi-sig out. And there have been some custody solutions that have been around for a while and people are building custody solutions, especially at, you know, some of the current exchanges or, you know, just crypto companies that are starting. What's hard for, I think, some of the more institutional-like investors,

they're not household names to them, right? So they're doing a lot of due diligence on those firms, understanding their controls and procedures. There's a lot of kicking the tires, right? So it's not just the fund managers betting them out, but investors are also trying to bet them out. Where things are getting really interesting is you're seeing a little bit more household names

like a Fidelity and others that are entering into the space. And that just gives a little bit more assurance to the people that are like, okay, if they're doing it, I can get on board with that. Not to discredit all the crypto companies, you know, they were the first pioneers

and they're building great practices, but it's more of just, you know, the people that just know the firms and you know it's kind of that just gut feel trust but definitely moving towards more custody because these managers they need to trade right they need to run their business and building a a self-custody operations is a big undertaking right so they'll want to outsource most of that if they can so what do you make of, you know, the announcement or at least some guidance saying that banks now will be able to

custody crypto in the United States? I mean, is that huge for them? Is that, it's kind of funny because it's obviously like people trust their bank to some degree, so they might want to do that, but it's also sort of like counterintuitive for anyone who says short the bankers, long Bitcoin. You know, I think it's good in a lot of ways, meaning that anytime you get some clarity from the regulators is good, right? The opportunities for the banks, you know, they might not be jumping into this just because, you know, even though the market share is going up recently, it's not still tiny. It's tiny compared to equities, gold or other commodities. So it's got a ways for for institutions. Hey, we can really capitalize this.

And this is really good for us. Just like when I said I had to convince the first, you know, CPA firm, there was very few traditional banks that would bank a crypto hedge fund. Not that they were custody crypto, they were just operating as a fiat bank account just to operate the funds operations. Investors are paying in fiat, they're paying their vendors in fiat, you know, so they needed a, you know, a bank account. There's very few that were willing to get into that space. So having more groups enter the space, whether they're lawyers, banks, exchanges, custodians, other fund admins, that's all good, in my opinion, because then we're moving it in the right direction, building the right foundation for sure. It kind of sounds like the stories you heard about the early days of marijuana legalization in Colorado, where, you know, they had state clarity, but no federal clarity. So you could operate, but you didn't have a bank. So you'd be moving around cash and

trucks and putting it in mattresses. Yeah, you know, it's funny. There's a lot of crypto analogies you can make, but I live in Colorado and it's been legal here for a while. And it's kind of a non-issue for us. It makes a lot of revenue for the state. But outsiders coming in, they're like, you know, is it a big problem here? What's going on? And, you know, it's not. It's just business. You know, people adopted it. It's kind of the new norm for us in Colorado. And then other states has followed. You know, crypto has got a similar evolution. I think, you know, comparisons of like the early days of the Internet and use cases of

the Internet to now compared to where blockchain and crypto are now to where it can be. You know, there's so many good analogies of where this is going. So many people are on both sides. Hey, they're huge believers or they're you know completely against it it's just kind of you know it's going to take some time to see how it all flushes out for sure I mean you touched on this before

a few times recently Fidelity said that I believe in their report that one third of institutions had some sort of crypto exposure now which to me seemed like an absurdly high number. There's always been the question whether institutional money is here or whether they're interested or what's driving price and all of these things. I mean, I think it's pretty clear

that institutional money is somewhat here and exposed and is getting more interested. I mean, do you think that that's true or do you think that this is still a retail driven market? Well, it's definitely retail driven, but I agree with the stance where maybe there's one, I don't know what the exact percentage, but the quote was 1% of institutional investors have exposure. That would actually make sense. But I would say a percentage of their net worth is a lot less. They said a third, their reports had one out of every three had some sort of exposure. But yeah, I would imagine it's way less than 1% of the... Oh yeah. When you think of like their net worth exposure is probably 50 basis points. Nothing.

But if you look at just the count of who has exposure, I think it's actually probably pretty high. But when I talk to, you know, people do a lot of operational due diligence on us and the names that are showing up are really interesting. That's one creating brand awareness for us, but then we get to share what we know and how we're growing in the space. And when I always ask them, are you, you know, are you guys considering investing? Are you guys, you know, where are you at on your life cycle of learning? And almost every group, well, one, every group has someone assigned to crypto to really understand it, right? And it's a small working group that is somewhat passionate about it that works with the investment community that says, okay, we're going to go explore this. We're going to report back.

And the common theme that I'm getting is they can't ignore it, right? Their job is to understand what's out there. They can understand everything and make an investment or not make an investment and that's okay. But if they completely ignore it and something happens, that's when people are like, why didn't you pay attention to this? But if they're going into it and saying, we're not ready, it's too immature. These are all the reasons why we can't invest. At least they're being educated in it. But so it's very, it's a very slow process, but I do feel like there are groups that are getting exposure from just learning and maybe making small investments, but they're not putting big allocations towards the space. Right. I mean, even if they hate it or have a negative opinion of it,

if your clients are asking, you need to be able to answer, right? At the end of the day, like if your client calls and says, Hey, what's up with this Bitcoin thing? I should, I have exposure. You have to be able to give a rational answer, right? Absolutely. And I think the thing that's exciting for us is we're getting more and more of those institutional like investors knocking on our door and more and more existing asset managers that are running billions of dollars and running dozens of

products over, you know, dozens of, of, of years. They're the ones saying, Hey, we might launch a dedicated crypto fund. And because our investor base wants some exposure and they're more comfortable going to them instead of just opening up a you know an exchange account and investing in themselves so that to us is exciting um you know it's slowed a little bit um but it's still there how how large on average is a crypto hedge fund versus you know a normal wall street hedge funds you know our hedge fund versus, you know, a normal Wall Street hedge funds? You know, our hedge fund, you know, you know, clientele is just on the smaller side in general.

Our largest crypto hedge fund is actually at a billion dollars. You know, so that's our biggest hedge fund in general, but relative to kind of, you know, the traditional hedge funds, it's very small, right? It's just,'t know, but relative to kind of, you know, the traditional hedge funds, it's very small, right? It's just, you know, but most of our crypto hedge funds are starting in the $5 to $10 million range. And, you know, hopefully they can ramp up to the $20, $50 million range where they can get some scale. But it's hard. Like I said earlier, it's hard to raise money.

It's even harder to raise money in crypto. That's just how it works. You know, so people that are getting allocations, it's people that definitely want some exposure. They're, you know, it's kind of sticky money. They're willing to weather these storms. They're not trying to go in and out of the funds. Yeah, they get it.

Yep, they get it. They want some, you know, street credit with their friends and say, yeah, I invested in this crypto hedge fund. They know the potential. They know that it's going to go up and down. So we don't see a ton of redemptions just because people get the volatility in the market. But I bet that wasn't the case in 2017 and 2018

because I would imagine now you don't get redemptions because your investors are savvy and saw 2018, right? I mean, if you saw it go from 20 grand to 33,000 something and you're still here and you're still interested in giving your money to a hedge fund then you have the this could go to zero mentality to some degree would you say but like back then it was all this is going to a million dollars by by christmas in 2000 you know and uh right i think it was the the january 1 2018 subscriptions that probably took the biggest beat down.

I mean, those were the ones that there was like Thanksgiving hit. Everyone was trying to figure out what fund to invest in. They got their paperwork in. They probably had their money in before stuff started to correct. And they thought maybe it would rebound. So, you know, those are the ones that I think probably felt the most pain. But recently, a lot of these investors have made a lot of that back up through not just Bitcoin, but through other investments. These funds have made good investments in ICO projects or other tokens or just good trading.

So there's been a lot of rebound for those people that have came in at the worst time. Now, it took two years. If they years. If they survived and stayed in business. But it's funny because even if you bought, of course, not going all in, but even as a retail investor, if you bought at 19,000, but you just kept conservatively buying, you know, dollar cost averaging and believed in it, price was that high for such a short period of time. I mean, it's really never been, you know, at this level that it's at even now for a sustained period of time, more than a month or two. So if you just kind of believed in it and kept buying, you're still wildly in profit. Oh yeah. Yeah. And there's a lot, you know, and I won't get into, I'm not the macro type guy, but that's exactly what our

clients are doing. And that's why they're staying in business. And that's why they're convincing people that they should be paying attention is because they get it. And that's the exciting part is just to see where this is all going to take us. So, I mean, your average person can go on any exchange and set a recurring buy, right? Even no matter how big it is in dollar cost average. So I guess the question is, why would they do that with a fund instead of themselves? Is it the custody issues or is it because these funds are also finding other opportunities? Yes, they're because the funds are largely just buying Bitcoin.

I mean, from what I've seen or who I've talked to, you know what I mean? But they're also investing in platforms and doing VC activities, as you said. So is it that mixture that they're seeking? It depends on the fund. If it's a Bitcoin tracking vehicle where they're charging fees and overhead costs, those are the people that don't want to own it themselves and they would rather put it with a trusted party, right? So that's very clear that they don't want to own it themselves. They're going to invest through a vehicle. The groups that are more, you know, kind of more diverse in their portfolio strategy, you know, the active traders, you know, they're just, you know, stat art, right? They'll make money trading apples if they could, right?

So those are just people that can, you know, make money regardless. So in that case, you're like betting on your horse. I like this guy. I have a good feeling about him. He's got a history. Let him have my money. succeed. Others have more maybe event-driven like, you know, strategies where they'll reallocate over time. You know, these are people that are really smart at what they do, right? They understand this much better than most. And if you feel like you trust them better, you're going to invest in that group. If you think that you know better than you're going to trade yourself. So that's kind of how, you know, I think most people are making those decisions.

Which goes back to the fact that it's just about being a people person and able to raise money at the, really, I mean, at the end of the day, what's your story, you know, what are you pitching people and can you, you know, actually prove to them with returns that you're good at your job. It's so interesting. Are most of the funds, the classic, like two 20 structure. I mean, you know, they take a management fee and then they take a percentage of earnings. I guess not everyone would understand that, but yeah. In the early days, we saw even higher fees, you know, kind of the three and 30 at times because

it was so hard to enter the space. It was kind of, you know, unique from a self-custody side that they had a competitive edge, right? And they were better and they had better returns. You know, so the funds with the best returns can get the best fees. But now there's been fee compression and 2 and 20 is probably a new standard. But when you think of an equity long short fund, it's probably 1 in 20 or 1 in 15, right? Just because they're not as diverse or unique structure and there's just this compression of fees. Crypto is not there yet. So it started really high, but it is slowly coming down. It's a niche asset class that requires a lot of skill and the best managers deserve the best fees.

So yeah, two and 20 is probably where we see most of them, but it's interesting that it started much higher. Yeah. Well, I guess they're taking custody of your funds and maybe that management fee at least i could see being justified in being harder it's a lot of risk and pretty crazy um we're talking about institutional money being here it's kind of i was talking to a friend travis cling recently or you might know as a fund manager and he basically we were just having a conversation and he said i think what people don't realize is that the biggest money can't touch this space at this market cap and these prices. So I guess institutional money is interested, but we need to see $30,000, $40,000 Bitcoin and multiple trillions of market cap for them to really even be able to participate.

I mean, do you see it that way as well? Oh, yeah. And that's when we talked to groups. I was like, well, I know these guys will only write a $200 million check. They are not going to invest in this fund that's $20 million. Yeah, they just don't care. Well, it's too risky for them, right? But coming down on their check size for these groups is too costly for them, Right. They need to hire people to do due diligence on them. It's not going to drive a lot of performance in the portfolio from an attribution standpoint. So it's just it's just too early. Right. But it's cool to see that they're building the team in case something happens. Now, some might invest in smaller. You know, if you can write smaller checks, they'll get some exposure. But some of these institutions like you were talking about, they won't write small checks.

And there's not many funds and vehicles that are comfortable investing that, you know, they don't want to be the largest investor in some of these funds. Right. Because if you need liquidity. It doesn't exist. You are the liquidity. Yeah. I guess you never want to be the one who can't get their money out because you're too big. But isn't that notion, I mean, I guess you could view it either way.

You can either be scared, we never get there, so the money never comes in. I like to take a more positive approach and say we're on our way there, and when we hit new highs with Bitcoin and when we see, you know, these larger market caps, and it grows, that that's when the real money floods in, and we just go parabolic. Yeah, I don't know the when, you know, I do think it will take time. And

I think that there could be a lot of different catalysts. You know, why I think something's actually going to happen is because I see so many people leaving really good jobs, and, you know, why I think something's actually going to happen is because I see so many people leaving really good jobs and moving into this space, whether it's blockchain or crypto. And there's so many groups, you know, new and kind of old that are building solutions for this asset class. I do believe that everything will become a lot more digitized. You know, DeFi is very fascinating because it's, you know, the way we do things, especially on kind of the alternative space where people have to fill out a 60 page sub doc and submit it, it's very archaic, right? It's very inefficient. So there's so many use cases that this can push it in the right direction. So is it going to be the use cases and the actual adoption of some of these applications that drives it? Is it going to be institutional investors that eventually will push the market cap up? You know, I don't know. And

that's where, you know, you got probably a lot smarter people on this show that can give you a better analysis on that. But I do think it will happen. It'll be kind of fun to see it. And that's why I guess we're excited to be part of, you know, the ecosystem and be part of the group pushing it forward and we'll just see what happens. So do you, I mean, to that end, you hear constantly people saying, we're still so early, we're still so early. Is that how you feel about it? I think we're very early. You know, for us,

I'm very grateful that our business is diversified, right? We have a lot of business outside of crypto, so we're not completely all in. So even if you've got some ebbs and flows, it's completely fine. Our business is sustainable. But I think it definitely will take time. And everyone says, well, this is going to go away, but it hasn't. And people just keep going into the space and there's more interesting things that are happening. When you think of just the hedge fund industry of crypto, like it's very different now than when we first started or even in 16, 17. Right now there's opportunities for people to trade high frequency and use leverage. So if the CME is creating derivatives, it just means that there's demand.

So as long as there's demand and there's opportunity, I think it will evolve. How we get there, when we get there, that's what I can figure out. I mean, in March, people were, it's going to zero, right? We heard that again. Like we hadn't heard that in a year or two, that it's the dead and it's going to zero. And then full on honey badger, bounce right back, has proven that it's the dead and it's going to zero and then full on honey badger bounce right back has proven that it's resilient. I mean, I think the notion that Bitcoin is going to disappear is dead at this point, in my opinion. I'm sure there'll be some other people that say it's never going to happen. That's when you buy. Yeah. But I talk to my clients. I feel very,

you know, they're very educated and they came from, a lot of them came from traditional finance or crypto and they really get it. And when they talk about their stories, it's hard to believe that it won't happen. And then even when I talk to investors, it's kind of like, wow, these guys are actually pretty interested. They're well educated. They get it, right? If that didn't happen, then I'd be easier to say, oh, yeah, this is all just going to go poof, right? I'm not getting that it, right? If that didn't happen, then I'd be easier to say, oh yeah, this is all just going to go poof, right? I'm not getting that feeling, right? I just feel like it's going to take time. A lot of very smart and wealthy people are pretty much all in on this, which

definitely gives me a lot of confidence. So, I mean, that said, we don't know what the catalyst will be, but we obviously both believe it will get there. How much of a catalyst for what's happening now? Do you believe the last five months COVID money printing infinite QE? I know you said you're not huge into the macro, but like anyone can see what's happening and, and judge whether it's affecting this market. I mean, do you think we're really seeing the use case here, the importance of it, or do you think that it's just, this is a part of a natural growth, the place? I think you, the things for me just operating, you know, our business here, there's some things where now banks will, you know,

banks that wouldn't accept an electronic signature will take electronic signature due to COVID, right? You know, we've got people kind of in these distributed environments and can't be always face to face. Right. So people need to be able to transact seamlessly without paper or, you know, physical interaction. Right. So a lot of those concepts aren't going to go away. That's going to be our new normal. Part of blockchain and DeFi is going to help and crypto is going to help us get there. Right. So maybe it's not one specific thing, but I feel like we're moving in this more digitized technology world. And I don't see how, you know, the digital assets world

and blockchain world isn't going to be a part of that. So it's like someone just basically hit a fast forward button because we were going to get there anyways, but in the last few months you had to do it. Right. We were forced to, like everyone was but in the last few months you had to do it, right? We were forced to. Like everyone was forced to work remotely and transact, you know, using more technology. And I think it's clear like that all money is going to be digital one way or another. I'm not saying there'll be cryptocurrencies, but digital yuan, digital euro, digital dollar. We're seeing these things experimented with and tested and tried. What do you think the effect of digital central bank,

digital currencies will be on the Bitcoin market? Or do you not have a thought on that? You know, I'm not going to make maybe the answer that you're gonna maybe or expect but you know what i always felt is fascinating is when you look at any paper beyond you know there's a serial number right if i have a hundred dollar bill um no one knows that i actually own that that hundred dollar bill that serial number is just i don't know what they're actually using it for right if i give that to you no one one really knows that I lost that $100 and it went to you. Bitcoin, you can track this on the ledger. To me, that's pretty fascinating, right?

A lot of people get scared about who owns what, and there's obviously things that we need to keep confidential. But I think there's a lot of strong cases that we can keep tabs on the money. You know, printing money doesn't exist in Bitcoin, you know, without new mining, I guess. But there's a lot of good things that can come from this. And I think a lot of people just don't understand it. But I always felt like that distributed ledger technology is pretty cool.

And, you know, that's kind of how Bitcoin started is on that, that blockchain, you know, distributed ledger, but how that relates to kind of the store of value or kind of the U S dollar. I would think if the governments were smart, they'd maybe, you know, print their own or generate their own, you know, exactly what I'm saying. That's being tested and that's happening. And then my fear there, I don't know if it's a fear,

but just what you just talked about. If I hand you a $100 bill, nobody knows about it. But if cash is gone and central banks control digital currency, there's going to be no more privacy. Right. I mean, they're going to know every single transaction. They're going to know what wallet it went to, and you're not going to be able to hide it and maybe that's a that's a case for bitcoin

and privacy coins and all these things and then everybody will then be familiar with how to transact digitally but will realize that they no longer have any privacy doing it and maybe push towards but it's just interesting to me that it's so clear that i mean people don't want to mess with i mean paper money is just going to die. I think. Yeah. I think criminals will use it more just because it's not traceable. But they say that Bitcoin is for criminals, right? Because the dollar, what's been used more for a criminal activity than dollars. I mean, didn't anyone watch Miami vice? I watched that. Right. I mean, I'm sure the early days, it was really easy where they thought no one was paying attention, but the records are there. It's very easy to create a set of watch.

Right. It seems crazy. So what do you think in your space and seeing what's happening now, what do you think the future is in the next few years? Do you think that we're going to see a continued ramp up of funds and institutional involvement? I do think that you'll see more funds launch, whether they're on the venture side or hedge fund side. You'll probably see a lot more, you know, we're going to get rid of the retail trader that wants to run a hedge fund, right? That I think will go away just because it's complicated, requires a business plan, working capital, some staying power. So that's a completely different acumen.

So we'll see more existing groups that are sophisticated in the space, launch more crypto products. You know, I think the opportunities of sub strategies in crypto are still, you know, you'll see more lending strategies or some debt funds. You know, some of that stuff is, you know, we'll see more opportunities like that. But I do feel like the market cap will stay pretty small for the next couple of years. It will just kind of trickle its way up before, you know, one of those catalysts that we're talking about where you'll see a big surge. But you'll see more managers launch, but it'll just be more thoughtful. And we're not seeing the two, three week launches.

People are taking, you know, three to nine months to really plan it out and make sure that they're thoughtful. They're not trying to time the, you know, the bottom or time of the pricing. They know that they're going to be in business for three years. So they're trying to structure the product the right way. So less money grabs. It's funny you describe that in the hedge fund world.

And then you look at the DeFi space and it's eerily reminiscent, obviously, of the ICO boom, even crazier. I get contacted about tokens that the idea was conceived yesterday and they launch in a week and then they're listed on a major exchange a week later. It can be less than a month from the birth of the idea to a full on listing and billion a week later. It can be less than a month from the birth of the idea to a full-on listing and billion-dollar market cap. It's nuts. I mean, it's kind of like the early days of dot-com. You just put dot-com in your name,

and you thought everything was going to go to the moon, right? Most of these projects will probably fail. They can't all succeed. Yeah, and who gets left holding the bag if that happens. No. And that's why you've got these smart people making those decisions. They understand it. They are the ones that are placing the bets. And that's why I would invest in fund managers because that's their day job, right? That's what they do all day long. Yeah. Everyone likes to think that they're a genius until the price goes from 20,000 to 3. And maybe if they had a smart fund fund manager,

that guy was actually shorting. So if somebody wants to start a fund, where do they, where do they find you if somebody wants to get in contact with you after this? Yeah, we, we definitely have a link on our website, imagingstover.com where you can reach out to us. We've got a LinkedIn and Twitter page as well that you can reach out, but you know, someone from our sales team would be happy to talk to us. We've got a LinkedIn and Twitter page as well that you can reach out. But someone from

our sales team would be happy to talk to you. I'd love to connect with anyone that's really in the industry and how we can collaborate and network together. But yeah, start with our website and you can track me down or someone on the sales team to get things going. I have a question actually that just, I see, like I said, all these guys on Twitter and stuff that say they want to start funds. What behavior that they're doing, sharing charts, trades, ideas on Twitter would put them out of compliance if they actually started a fund and were managing other people's money? Yeah, I mean, they got to definitely be careful. It's based on the jurisdiction that they're in. But, you know, the smart money, they don't want to be sharing ideas, right? If they're that good, you know, they want to make sure they're keeping that closer to the vest.

And, you know, that's their unique strategy, that's what makes them different. And I think the people that are pushing these products or charts, graphs, those people are trying to get people to subscribe maybe to their service, right, as an offering. I don't know. There's a lot of noise in crypto.

I find it very exciting, but I can't read everything I see because it's everyone's pitching something. Yeah, of course. I mean, everyone's, you know, myself included. Listen to my podcast. Thank you so much for being here. I really appreciate it. And it gave really a ton of insight into like this sort

of corner of the industry. I think that nobody talks about, you know, the, everybody knows that these funds exist, but they have no idea how that happens or what they're actually doing. So I'm glad that we finally got myself included that, that clarity. So thank you very much for explaining. Scott, it was my pleasure. It was a great conversation. Thank you. Awesome. Speak soon.