Behavioral vs. Mechanical: Ideas to Evaluate Cryptocurrencies
It's easy to fall into the trap of seeing the crypto space within a mechanical framework. After all, Bitcoin and blockchain is just an amalgam of code, maintained on a decentralized network, and supported through a literal army of machines permeating across the globe. The architecture and design of crypto and blockchain matter a lot. However, it is easy to get lost in the engineering of this nascent technology and lose out on the bigger picture of actual utility and function. No matter if this peer to peer cash system is seen as a currency by some or as a store of value by others, one thing is evident: people buy, sell, and use Bitcoin for different reasons.
As the cryptocurrency ecosystem continues to mature, more and more players in the traditional finance space have latched on. With Wall Street execs observing and commenting and even bankers, researchers, analysts, and economists making their presence known, imparting their thoughts and speculation, nearly everyone has an opinion on digital currencies. They have their own perspectives, and those perspectives are much older, built upon decades of our time’s best economic minds, like Friedman, Hayek and Keynes. After all, money has existed far longer than the digital currency boom of 2009 and will continue to exist long after. That means, like good cryptography, these ideas have withstood the test of time, and as a result, we should carry the weight of their expertise with us when re-envisioning our economic ecosystem
In crypto circles, the current breakdown of cryptocurrencies is structured mechanically. In the case of stablecoins, they fall into three neat categories which will help us understand their functions better:
However, these 3 mechanical classifications only tell you part of the narrative, and from an investment standpoint, a very small and potentially unremarkable part. For example, knowing that TrueUSD or Tether simply collateralizes fiat (US Dollars) and puts dollars on the blockchain doesn’t tell you very much as an investor. The mechanical component really leaves something to be desired when you want to know how a market might receive a coin, let alone behave once it’s released into that market.
A look at Tether ($USDT) showcases this. Tether recently had a period of heavily negative news. The news was inescapable and it focused on the fact that Tether was not being fully backed by US Dollars (USD). Mechanically, Tether stated that every 1 USDT would be backed by 1 USD. But when it was revealed that this 1:1 backing was not true, what happened? The price of Tether stayed the same. Why? Let’s look at what users care about when using Tether:
They could buy at $1 They could sell at $1 They had confidence they could do this whenever they wanted
In short, what makes Tether useful for investors is not whether it’s actually, mechanically backed 1:1 with the dollar. What matters is liquidity. This is behavioral and it’s how the coin behaves that caused it to retain it’s usefulness and therefore value.
Let’s key in on that word: Behave. It just so happens that a very valuable framework stems from how things behave. Instead of using a mechanical filter, what would happen if we used a behavioral classification. How would it be received if we put coins into behavioral buckets instead of mechanical ones? Let’s apply a few ideas and see how new buckets might provide us with additional, important information.
Inside vs. Outside Money
To start, let’s look at the fundamental differences between inside vs. outside money. Understanding whether a coin is an inside or an outside money can tell us about how the coin functions and behaves. For example, fiat-collateralized digital assets are inside money. You have an inside money anytime an asset is backed by a form of private credit (an “IOU”). Simply stated, inside money is collateralized. TrueUSD, for example, is an inside money. For every 1 TrueUSD, there is a corresponding liability of 1 actual US Dollar, assuming the system is working correctly.
Bitcoin on the other hand is an outside money. Ampleforth’s Amples (AMPL) are also an outside money. Outside money is not collateralized. Outside money is also a net asset for the private sector. There are different performance characteristics between outside money and inside money, with some being advantageous at times and harmful in other instances. That's why it's critical to understand if a digital asset is an inside money or an outside money, much like its crucial to know what a layer 1 protocols consensus mechanism is - PoW or PoS for example.
Rules vs. Discretion
Another view which can shed light on the behavioral side of things surrounds rules vs. discretion, with advantages and disadvantages to each approach. To outline some potential disadvantages, discretionary policies have the vulnerability to have subjective applications, which can introduce errors in terms of subjective timing, scope and participation. Discretion in the traditional finance world is often regulated to give protection to consumers. An example of this could be transparency about how an interest rate can change and by how much. In the decentralized world with no strong authorities, there's no guaranteed regulation except for rules-based code. Contrastly, rules-based policies can have the potential disadvantage of being too rigid, not allowing for unique action in times of full blown crisis.
The important take-away in either event is to understand what type of digital asset you are dealing with, which will provide you with an indication of how the asset might perform in a given scenario. As an investor, you may achieve a more predictable performance out of a rules-based digital asset than a discretion-based digital asset.
Maker DAO is in the news as a result of their discretionary policy. According to a Coindesk report borrowers are unhappy with exponentially increasing stability fees (basically, interest rates) in extremely short time frames. These stability fees are set via a vote, and the people casting votes are arbitrarily doing so based on their own discretion. They have passed rates that are 40X higher than they were mere months ago in order to prevent a negative outcome for their token. However, the outcome is increasingly negative despite their best efforts. The uncertainty surrounding how the chosen few will vote only adds to the problem.
This information is - necessary - for an investor to know.
A discretion-based system may fail to act when action is needed, and may act when inaction is best. A rules-based system will act exactly when the rules dictate, irrespective of whether or not action is prudent. In a discretionary system, additional, sometimes unpredictable variables are added in the form of subjectivity, which are eliminated in a rules-based system.
It becomes increasingly important to know how digital assets behave. Be sure to understand if a digital asset is rules-based or discretionary if you want a full picture of that digital asset.
Tying It All Together: A More Complete Picture
Having a complete awareness and knowledge of asset classification and behavior provides a more useful, fuller picture of a digital asset.
Framing a digital asset under the lens of behavior and mechanics helps guide one to ask better questions to determine if the digital asset is the right one to invest in. For example, with the right behavioral lense, you can better understand the impact of how coins enter or leave the system. You have an idea of what to ask- are new coins entering through minting/selling? Buy-back and burn? Collateralized Debt Position (CDP)? If it’s through CDP we can apply another lens to determine another question we need answered- If it is CDP how is demand for CDP and stablecoin balanced?
Additionally, taking into account behavioral characteristics helps you to question other important ideas, such as what assumptions about the underlying economy does the protocol of a digital asset rely on? For example, if a project relies on bonds, there must be a long-term underlying growth for that bond market to make sense. Other questions will arise as well, such as what information is propagated into supply, if any? If that’s not the case, is supply scheduled deterministically? If it is scheduled deterministically, what might that mean for the future of the digital asset? Mechanically, that answer is simple - you know for example that Bitcoin will only have 21 million coins ever. Behaviorally, how will a fixed supply affect the price and performance of that digital asset? Clearly, the behavioral characteristics of a digital asset are important to consider.
Hopefully this has provided you with a few new ideas and additional lenses with which to view digital assets. Knowledge and information are powerful, so I hope this additional framework helps you in the future while evaluating digital assets.
In the video “Ray Dalio breaks down his ‘Holy Grail’”, he sets out to break down what were the marginal benefits of diversification within a portfolio. Ultimately, using the graph below, Ray Dalio broke it down into 3 pieces: Risk, which he called the standard deviation, the number of assets or the sample size, and the correlation of the bets.
What he found in doing so was the higher the correlation between assets in a portfolio, the lower the ability to reduce risk by increasing the number of investments. Essentially what this means is if you take a group of investments that are 60% correlated, there is no real reduction in risk after adding more than 4 investments to the portfolio. It’s only in diversifying your portfolio that allows you to cut your risk.
Dalio says for an ideal return on investment, investors should find 15-20 good, uncorrelated return streams, as that will allow for the most return on investment while cutting risk. In taking 15-20 good investments, with a 0% correlation, using Dalio’s chart, the return to risk ratio is 1.25, meaning the probability of losing money in a year is 11%. With any one investment with a 10% risk, the probability of losing money in any given year is 40%, almost 4 times as much.
What this all boils down to is the power of diversification in balancing risk. There is no great 1 best investment, but you are able to improve your return to risk by 5 times as much when diversifying across 15-20 good investments.
Since Bitcoin was created, it has shown to be an asset that is uncorrelated to the stock market. This provides investors with a tool for diversifying their portfolio, but many investors prefer to have more than one tool. Since Bitcoin thousands of altcoins have come onto the scene. Combining Bitcoin, all altcoins and all future projects has the resulting effect of an entirely new asset class: Digital Assets.
That begs the question: How does this relate to digital assets? You need only look at Bitcoin and the subsequent other similar coins found in the market to see the issue in diversifying your digital assets. Correlations within the crypto space are for the most part high, but there are a few different coins that break the mold of digital assets, which allows investors to diversify and improve their return to risk. One such token is Ampleforth, whose movement pattern in reality should have a much lower correlation to Bitcoin. For those who subscribe to modern portfolio theory and have a mindset like Ray Dalio, seeking out digital assets that don’t correlate strongly with Bitcoin may allow investors to improve their return to risk, while digital assets on the whole may help reduce correlation to other traditional holdings.
To learn more about modern portfolio theory and how it can apply to digital assets, check out our piece on the subject which you can find here.
This is a post on my decision to join Ampleforth: what it is and why it is so special. Equally as important, this is a brief exploration of one human continuing to find themes that echo and magnify within his life.
As T.S. Eliot once wrote: “Do I dare / Disturb the universe?” Eliot was a young man of 22 when he wrote his haunting “The Love Song of J Alfred Prufrock”. How many times I poured over these lines as an undergraduate at Yale, I cannot begin to guess - I related to T.S. Eliot: as a young man he seemed ‘wise beyond his years’, he had also hated university (specifically Oxford) and throughout his life pursued perfection in his art form (he produced meticulous work but at low volumes). I wanted to be a poet, or a musician, or an astronomer - drawn to the purity of chasing passion and meaning. Computer science was something for robots like my parents - too rigid. But as Senior year approached, the economist (i.e. rationalist) in me took over, I considered Finance and Consulting, though my heart was in neither. Looking back, this was a time of struggling with honesty - I was not honest with myself or others on what I wanted in life.
Flash forward five and a half years - I’m packing two bags in my 325 sq ft West Village apartment (well it’s technically a studio and it’s in Greenwich Village, but it’s always more romantic to say West Village). I’ve stuffed a carry-on with my laptop and a check-in bag full of personal things, scratch that, just mostly full of work clothes. In my phone app is a one-way ticket to Beijing. Some of my friends and family think this is burnout or an existential crisis, but in reality I am just getting good at being honest.
Who is Ampleforth?
Now it’s late 2018 and I meet Evan and Brandon at a coffee shop. We (FBG Capital) are meeting with portfolio companies to push them to list: it’s as enjoyable as pulling teeth out. However, Evan and Brandon are different from others we are meeting, they appear refreshed, relaxed and certain - they are looking to list. The team clearly believed in their idea and project - and could give a damn what the market was. I am intrigued, having heard about Ampleforth under its old moniker, Fragments. The crypto-investor community in SF is small and Fragments had generated quite a lot of buzz with its invention of an ‘elastic supply protocol’ in early 2018. I returned home that night to read up on the whitepaper and website, sucked into the vision that was presented to me. To my luck, our interactions were extended by on-going support FBG was providing to Ampleforth.
As I came to know the people behind the project, I quickly realized a combination of three things that was rare among the 100+ other projects I had come across:
Integrity & Professionalism - The team exhibits a level of integrity and professionalism that can sometimes be lacking in the darker corners of our beloved crypto-space. Starting from Evan & Brandon and continuing to the rest of the team, there is a genuineness to the actions and direction of the project: honesty is abundant.
Realistic - The team shines as one of the most ambitious blockchain projects, but has paired this with a heaping dose of realism. They understand the limitations in the short-run, and embrace this - turning it into an opportunity to leverage as they grow towards their ultimate goal.
Optimism & Sense of Fairness - Pursuing a grand vision requires a healthy mix of optimism and strong foundational beliefs. Though Ampleforth focuses on money and monetary economics - a boring and overlooked subject to most folks - Evan and Brandon have developed an intense passion and core belief in fairness. Mixed with an optimistic view of the world, the combination is a refreshing and inspiring change-of-pace. It is what drives the project relentlessly towards creating an “ideal money”.
But enough about the people behind the project, let’s get to the star of the show...
What is Ampleforth?
Ampleforth is a digital-asset-protocol for smart commodity-money. Founded with a mission to create fair, politically independent money, the protocol’s creators noticed that commodity-monies like gold and silver are naturally fair and independent.
Unfortunately, commodity-monies cannot efficiently respond to changes in demand, making them a poor substitute for central-bank-money. To address this shortcoming, the project's founders designed a synthetic commodity-money that propagates price-information into supply, much like how thermal expansion propagates nearby kinetic energy into a material’s volume in the natural world.
Let’s unpack this: The Ampleforth protocol is a protocol with an absolutely scarce amount (i.e. fixed supply) of native tokens, called Amples. These Amples can be thought of as a commodity, sharing qualities similar to Bitcoin or other natural resources (e.g., gold or oil). However, one distinct characteristic makes Amples different: they always seek a price-supply equilibrium, and will automatically enter a state of unrest until they find one. In a way, it is a ‘smart’ version of a commodity - a smart commodity! To illustrate this, here is a simple example:
Alice has 1 Ample worth $1.
Alice has 1 Ample worth $2.
Alice has 2 Amples each worth $1.
The vice-versa scenario occurs when the price decreases (i.e. Amples contract). To summarize: when demand changes, the system seeks a new equilibrium point by universally expanding to, or contracting from, balances and holders. It is the elastic supply protocol.
It’s 2016 and I spend my birthday alone in the W Hotel Downtown Atlanta. My shirts and suits hang in the closet while I watch TV (maybe Yukon Men while daydreaming about moving to Alaska...?). I stare at my work laptop, where I’ve begun writing and collecting a series of poems I hope to one-day publish, something like Frank O’Hara’s Lunch Poems collection, but shittier… way shittier. I’m considering getting an MBA and finding a line of work that allows me to find the intersection of “analysis and creativity”... a direct quote from one of my discarded business school application essays. I wonder if I can find a career-path with the depth and richness that only poetry and music seem to possess.
Flash forward again (like a Christopher Nolan movie), I’m in Beijing at my Liangmaqiao apartment. I’ve fallen in love with the city despite the smog, the crowds and the fact that I moved overseas utterly and completely alone - not a single friend or relative within ~5 hours of Beijing. On the phone is my Director, (boss, friend and mentor), who is speaking excitedly: he’d very much like for me to stay in Beijing, and not to consider business school or returning to the USA. I spend a night turning it over in my head and decide it’s a leap I’m willing to take - he’s shown me the ropes of the crypto-world -- what an amazing opportunity to learn from someone who was an early investor in Ripple, is close with Jihan Wu and works with the board of Circle. He’s had me analyze various exchanges for potential acquisition by Circle and also diligence BitPay’s Series B. Even more, I seem to have found my calling: a space that matches my level of imagination, my feelings as an ‘outsider’+‘underdog’ and most importantly, my deep-rooted desire for meaning. The next day I sit down with the Partner at the pristine IDG Capital offices near Jianguomen. He shakes his head and says no, there is no future for me in China - there will never be a road for me to Partner. The scene fades to black. Maybe I should learn to be more realistic...
Why is Ampleforth Special?
I can do this in a simple list, Ampleforth: (1) Solves the deflationary problem of Bitcoin and other natural resources; (2) Addresses the ‘killer use case’; (3) Has a realistic approach to both short- and long-term time horizons; and (4) Is innovative and requires the blockchain
Deflationary problem of Bitcoin (BTC):
This is a well known and discussed phenomena about Bitcoin. With a defined absolute quantity of 21 million BTC, Bitcoin’s supply is capped, and thus deflationary. As demand naturally increases (e.g., increasing population of the world, increasing adoption of the blockchain) in conjunction with an inelastic supply, the price of BTC will rise. In a story similar to Japan’s deflationary spiral, this force may become so strong that eventually no one will want to spend Bitcoin even if it is universally accepted. This means one day Bitcoin might be increasing in value so much that in the time it takes for you to pick up a pair of jeans then pay for it, you’ve lost money by simply transacting in BTC. Better to “HODL” than “SPEDN”!
Amples avoid this issue through its elastic supply protocol, as demand increases or decreases and the price changes, the automatic (or rules-based) protocol will adjust in a predictable and transparent manner. This applies a gradual pressure to bring the market to a new equilibrium point, albeit at the same/similar price but a different quantity (the total market capitalization could now be higher or lower). Oversimplifying: the Law of Supply and Demand allows Ampleforth to maintain around a target price while scaling in-line with the market demand and overall usage/adoption of the token. In this way, it has innovated and improved on the pivotal foundation Bitcoin has laid.
2. The killer-use case of the blockchain:
Those who consider themselves ‘crypto-insiders’ are likely familiar with the term “the KILLER use case”. It grew to a crescendo near the end of 2018 and has largely quieted as we’ve seen DApp users rise (although slowly) and deployment of DLT in traditional industries. However, in any debate around the ‘killer use case’, we must not forget Satoshi’s original white paper - "Bitcoin: A Peer-to-Peer Electronic Cash System". The original vision for the blockchain was a ledger for electronic cash. In this sense, the purest form of the killer blockchain use-case appears to be supporting a peer-to-peer digital cash, but not just any cash: one that does not rely on any central authority.
In this, Ampleforth once again checks the box. In its long-term lofty vision to create an ‘ideal’ or ‘fair’ money, it is tackling what I consider to be the Holy Grail of the blockchain space: a non-sovereign currency. The current monetary system is obviously integral for society as we know it, but also exhibits flaws. To use an anecdote: back in 2015 when the European Central Bank (ECB) was in the midst of austerity programs impacting citizens of Greece, Portugal, Italy, Spain, etc., a protestor disrupted a press conference by throwing confetti on Mario Draghi (President of the ECB), screaming “End the ECB dictatorship”.
What was this all about? The protester was highlighting the ECB as ‘illegitimate’, Mario Draghi is arguably the most powerful man in Europe, being able to impact millions of citizens across multiple countries with his decisions, yet he is not elected ‘by the people’. This represents some of the issues around what economists call a discretionary monetary system: central banks work with imperfect knowledge (do we trust a single individual or committee of individuals to tell us what is best vs a robust free market?), and are prone to self-interested behavior (i.e. it is hard to say that central banks’ policy decisions are completely divorced from the influence of public or private interests). In the end, I think the system is not perfect, and will likely not be completely replaced, but we should at least have an alternative option so we can hedge our risk or ‘vote’ with our own choices. Would you rather live in a world with only one choice? Or maybe two or more?
Now, it is important to pause and understand that Ampleforth is not purporting to replace the existing financial system, it is merely providing an alternative option. As F.A. Hayek noted in his oft-quoted essay “The Denationalization of Money”, competing currencies can be a positive as free markets and competition lead to innovation and improvement. If this seems too far-fetched and in the future for your taste, then read ahead to…
3. Realistic short- and long-term goals:
There has been a late-2018 Morgan Stanley report circulating with a graphic describing the ever-evolving Bitcoin/Crypto thesis:
Though the graph is closely tracking the market’s attitude towards BTC, the market’s evolving thesis itself has clearly not been so sharp. The collective thesis has moved in the order of Digital Cash → Financial System Antidote → Replace Payment System… → New Institutional Investment Class. What has happened is we’ve started with a grandiose vision for Bitcoin, which has slowly deflated overtime to settle on its reality: a new and orthogonal asset class. Rushing too far ahead (i.e. Digital Cash), is like a runner getting ahead of his or her body: face meet ground.
As an alternative framework, I propose the non-delusional and more realistic vision of how the crypto thesis should evolve:
In the short term, Amples are a new investment class, high risk-high return - this use-case has been under our nose the whole time, for at least 10+ years. They should be volatile and uncorrelated with the traditional market; therefore, an interesting portfolio diversification tool (read more on this topic here, from our Growth Lead). Only in the medium- to long-term will Ampleforth begin to shift the paradigm of money, but a whole host of steps must occur first (see graphic above).
To summarize: Ampleforth’s vision means in the short-run, it will have a high risk-return profile as a new and uncorrelated investment asset. The issues with Bitcoin was it was hailed as ‘digital money’ far too early… as its very first use case. This is not only isolated to Bitcoin, many crypto projects dive in head first assuming we are in the deep end of the pool, only to realize it’s in fact the kitty pool and the bottom is concrete. The reality is ‘digital money’ is the end of the crypto-rainbow. To arrive at this achievement will require the hurdles of becoming a unit of account, store of value and medium of exchange. Ampleforth understands this, and the best part of this realization is that Ampleforth has a balanced approach: it has not given up sight of the ultimate goal - re-defining what ‘fair’ and ‘money’ means.
4. This innovation actually requires the blockchain! (Not to be underestimated...)
To be more scientific with our description of Ampleforth, Amples are a synthetic commodity. Until now, synthetic commodities have mostly been left in the realm of monetary economists ‘theorizing’ from ivory towers. Since the arrival of Bitcoin, the floodgates have opened for synthetic commodities coming to the market (though the general public is likely not aware or familiar with this concept).
Given its short history, synthetic commodities are the cutting edge of monetary economics and the evolution of ‘money’ as an instrument or technology. To this end, Amples are innovative as they are able to apply a rules-based monetary system directly and equally to all balances, addressing issues of deflationary and inflationary pressures through the elastic supply protocol. Additionally, synthetic commodities like Amples avoid the ‘supply shock’ effects that natural commodity monies face.
Until now, there was no possibility Ampleforth could have been created - the blockchain is integral and absolutely necessary for this project. As such, it passes the most elemental and important hurdle of a blockchain project: it actually requires the blockchain. Amples are pushing the envelop along multiple edges, challenging what we think of as investable assets, synthetic commodity moneys and of course, cryptocurrencies.
I’m lazily glancing at a nice brownstone across the street as the sun sets, I’m on the phone with my parents in an apartment in NYC, I tell them I have an opportunity at a fund in China who invests in this crypto stuff. They think it’s crazy - I’ve got a stable job at a reputable firm.
I’m looking out the window at the coal-fired smog clouds from my apartment in Beijing, I’m on the phone with my parents and I tell them I’m coming home and applying to business school. They’re glad I’ve gotten over this hump.
I’m staring at a blank wall as I chat with my parents - I didn’t get a single business school interview (750 GMAT? Yale? Hello, is anyone home?). I tell them I’m going to move to SF, I can’t quiet the voice that tells me this is a sign that crypto is my calling, that it’s the real deal and a part of my story.
I’m on the tarmac in Shanghai, taking-off for Haikou. Moments earlier I was on a Wechat call practicing pitching myself in Chinese with my parents. After landing, I take a Didi for an hour to meet Vincent, the founding partner of FBG Capital. When he greets me, he does so without a smile or nod, and takes me to breakfast. I’m not sure if he likes me - remembering the last time I sat across the table from a Partner in China - but I get the job and become their one and only man in SF (plus all of the Bay Area for that matter).
I’m shivering because the crypto winter is in full force and firms are making cuts. Bad news seems to crowd CoinDesk - the market precipitously dropped again only two weeks ago. Outlook is at a low when I walk into a coffee shop to meet these Ampleforth guys who seem strangely optimistic… … a few months of close collaboration have passed and over a drink I ask Evan why he is doing this. Without pausing he says that we can choose the things and legacies we leave behind, that lines of code can be like whisps of thoughts for future generations to remember us by when we are in the ether. I can tell that is an honest answer. Long ago I’ve started to think of computer code as poetic and the blockchain as strangely rhythmic. I realize I've stopped writing poetry since joining the blockchain space, or have I? I am certainly more optimistic now, as I laugh and start to think...
“Do I dare / Disturb the universe?” To me, blockchain represents the audacity to challenge what we know and believe. After spending years as a consultant for the financial services, I have seen how executives on Wall Street and Main Street think. To be frank, they are damn good at preserving the current order, but will usually shy away from pushing too close to the bleeding edge. Our current financial system is obviously absolutely necessary, but is also extremely inefficient. On top of this, one of the most stagnant areas to address is that of money. What is it? How do we use it? Most people would have immediate answers to these questions, treating them as a priori truths; however, I think with the entrance of Bitcoin and now Ampleforth, the door has opened to adding a much needed jolt of innovation to such an old tradition. I sincerely believe that blockchain technology and the cryptocurrencies it supports will play a transformational role in the traditional financial system. The daily lives of everyone will be impacted, and I want to be a part of that driving force.
In regards to Ampleforth, the opportunity, the timing and the team - the decision was natural. Not only do I believe that Ampleforth is a promising project, but also an amazing platform to educate everyday citizens (i.e. non-monetary economists): a way to help people realize that it is an amazing time to be alive with innovations occurring in such a long-ignored area. Hopefully we can do this while raising the bar around the intellectual rigour and discussion within the crypto space, focusing on ‘economics’, not just ‘tokenomics’.
Let’s re-define what ‘fair’ means.
Follow me on Twitter, connect with me on LinkedIn, or message me on Telegram. For more in-depth information on our project and the team, visit our website and read the Redbook and Whitepaper at: www.ampleforth.org.
Ampleforth's Blog and Telegram group are the best ways to closely track our progress and updates.
About Me: With a simple handshake on a street in Guangzhou, Vincent propelled me to the position of Venture Partner at FBG Capital. He has given me a chance when others have said ‘no’. Fittingly, I think Evan, Brandon and the Ampleforth team are allergic to the word ‘no’.
As Venture Partner, I will retain my position (albeit in a minor role) at FBG, primarily assisting in portfolio company support and deal sourcing where the opportunity presents itself. Effective immediately, I will be full-time as Chief Business Officer of Ampleforth - inspired by the honesty, realism and optimism of the project.
Are your crypto investments truly diversified? What's missing?
Every investor that wants a diversified portfolio should have exposure to cryptocurrency assets — or digital assets as they are sometimes called. Digital assets make up an asset class that has more volume every year and has shown to be uncorrelated to the stock market. One digital asset in particular, Bitcoin, has outperformed the S&P 500 since its inception, and is the best performing asset of any type over the past 10 years. Even Mike Novogratz the Founder and CEO of Galaxy Digital has said every Hedge Fund should hold 1% of their entire Portfolio in Bitcoin as a hedge to the systemic market risks.
In all markets, being correlated with how well the economy is performing has distinct advantages and disadvantages. If the economy is doing well, it often has low unemployment rates, strong productivity and controlled inflation. In these periods of economic boom, it’s good to have assets that perform accordingly. But when the economy starts to slow down and sentiment from markets shift, it is important to have a portion of your portfolio that takes advantage of the market downturn. Traditionally this is achieved through derivatives of underlying assets; however, in recent times cryptocurrencies have provided another way to add non-correlated assets to any portfolio.
What is Modern Portfolio Theory?
Modern Portfolio Theory suggests that the return of an asset should follow the amount of risk that asset has. This means that if an asset has a lot of risk then you should be expecting a higher return from that asset.
Those who subscribe to Modern Portfolio Theory target the best performing assets in multiple industries and asset classes including stocks, bonds, commodities, and in today’s market, digital assets such as cryptocurrencies and smart commodities. These types of investors aim to reduce correlation among the assets they choose for their portfolio, so that they can target high returns, but hopefully hedge downside by choosing assets that move in an unrelated (or uncorrelated) fashion to each other. Investors then weigh their allocations of each asset in their portfolio to maximize returns, as well as to additionally hedge their risk by securing assets that have different levels of correlation to the broader economy.
In today’s market, there is a new opportunity to introduce a diverse asset that has it’s own unique risk/reward profile and a brand new level of correlation to traditional asset classes. That new opportunity is, of course, digital assets like Bitcoin. Having digital assets in a portfolio can add a previously unattainable level of asset mix to an investor’s holdings, and can impact the level of risk and exposure an investor has in a potentially positive way. It’s also quite realistic for retail investors to be able to attain digital assets if they so desire. Digital assets like Bitcoin, Ethereum and other altcoins have provided the first opportunity in recent history for retail investors to add unique assets to their portfolio without requiring them to meet minimum net worth thresholds.
But what is uncorrelated with Bitcoin?
With the critical role uncorrelated assets play in modern portfolio theory, it’s important to hold assets that perform in an uncorrelated way to their broader asset grouping. In the digital asset world, we’re currently in a period of time where price discovery is a metric that gets a lot of attention by the media and it outlines an approach that a majority of crypto investors attempt to use to value and evaluate digital assets. Within the digital asset bucket, it’s important to have alternatives. This is because historically, virtually all digital assets follow Bitcoin’s price movements closely. Investors in digital assets need to have an alternative to current day cryptocurrencies in order to hedge and perform well when the broader asset class is down. With a redundancy in performance from cryptocurrencies following Bitcoin’s price movements, where can we find a digital asset that performs in an uncorrelated way?
Enter Ampleforth. Ampleforth is the first sound money with an elastic supply. The unit is called the AMPL. AMPLs are a completely different crypto model that spreads price information into supply. The Ampleforth protocol aims to achieve price-supply equilibrium, and it does this by expanding or contracting the amount of AMPL for every wallet holder at the same time every day: 4pm EST. This daily expansion or contraction is rules-based and transparent you can find the expansion or contraction rate at the AMPL dashboard. This daily event can lead to a different movement pattern for AMPL than Bitcoin and other cryptocurrencies. Should AMPL show to be uncorrelated over time to other digital assets, that could make it a very interesting tool for portfolio construction. This is because finding digital assets that are uncorrelated with Bitcoin can be advantageous in every crypto portfolio, in the same way that crypto can be advantageous in every asset management portfolio.
Out of all of the industries where investors hope for high returns, where risk and return run hand in hand, digital assets are at the top of the list for many of today’s investors. As the world continues to innovate, and digital assets add to and improve on the options we have for transacting, storing value and even creating new synthetic commodities, it’s important to consider assets that not only capture potential upside, but also include some assets that have their own price movements uncorrelated with Bitcoin. Should AMPL generate movements that differ from Bitcoin in a random way, AMPL could very well be the tool institutional and retail investors need to achieve the risk/reward balance missing from the digital asset space today.