Tim Johnston

The Unimportance of Coffee and Cake

When people think of “money”, most think about using it to purchase goods and services. Bitcoin is terrible as a means of payment. It is slow, can be expensive and is not widely accepted. We are often asked, “what you can actually buy with Bitcoin?” The answer is not much.

Crucially though, it doesn’t matter.

Bitcoin offers little improvement for users when it comes to purchasing coffee and cake. It is easy to underestimate the importance of user experience. Often it is the difference between success and failure. The innovation behind a number of successful technology companies is not necessarily the complexity of the technology, but the improvement it offers to the users’ experience. Amazon originally succeeded as a book seller because it allowed customers to browse, purchase and receive books from the comfort of their lounge chair. Uber offers users a superior customer experience as they order a lift from anywhere, track when it is due to arrive and pay with ease. AirBnb offers users a wider range of accommodation options, often for a lower price than hotels.

Bitcoin does not offer customers a better payments experience. In fact, it is far worse and while it might improve with new technology like the Lightning Network, it is unlikely to be a giant leap forward in payments. The bar for payments is currently very high, by design. Existing payments networks are designed to reduce friction for users. Less friction leads to more payments which leads to more profits for payments networks. Visa’s Paywave allows users to buy their coffee and cake with the tap of a card. Paywave is seemingly everywhere. Apple Pay has improved this again by allowing a simple tap of the phone. Any further improvements are likely to be marginal and are unlikely to come from Bitcoin. Bitcoin is slow, difficult to use and does not improve the customer experience.

Bitcoin might be an improvement for merchants. Using Bitcoin eliminates the risk of fraudulent purchases. Global credit and debit card fraud has been estimated at around US$25bn, a great deal of which is worn by merchants. Bitcoin is a digital bearer asset. Bitcoin can only be spent if the customer is in control of the Bitcoin. There is no room for impersonation. Bitcoin as a means of payment may also result in lower transaction fees to merchants. Credit card issuers charge merchants up to 3% for the privilege of receiving payment. The fees for using the Bitcoin network are typically lower. On the flip side, the Bitcoin network isn’t going to roll itself out to merchants and a middleman is required to build the required infrastructure. Just as Visa and Mastercard charge a healthy commission, it’s safe to assume any middleman will as well. While in theory there might be some improvements to merchants, the customer experience improvements aren’t significant enough to convince customers to absorb the switching costs and start buying their coffee and cake with Bitcoin.

There are two use cases where Bitcoin might flourish as a form of money to make payments. The first is micro transactions. Bitcoin is useful for tiny payments, such as 5c. Credit cards often charge minimum fees per transaction, such as a 30c flagfall, making micro payments impossible. Micro payments could become commonplace for new uses on the web like micro donations or paying for content. Secondly, Bitcoin might flourish for large payments. Transferring $1m to someone else through existing banking infrastructure can be difficult, slow and expensive. Bitcoin happens almost instantly and is relatively cheap. However, the problem of transferring large sums of money is not widespread and Bitcoin’s edge in this regard is unlikely to drive mass adoption.

While Bitcoin struggles as a medium of exchange, many forget that there are other roles of money. There are three roles of money - a store of value, a medium of exchange (buying coffee and cake) and a unit of account.

Bitcoin excels as a store of value - this is where the value of Bitcoin lies.

The following highlights four scenarios in which Bitcoin is appealing as a store of value:

  1. An alternative to gold - Bitcoin is superior to gold. It is easier to divide, transfer, store and secure. Gold has an estimated market cap of $8 trillion and only a tiny fraction is used (in jewellery for example). It is easy to see Bitcoin competing with gold and capturing some of this value.

  2. Offshore banking - it is estimated that $15 trillion is stored in offshore bank accounts such as in Switzerland. There are many different motives for storing funds offshore. It is easy to see Bitcoin competing with offshore bank accounts as an alternative place to store value, outside the purview of others.

  3. Investment hedge - just as many store value in US Dollar or Swiss Francs, many will look to store value in Bitcoin. Storing valuing in Bitcoin is a hedge against macro economic events. Bitcoin is free from association with any country, central bank, political movement or individual. Bitcoin is completely independent and has proven to be uncorrelated to other assets.

  4. In developing economies - for citizens of countries that are ravaged by inflation and political influence, like Venezuela, Bitcoin is an attractive alternative to storing value compared to local currency. For citizens of developed economies, it is easy to underestimate the value of a digital currency that is independent, permissionless and censorship resistant

A common counter argument to Bitcoin as a store of value is volatility. Bitcoin has been highly volatile, which is expected of an asset and technology that is still going through the discovery phase. Bitcoin is only 10 years old. It will take a long time for Bitcoin to be more widely recognised. In the interim, as with any new technology, Bitcoin will be met with both skepticism and enthusiasm. We expect this to continue as the technology and its understanding develops. Gold and fiat currencies have taken a long time to be widely accepted and even today, are at times more volatile than Bitcoin. And volatility works both ways. Just as an investment in Bitcoin may lose value due to volatility, it may increase significantly. Bitcoin clearly has greater potential than gold or fiat currencies.

In most respects, Bitcoin is not a very good form of money. Bitcoin struggles and will continue to struggle as a medium of exchange. People focused on where they can or cannot buy their coffee and cake with Bitcoin miss the point. Bitcoin will continue to break ground as an alternative, superior store of value. Other scenarios to those listed above will likely develop, drawing upon Bitcoin’s groundbreaking properties. There is clearly a large enough market for demand to outweigh supply, as more people learn about and embrace a truly unique form of money.

And if one day it so happens that you can buy a cake with your Bitcoin, well that will be the cherry on top.

Test Driving The Future of Finance

In June 2017, Binance raised $15m in an ICO for Binance Coin (BNB). At the time, it wasn’t exactly clear what the value proposition was for BNB. BNB offered traders a discount on trading fees on Binance’s exchange, but this wasn’t exactly groundbreaking.

Fast forward 2 years and Binance is spearheading some impressive and innovative efforts. The most pressing is the creation of Binance’s Decentralised Exchange (DEX), which will be powered by Binance Coin.

Apollo Capital sees decentralised exchanges as exciting developments and crucial infrastructure in the world of decentralised finance promised by crypto assets. Decentralised exchanges promise minimal counterparty risk, lower costs and censorship resistance. We thought it would be an interesting exercise to sign up for the testnet and take our readers on a test drive through the future of finance.

Binance’s Testnet is only available to current Binance customers that have a minimum of 1 BNB. Perhaps this is a savvy marketing ploy, but the first step was creating a Binance account and purchasing 1 BNB (I was interested to observe that the only thing required to create a Binance account was an email address: no ID or anything else is required).

1 BNB Required.png

Next I needed to fund the account where I could receive 200 free testnet BNB sent to my wallet on the DEX.

Funding BNB.png
Funding Secured.png

The exchange looks similar to Binance’s main exchange. There are similar buy and sell ‘panels’ in the bottom right hand corner. There are markets on the left hand side and market depth on the right hand side. The noticeable difference however is there is very little activity. I’m not sure how much feedback Binance is receiving from people using the testnet, but I’d imagine it would be limited until there is a critical mass of users. The lack of activity is understanding, albeit a little frustrating for enthusiastic users like us. I placed an order to buy some BTC for BNB and despite being the lowest ASK, my order remained unfilled for a number of hours. A stark difference to the experience on Binance’s main exchange.

DEX Homescreen.png
BNB Buy:Sell.png

While it is promising to see the launch of the testnet, it appears that the real test will come with the launch of the exchange. As is often the case with crypto projects, given the immutable and censorship resistant nature of blockchains, teams tend to take their time to make sure everything is working perfectly. When considering the irreversible nature of transactions and the value of assets at stake, there is little room in crypto to “move fast and break things”.

Binance’s impressive record over the past 18 months in growing the world’s largest crypto exchange shows that it is highly capable of developing large projects at scale.

Readers might question why Binance would seek to disrupt its hugely profitable exchange, with another exchange that is decentralised. Aside from the immortal words of Steve Jobs, “if you don’t cannibalise yourself, someone else will,” part of the reason is answered by the new business model of crypto.

Traditional business models often revolve around extracting as much revenue as possible out of customers. Crypto assets can offer a new business model whereby the founding team is rewarded with a large allocation of tokens. The team then works on the project, encourages early adopters to look at and invest in the project and seeks to increase the value of the token. All going well, the team is rewarded by an asset that increases in value, as are the early adopters. The key difference of this new business model is alignment - all participants in the network are aligned to increase the value of the token. Binance seems to be a working example where the team have a large and early interest in increasing the value of its BNB holdings, even if this is at the expense of its main exchange. Perhaps it is telling that the team is willing to cannibalise its hugely profitable existing exchange, in place of something which may be even more valuable.

Disclosue: Apollo Capital is an investor in Binance Coin

Blockchain vs Crypto

“I’m big on blockchain, but I’m not so sure about crypto...”

...is a comment we’ve been hearing often.

There is a great deal of hype around blockchain revolutionising the world. Crypto is a scam, blockchain is robust.

Unfortunately, the hype, and this line of thinking, misses the mark.

Private blockchains are little more than glorified databases. They might lead to incremental improvements, but the greater technological leap forward is crypto networks - open, decentralised markets that allow participants to transact with a new basis of trust.

Blockchain and crypto are inseparable, and require a new, unfamiliar way of thinking.

Naval is a vocal critic of the ‘blockchain not crypto’ line of argument

Naval is a vocal critic of the ‘blockchain not crypto’ line of argument

Before I explain, let’s make sure the basics are clear.

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Blockchain is a ledger that keeps track of crypto tokens that are the subject of that ledger.

Let’s dive deeper, using Bitcoin as an example.

The “Blockchain form of accounting” was invented to keep track of bitcoin. When a Bitcoin transaction occurs, the transaction is bundled together with other transactions into a ‘block’. The network needs to validate the transactions, to ensure they are free from fraud and error. Bitcoin miners and market participants prevent double spending by validating the block of transactions using a combination of computational power and mathematical cryptography (the basis for the broader name ‘crypto’). Once the block of transactions is validated, it is added to all previous blocks of Bitcoin transactions. Herein lies the term blockchain - the block is added to a chain of blocks, and we have a blockchain.

Fun Fact: the term “blockchain” was not used in the original Bitcoin White Paper published in 2008.

Crypto (or “Open Blockchains”)

Crypto assets (or ‘cryptocurrencies’, ‘tokens’ or ‘coins’) are traded on a blockchain. In the case of the Bitcoin network, bitcoin is the subject of the transactions. Bitcoin is transacted from one person to another and the Bitcoin blockchain keeps track of the transactions. If we think of Bitcoin as digital money, the system of maintaining the ledger is critically important. A system is needed to introduce scarcity to digital assets, otherwise participants could simply create more money or transact fraudulently, undermining the whole system and inevitably making it worthless. The blockchain solves this problem by preventing double-spending and introducing scarcity to these digital assets.

Crypto networks are a technological breakthrough. Crypto networks redefine trust. For the first time, people can transact peer-to-peer globally, at scale without the need for a trusted third party. Crypto networks are decentralised. Whereas previously a centralised party such as a bank or financial institution was required to process a transaction, now, with blockchain technology, the network processes the transaction. Participants can transact with each other with a new basis of trust. Trust is placed in the open, verifiable system that in turn relies on mathematics and computer code. The removal of centralised third parties removes inefficiencies, costs and has created enormous value.

One of the key takeaways is that crypto networks are open. The network is open to anyone with an internet connection to both transact and validate transactions. The more independent users that take part in the verification, the more secure and decentralised the networks. This openness is related to the trust equation above. The openness lends itself to this new basis of trust.

“As society gives you money for giving society what it wants, blockchains give you coins for giving the network what it wants”

Open blockchains are not without limitations. Open blockchains are not a good solution to store data and they are currently limited by scaling issues. Both of these limitations relate to the structure of an open, decentralised network. Each piece of information stored in a blockchain, such as details of a transaction, sits in hundreds or more nodes around the world (more than 100,000 in the case of Bitcoin). This is in contrast to the alternative - a centralised repository that stores and controls the data. The structure of storing data in multiple places around the world can make open blockchains costly and slow, although it should be noted that some of the world’s best developers are working on ways to solve these problems.

Private Blockchain

A private blockchain seeks to modify blockchain technology for use by a private consortium. A private blockchain does not use crypto tokens or assets.

We have seen in the press a number of stories about how private blockchains will revolutionise the world, increasing efficiencies, saving companies billions of dollars. IBM has developed the “Hyperledger Fabric,” an emerging de-facto standard for enterprise blockchain platforms. Walmart has announced it is putting its lettuce supply on the blockchain, pushing suppliers to use IBM’s blockchain-based software. Global shipping giant Maersk has announced a collaboration with IBM, sharing information about individual shipment events in an effort to reduce shipping administration costs.

While the hype is impressive, it is exactly that, just hype. A private blockchain is a glorified database. There might be incremental improvements for re-structuring the private database, such as improved error checking and validity, but it’s hardly groundbreaking. If people tracking lettuce want to input incorrect information on the blockchain, they can still do it. If Walmart wants to reverse lettuce transactions, it still has the power to alter the data. IBM have taken new technology that doesn’t need a middleman and have made themselves the middleman.

If a trusted third party could administer the ledger, then a blockchain is a “solution in search of a problem.” CB Insights

In 2016, global mining behemoth BHP Billiton announced a program to apply blockchain technology to its supply chain, to enhance security around real-time mining data, including the movement of rock and fluid samples. The hope was coordinating disparate contractors and moving them onto a standardised blockchain based system. In April 2017, the program was abandoned. BHP cited immature technology that wasn’t ready for enterprise adoption. However, I suspect the real reason is a blockchain simply wasn’t required.

The groundbreaking part of blockchain technology is an open system in which anyone can participate, removing centralised third parties and transacting with a new basis of trust. A private blockchain is, by definition, closed and does not offer these qualities.

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Internet vs Intranet

A similar example to crypto versus closed blockchains is the Internet vs Intranet. In the early days of the internet, people used to talk about the intranet as the really big innovation - and the public internet as being untrustworthy and unregulated - "no one will ever bank or shop on an open internet". The rest, as we say, is history. It will likely be a similar outcome - private blockchains will likely exist but will not be nearly as significant as public blockchains.

Why The Hype?

The most obvious reason for the hype is the PR machine. “Blockchain” is like “Artificial Intelligence” and “Medical Marijuana” - it’s a buzzword du jour. At the start of the year, at the peak of the hype, Kodak announced KodakCoin, an Initial Coin Offering to help track photo rights and royalties for digital photographers. The stock price promptly tripled (although since the announcement, the stock price has unsurprisingly dropped back below pre-January prices). It is inevitable that we will continue to see more blockchain hype in the media.

I have developed my own theory as to why people like blockchain, but not crypto. My theory relates to availability bias - failure of logic due to placing more weight on information that is available to the individual. People are familiar with corporations and controlled entities. The idea of a blockchain being controlled by a government or company is easier to digest than an open blockchain. A private blockchain fits within the framework of familiarity. Crypto assets do not. Crypto networks are a new, difficult concept to understand. It’s a frictionless path to gravitate to the familiar, instead of wrestling with the new. I believe this is the main reason why people make the statement at the beginning of this article: “I’m big on blockchain, but not so sure about crypto.

The idea of a blockchain being controlled by a government or company is easier to digest than an open blockchain. A private blockchain fits within the framework of familiarity. Crypto assets do not.

Apollo Capital’s view is that understanding crypto assets requires a different, new way of thinking. An open-mind is a crucial first step. Public blockchains and transparency around transactions is a new concept, at odds with how society has previously functioned with closed, private transactions. Many of today’s crypto enthusiasts took a long time to understand crypto - myself included. We encourage people to keep an open mind, keep learning, reading, listening and following updates from reputable sources like Apollo Capital (#selfplug).

7 Reasons You Should Definitely Not Invest In Crypto - From a Guy Who Co-Founded A Crypto Fund

“I hate crypto”
“What’s all this bitcom (sic) business about”
“Crypto is a scam”

I have spoken to over a thousand investors since launching  in November 2017. Despite meeting a number of savvy investors, many of whom have invested in the Fund, the overwhelming response to crypto has been one of caution and scepticism. By now, I’ve heard just about every response to why you should not invest in crypto. While some reasons for not investing in crypto are sound, others highlight common failings in investor psychology.

Let’s dive in and explore the 7 reasons why you should definitely not invest in crypto.

1. I Don’t Understand It

This is clearly the best reason not to invest in crypto.

Investors need to understand what they’re investing in, whether it be crypto, derivatives or exotic fish. A basic understanding is essential. Warren Buffett has said repeatedly, “don’t invest in something you don’t understand.”

Without an understanding, investors will not have conviction in their investments, will not be prepared for the investment journey and will likely make a poor sell decision.

There are two options for an investor that doesn’t understand an investment opportunity.

The first is to move on. If you don’t understand crypto, if it’s too complex or you simply don’t have the inclination to learn, the wise decision is to move on. Investors cannot be faulted for knowing their limitations.

Many investors don’t realise there is a second option: homework. Read, listen, watch, discuss and learn about the investment opportunity. Warren Buffett avoided investing in many of today’s most successful tech companies because he didn’t understand them. Perhaps he would have been even more successful if he made the effort to understand Internet companies? Applying this lesson to crypto, today’s investors might be more successful if they do the homework to understand crypto. For those interested in learning, our resources pageis a wonderful place to start.

2. Volatility

Crypto is volatile. Apollo Capital recently analysed the average returns of crypto Fundsand the results are fascinating. In a series of returns from June 2013 to April 2018, monthly returns varied from over -30% to over 400%. These returns are not for the faint hearted.

Investors need to know themselves. This sounds like a cliche, but it is true, especially when it comes to investing in crypto. Some investors can stomach volatility, some cannot. If the thought of the value of your crypto portfolio dropping by 20% in a given month makes you weak at the knees, crypto is not for you.

Volatility is relative to position sizing. The volatility of a given investment is relative to how much is invested. If an investor invests their life savings in crypto, the volatility would be extremely difficult to manage. The thought of losing 20% of your life savings in one month is frightening. However, a position of 2%, 5% or 10% of an investor’s portfolio in crypto might mean the volatility is less daunting.

Let’s take an example of investing 2% of a portfolio in crypto. If crypto goes down by 50%, the investor will lose 1% of their portfolio. While not desirable, most sophisticated investors can handle such a loss. Many investors don’t realise the potential upside from a 2% position. In a recent study by Apollo Capital, a 2% allocation to crypto from Jan 2016 to Apr 2018 accounted for 50% of the portfolio’s return.

It is also important for investors to distinguish between the volatility of an investment and the volatility of a portfolio. Including a volatile investment, such as crypto, in a portfolio does not necessarily increase the overall volatility of the portfolio. It all depends how that investment is correlated to the other assets in the portfolio. Crypto assets have shown not to correlate to traditional asset classes. Put simply, even though crypto is volatile, including it in a diversified portfolio doesn’t make the portfolio more volatile. Investors can have the benefit of the return potential of crypto, while keeping the volatility of their overall portfolio constant.

3. Crypto Has No Use

Here, I will go no further than to quote Marc Andreessen’s New York Times’ article “Why Bitcoin Matters”:

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.

Crypto is not perfect. Nothing at this early stage of its development is faultless. We constantly remind investors of two crucial facts. The first is crypto is a technological breakthrough. The second is many of the world’s smartest computer scientists and technologists are working in crypto. And now after the ICO boom, some of the smartest minds in tech are working on delivering on the promise of this technology.

4. Illegal Uses

One of crypto’s first popular use cases was for nefarious purposes. Silk Road was an online marketplace where users could buy and sell illegal goods, including illicit drugs and firearms. Users generally paid for goods with Bitcoin, thinking it was untraceable and anonymous. Many bad actors have moved on from Bitcoin, realising that it is in fact traceable.

The question becomes whether these cryptos are used solely for illegal activities, or whether this is just one use-case. For example, the Internet is used for illegal activities, including piracy, identity theft and terrorists communications. Should we call for a ban of the Internet because it is used for Illegal activities? Yes the Internet is used widely for illegal activities, but this is a tiny percentage of the overall use of the Internet. Applying this to crypto, what percentage of the use case of crypto needs to be for illegal activities before it is worth banning? 10%? 50%? 100%? This is a tough question and different people will have different answers.

It’s impossible to know how widely crypto is used for illegal activities. Top researchers in the space have stated that any reported figures are, at best, an estimate. There needs to be a clear distinction between something that is designed for illegal activities and something that might be used for illegal activities. If something is designed solely or primarily for illegal activities, it should be shut down. Silk Road is a clear example. However, we know there are many use cases for crypto which is not illegal and indeed, is a force for good. It appears naive to avoid investing in something or using it, simply because it can be used for illegal activities.

5. Another Bitcoin

A common response I have heard from wary investors is will Bitcoin be the Myspace to another crypto’s Facebook? It’s a good question and there are two key responses.

The first is network effect. Network effects have been called the business model of the Internet. Bitcoin has the largest network and the most number of users. At the time of writing, Bitcoin’s market cap and daily traded volume is roughly three times that of Ethereum, the second largest crypto. This is not to say that Bitcoin will be dominant for eternity. Network effects can be competed away. Myspace and Facebook is a well-known example. However, currently, Bitcoin is the dominant crypto and it will be extremely difficult for another “money-like crypto” to compete.

The second response is a portfolio approach. Investing in crypto is best done in a diversified portfolio. There is no reason why an investor cannot invest in both “Myspace” and “Facebook.” We don’t need to be exactly sure of which one will win, we don’t need to put all our eggs in one basket. With a technology this young, the best approach is to invest in a range of crypto projects which show enormous potential.

6. Crypto Has No Intrinsic Value

Another reason not to invest in crypto is because it has no intrinsic value. Crypto does not pay dividends, is not tied to cash flows, has no right to other assets.

This line of thinking requires a broader perspective. Let’s consider fiat currency. A $5 note has no intrinsic value, it’s simply a fancy piece of paper. The piece of paper is worth $5 because we all believe it’s worth $5. Some will argue that it’s backed by the government which issues the currency, but this doesn’t point to any intrinsic value. There have been plenty of cases where this backing has become worthless, like the current crisis in Venezuela.

Another example is gold. Gold has been the worldwide store of value for thousands of years, yet where is its intrinsic value? Gold is valuable because we all believe its valuable. In both cases of fiat currency and gold, neither has any intrinsic value. Yet they are valued because we are told to value them and we collectively believe in their value. We all believe they have value until we stop believing.

We could argue that this applies to any asset class — there is no such thing as intrinsic value. The value of all assets comes from the perception that other investors, often called the market, would be willing to pay for that asset. In some asset classes like equities and real estate, the models used to value the asset are well established and well known by market participants. The value of other assets, like commodities, currencies and crypto, are determined by the forces of supply and demand. Investors point to discounted cash flow models and net present values, but the only model that truly works to value an asset is working out what someone else is willing to pay for it. That’s where value comes from. In crypto, the asset class is young, scarce, not well understood, is a technological breakthrough and we believe the demand for these assets will increase in the future.

7. Wait and See

At the start of the article, I mentioned that some of the reasons for not investing in crypto are examples of failures in investor psychology. The “Wait and See” approach is the most serious of these failings. In most cases, it will only lead to worse investor outcomes.

Let’s analyse the scenarios for the Wait and See investor after crypto prices go up, go down or go sideways

  1. Crypto Prices Go Up — prices have gone up, therefore crypto is great and I’m now comfortable to invest, albeit at a higher entry point
  2. Crypto Prices Go Down — the investor gets scared, there must be something wrong with crypto, and decides not to invest
  3. Crypto Prices Go Sideways — crypto isn’t that impressive, what’s all the fuss about?

One of the biggest lessons from co-founding Apollo Capital is how I have observed countless investors, including sophisticated and professional investors, using price as a proxy for quality. At Apollo Capital, the interest we have received in investing in crypto has been directly correlated to the price of crypto. Prices goes up, everyone wants to invest. Prices go down, no one wants to. We all like to believe we are capable of going against the heard, being the contrarian investor who reaps the uncommon gains, but most of this is self-delusion. I haven’t heard one investor say “I’d like to invest, but I’d like to see prices drop to buy in cheaper.”

The approach we advise is the same as analysing any other asset class: it comes down to fundamentals. While crypto assets don’t have fundamental earnings, business plan or asset backing, the fundamentals in crypto is the technology. Investors need to understand or at least appreciate that crypto is a technological breakthrough, it is early, and that there could be huge demand for these assets in the future. Price action should have no impact on investors’ decision making.


Crypto is not for everyone. In the basket of alternative assets, it is an alternative asset. There are a number of sound reasons why investors should not invest in crypto. Yet, through my own personal journey in crypto, I learnt an important lesson. When I first heard of Bitcoin, I dismissed it almost instantly. It might have been fear of the unknown or because crypto is difficult to understand. It was easier for me to dismiss crypto and move on, than to keep an open mind and learn about it. Now, with the benefit of perfect hindsight, I realise I should have set aside a few hours and learnt about this fascinating new technology. It would not have cost much to invest a small percentage of my portfolio. At worst I would have lost my investment, shrugged it off and moved on. Instead, I was later than I would have liked to what is shaping up to be the biggest investment opportunity of my lifetime. I wonder whether the same applies to investors today who are yet to invest in crypto.

Tim Johnston is the Managing Director of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please head to apollocap.io

Should you add crypto to your investment portfolio?

Investing in crypto assets before 2017 was a very niche activity, largely limited to technologists, libertarians, and some speculative investors. This is changing, and fast.

Goldman Sachs, perhaps the most storied name in finance, has confirmed their intention to trade bitcoin. And just last week Larry Fink, the CEO of the largest asset manager in the world, BlackRock, confirmed that they have a assembled a working group to look into cryptocurrencies and blockchain technology.

Bitcoin was the first crypto asset, the first asset that enabled outright digital ownership. The Bitcoin blockchain is used to transfer value over the Internet while disintermediating financial institutions. General purpose blockchains such as Ethereum could dis-intermediate many other industries. Today, there are 1,600 crypto assets, trading 24/7. 

Here we try to understand how these assets perform when placed within a diversified portfolio of traditional assets, and not just as an independent, emerging asset-class. 

Crypto in Australian Portfolios

This article analyses a portfolio of crypto assets together with Australian stocks and bonds. 

The four hypothetical portfolios analysed here are:

   1.    60% Australian equities; 40% Australian Bonds;

   2.    59% Australian equities; 39% Australian Bonds; 2% CryptoAssets;

   3.    57.5% Australian equities; 37.5% Australian Bonds; 5% Crypto Assets;

   4.    55% Australian equities; 35% Australian Bonds; 10% Crypto Assets.

We tested these portfolios from December 31 2016 until April 31 2018  using monthly rebalancing. This period includes a sharp downturn in crypto prices.


Even the portfolios with a minor allocation of crypto performed significantly better than the portfolio without exposure. 

For this time period, there has been a direct correlation between increasing crypto exposure and outsized investment returns. 

For this time period, there has been a direct correlation between increasing crypto exposure and outsized investment returns. 

Source: Apollo Capital

Source: Apollo Capital

The return with 0% allocation to crypto assets was 17.10%; with 10% crypto allocation, the portfolio returned 124.40%

    •      Allocating 2% crypto in the portfolio was responsible for almost 50% of investment returns; 5% translated to 72.89% of returns; with 10%, 86.22% of returns. 

    •      The Sharpe Ratio increased in line with increasing exposure of crypto assets. The Sharpe Ratio determines how much an investor is compensated per unit of risk taken on. It is calculated by determining the average return earned in excess of the risk-free rate (in this case the 10 year Australian government bond return) per unit of volatility. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return. It’s a really useful way to analyse crypto assets because while the returns have been substantial, so has the asset class’ volatility.

We can see that for these portfolios investors have been compensated generously for any added volatility in the portfolio due to crypto assets.

Three Take-Aways

1. Non-correlation

Crypto asset class have a low correlation to other asset classes and can thus provide a diversification benefit. The below correlations were completed for the time period June 2, 2017 to June 8, 2018. 

The correlation of crypto with other crypto assets and asset classes. Source: Apollo Capital

The correlation of crypto with other crypto assets and asset classes. Source: Apollo Capital

“Diversification is the one free lunch of investing, and when you see a free lunch, the only rational thing to do it eat” — Cliff Asness, Managing Principal and CIO at AQR Capital Management 

2. Efficient Frontier, Optimised 

An ‘efficient frontier’ of portfolios can be built, where returns are optimised per unit of risk. 

As we’ve seen, crypto assets aren’t correlated with other asset classes, and they have experienced significant capital growth. These attributes make it ideal in portfolio construction. Despite this, the vast majority of portfolios fail to include even a small amount. We believe that this omission means that current portfolios are less than ideally constructed. 

We believe that the efficient frontier shifts up if we include crypto assets in our portfolio. In other words, the risk-return profile can improve with the inclusion of crypto assets. 

3. Barbell Investing with Crypto assets

The barbell investment thesis was made famous by Nicholas Nassim Taleb, the investor and author.

The barbell theory’s prime directive is unambiguous: Stay as far from the middle as possible. Taleb invests in emerging, even speculative, investment products with very high potential upside; his other investments are the safest possible assets to invest in. 

“If you know that you are vulnerable to prediction errors, and … accept that most “risk measures” are flawed, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative.” — Nicholas Nassim Taleb

Crypto fits very comfortably into the barbell investment thesis. Crypto assets remain a small asset class that still shows very high volatility. Because crypto has the potential to reengineer large swathes of the economy, we believe an investor has high potential upside.

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All the while, by keeping an investors position small, to between 2–10%, the downward risk is minimised while remaining sufficiently exposed. 


This analysis has demonstrated that including a small portion of crypto assets in a diversified, Australian portfolio of stocks and bonds has greatly benefited investors. This is not only from a capital growth perspective but also from a risk/reward perspective. 

Even when the downside is limited (2% of a diversified portfolio), the upside has been shown to be very substantial (responsible for almost 50% of total returns). As large international investors are waking up to the opportunity of crypto assets, we believe now its time to pay attention.

Apollo Capital is Australia’s premier crypto fund, allowing sophisticated wholesale investors to gain access to investment opportunities within the crypto asset market. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions. Past performance not indicative of future returns.

Published: Friday, July 27, 2018

[This article was originally published in Switzer]


Analysing Crypto Fund Returns

A common question we receive at Apollo is what return can investors expect from investing in the Fund. It is an impossible question to answer. Yet, while the disclaimer “Past performance is not a reliable indicator of future performance” is suitable, it is interesting to examine past returns from crypto funds. Such analysis doesn’t necessarily answer the previous question, but it does offer insight into the range of possible returns and volatility for which investors should be prepared.

At Apollo Capital, we undertook this research by examining the returns of the average crypto hedge fund, made available by Eurekahedge. Eurekahedge maintains a database of over 30,000 hedge funds, including crypto hedge funds. The Eurekahedge index provided 58 monthly data points from June 2013 to April 2018. The data relates to the average performance of crypto funds monitored by Eurekahedge. For ease of reference, we can consider this data to represent the average crypto fund return.

From analysing the data, we can extract results like Average Returns and the Largest Monthly Return. A deeper dive reveals even more insightful information like the Average Return in Up Months and Average Return in Down Months.

The Return for the period was 21,710%, which equates to a compound annual return of 304%.

The Mean Monthly Return from June 2013 to April 2018 was 16.1%. The Median Monthly Return was 7.6%. The difference between the Mean and Median return can be explained by a few bumper months which dragged the Mean return up.

The Largest Monthly Return was 405.3%, recorded in November 2013.

The Largest Monthly Drawdown was -29.9% in March 2018.

There were 36 Up Months compared to 22 Down Months.

The Average Return in Up Months was 33.9% and the Average Return in Down Months was -12.9%.

The lowest return in an Up Month was 2.0% and the highest return in a Down Month was -1.4%.

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We also charted a histogram of the returns.

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We can see that most returns fell within the range of -20% to +30%. It is easy to observe this without stopping to reflect. A -15% return in a given month has not been uncommon.

On the positive side, we can see that large returns have been frequent. There were a total of 5 months that returned greater than 50% for the month. Returns of +30%, +40% and greater have not been uncommon.

Returns that are common in crypto would be classed as extreme in nearly every other asset class. We could imagine the mayhem that would follow a monthly return of -15% in global equities. The same return in crypto is just another month. We believe the reason for this is clear - crypto is a young asset class and will likely continue to be volatile as it matures. We believe volatility will settle as institutional money enters the space. 

For us, the most important lesson is that crypto investors need to be prepared. Returns that can otherwise be classed as extreme are not uncommon in crypto and most importantly, should not come as a surprise to investors.

The Apollo Capital Fund has been set up with a philosophy of long term investing. We believe that in crypto, and arguably other asset classes, the largest returns are had over the long term. To some extent, we are indifferent to the monthly volatility. We believe patient investors with an understanding of the investment thesis and an understanding of the expected volatility of returns will be rewarded.