HODL Capital: Scams Everywhere. Only Bitcoin And a Select Few Other Projects Are Currently True Value Offerings

Interview
21.08.2018

While the crypto market keeps on moving down, it becomes even harder to convince unfortunate retail investors that there is a real value in Bitcoin and its underlying technology.

There is also a huge information bubble in mainstream media around falling prices, the “inevitable death of Bitcoin”, as well as various scams and hacks. To a large extent this stops people from seeing the long term perspective for digital assets, and with no Lambos outside their houses, they often forget what Bitcoin is about and why it actually matters.

That is why there is panic selling and a growing number of class action suits against crypto projects, with lack of technical sophistication being the root cause for Ponzi allegations against Bitcoin.

Back in 1982 cryptographer David Chaum released the blind signatures paper which laid the foundation for almost 30 years protocols’ evolution and eventually led to the birth of Bitcoin.

The cornerstone of Bitcoin is that it eliminates intermediaries. It’s the first ever trustless peer-to-peer electronic cash system which solves the problem many people were trying to find the answer to. Those are things that make Bitcoin valuable, no matter what its price is.

In an exclusive interview with ForkLog, Thomas Pacchia, CIO of New-York-based investment firm HODL Capital, spoke about the nature of Bitcoin, reasons behind his maximalist views, the current state of the market and the of “blockchain not Bitcoin” that seems to gain popularity within certain circles of the industry.

ForkLog: Before embracing blockchain & crypto you worked for large multinational banks and law firms. What was the reason for you to dive into digital asset space?

Thomas: I guess I found out about bitcoin from one of the earliest article about it in Wired Magazine. There are thousands of such articles now, but back in November, 2011 it was one of the first. It was really interesting from the academic point of view and I started to explore the companies mentioned and opportunities for investors.

I think the main reason why I became obsessed with bitcoin then is because of its antifragility and resilience to so many types of attacks. I felt that there was not enough active conversation and academic research of the bitcoin ecosystem that time.

The article was published at the time of the first major BTC price crash from $30 back to $2. Many of the early adopters then claimed that bitcoin tech is a fundamental shift, but media thought the falling price was the end of the party.

ForkLog: I have some existential questions for you. What is bitcoin? Is it a currency or investment asset? How can you explain the essence of bitcoin?

Thomas: My view is that bitcoin is an Internet protocol that has its own unique distinguishing factors for asset scarcity, rate of supply, and crypto-economics more broadly. It has started to resemble an asset that looks like a store of value. It’s definitely not a currency in the traditional sense yet, but I think second layer solutions could help it to get there. But what we’re starting to see if the building blocks of a unique store of value.

That really is derived from security of the network and scarcity of the asset itself. I like to focus on supply side of bitcoin which accounts for quite possibly the most scarce asset the world has ever seen. We have fixed and transparent supply and rate of inflation. We don’t see such features in any other assets, not even gold.

I know that BTC price achieved first highs partially due to its use case as Silk Road payment rail and the Mt. Gox collapse, but there were also early speculators who saw the potential of the rush. So, even then bitcoin whales considered it as investment.

For now deflationary model is efficient, but the technology is still on the earliest stage of development, so there are some systemic risks which can substantially slow down the progress.

ForkLog: Do you believe that scarcity is the most valuable feature of bitcoin?

Thomas: Yes, scarcity and security.

ForkLog: And what about anonymity?

Thomas: For bitcoin it’s not the most valuable one. I think that Monero, for example, provides better anonymity than bitcoin, but it has its own problems – a speed, transaction cost and concerns about scalability. I don’t even think that anybody really uses ZCash for anonymity purposes today. ZCash’s anonymity set is not nearly robust enough.

People take advantage of bitcoin network speed, because it allows to move funds to anywhere in the world in a matter of minutes or hours. On the one hand it’s hard for law enforcement to keep pace with the speed of transfers, and yet on the other hand there is always the digital trail which can be a really powerful tool to work with over time. I think it can be called a balance between speed and opportunities for authorities to keep track.

ForkLog: Some prominent economists claim that anonymity is the only reason why people use bitcoin.

Thomas: They’re obviously wrong. They have a sort of wilful ignorance for the technology, they continue to make rudimentary mistakes about the nature of bitcoin. For me it seems like an agenda, but I don’t know if they have personal interest in it.

It’s a common mistake to think bitcoin is anonymous or untraceable. Most of big exchanges allow you to open accounts only after completing rigorous KYC procedure similar to, or even with higher requirements than many major banks. Once you have certain data points, bitcoin transactions are recorded on the public ledger, so you always have the bread crumbs left behind.

ForkLog: Will blockchain exist without bitcoin and crypto? Is there any strong use case to invest other than digital currencies?

Thomas: I haven’t seen any compelling use cases of blockchain without cryptocurrencies yet. It doesn’t seem viable or compelling for me to use blockchain as a database as we’ve seen massive costs and inefficiencies to spool up and secure the network. When we look at things like supply chains management that keep track of a large amount of data across lots of different stakeholders and participants, it really depends on the quality of data they’re putting in. This point makes such use cases truly corruptible.

Blockchain ecosystems should be self-containable and simplistic, use case for bitcoin is self apparent here since it’s simply the reassignment of a value of bitcoin to another address. But when we have lots of externalities, when we start to talk about oracles and other data elements that need to be incorporated into a blockchain, we really talk about a distributed database, not blockchain.

ForkLog: Murder-for-hire markets were established recently in Augur blockchain. What do you think about this kind of use case?

Thomas: So it’s really an interesting problem, because blockchains are supposed to have an element of censorship resistance at itscore. Obviously murder-for-hire markets are should not be tolerated anywhere in the world but the early indication is some of these projects may help them become a bit harder to prevent.

When we talk about people who work on these projects and protocols, it’s unclear whether they have an ability to censor certain markets, whether they should or whether they have to be required by law to do this. I don’t really know answers, but this is a big problem for many blockchain teams. It will be interesting to see how it all plays out.

ForkLog: Even if they have a will to censor this market, the real question is about node operators will to accept the upgrade. Because if they don’t, the market will flourish.

Thomas: Yes, you’re right from the tech perspective, but it’s really hard to explain to those who don’t get how blockchain works. For example, elder statements and politicians aren’t going to devote the time and energy required to understand these distinctions. I think they will be upset about the fact that such things exist and look for ways to ban or contain them, as they probably should. But they won’t understand how effective these reactions are in the long run, and whether it solves or exacerbates the problem. That’s true for most of the people on the planet, because we are in extreme minority to those who don’t have a technical sophistication to lead this conversation.

ForkLog: There is great depression on crypto markets now, but institutional investors keep coming and embracing it. I mean Andreessen Horowitz, Intercontinental Exchange, Grayscale Investments, Mike Novogratz, maybe even Goldman Sachs and many new crypto funds. Why do you think the current situation doesn’t seem to scare them off at all?

Thomas: I think that there is a reluctance to participate directly in the spot market. We’ve seen CBOE, CME and Goldman Sachs are interested in the options and futures markets but still little interest in the spot. There is a clear hesitation to become involved with bitcoin itself, they are more comfortable with its synthetic versions.

There could be a couple of reasons for this. Custodial solutions are still few and far between. There are also a number of issues with how these businesses balance regulatory requirements without sacrificing aspects of security or technical access.There are also lack of insurance products, and basic access to existing financial infrastructure for the space. So many things have to come to the market to make these people to be comfortable with bitcoin, but there is a real desire to work with the new asset class which has a strong potential to grow.

Nobody wants to miss the next wave of the internet age; that’d be a bad look for CTO’s and strategy groups in large banks. For many organizations the safe answer is to continue to say no to ground breaking products and monitor the space.

But when we talk about banks’ attitude, we should remember that bitcoin empowers the end users and its rather difficult to find viable long term business models in bitcoin. This is an existential problem for those institutions and they are uncomfortable with that. That could be the reason why they prefer synthetic instruments, it maintains a certain level of control through complexity.

ForkLog: There are lots of rumors around Goldman Sachs stance on crypto. Could Goldman intentionally manipulate the market through rumors?

Thomas: I don’t think it’s likely. Cryptocurrencies is still pretty small market if compared to those markets where Goldman typically plays in. I believe that they are still on the educational level. Judging by the articles covering their interest in the space there is a bit of internal conflict going on. One part of it thinks that bitcoin is dead and will never come back. And then Bloomberg says Goldman wants to launch a custody for crypto funds. I think it’s quite normal for such big organizations to have different opinions in different units.

ForkLog: Some experts claim that the futures launch by CME and CBOE allowed some players to manipulate the market and was the reason behind bitcoin price collapse this year.

Thomas: It could have been a contributing factor, but I don’t think it was the sole cause for the pull back. 2017 was a pretty incredible run, so a pullback seems reasonable in retrospect. The crypto ecosystem has a tendency to over-engineer market moves. The futures market volume is still relatively low, these products are still gaining traction, so I’m not sure if they have enough influence to significantly hurt the market.

ForkLog: Do you believe that bitcoin-ETF will be accepted by SEC? Will it trigger the next bull run?

Thomas: As for me a market access and a market infrastructure for cryptocurrencies is still very immature. The current level of adoption still looks rather low for institutions to come in a meaningful way.

But we also see that there is Bitcoin Investments Trust from Barry Silbert which already provide investors with exposure to bitcoin. This product trades at a significant premium over the price of bitcoin. This mismatch shows there’s demand for a bitcoin product that investors can plug into brokerage and retirement accounts.

ForkLog: How does HODL Capital work? What do your investments look like? What strategies do you use?

Thomas: We are bitcoin maximalists at heart, but we also have stakes in some coins that could provide solutions to perceived or actual risks in bitcoin. For example, bitcoin’s transparency could present a fungibility problem down the road, so we think that privacy coins are valuable in that they explore solutions to this potential problem. Litecoin is another example of a coin that is additive to bitcoin’s broader thesis. It resembles something like a skin in the game testnet that was important during the SegWit debates.

There is value in a few other protocols out there, four or five, but the majority of coins are just a waste of time, intentional or unintentional scams.

The most of crypto funds have transformed into traditional venture capital firms looking for an access to projects.

Our main strategy is to HODL for the long term. We look at the space in longer term checkpoints, 5 to 10 years down the road which in crypto might as well be centuries. When taking a broader view, the basic building blocks of security, decentralization, and threat vectors become much more important. So we tend to obsess over these details more so than the short term hype cycle or “when ETF?”

ForkLog: Has the ICO era come to an end?

Thomas: No! I think it’s just transforming into tokenized security offerings. There will be a couple more rounds of this. When teams make it look easy to raise $1 billion through ICO, follow on projects will work pretty hard to keep the party going. While I would like to move on from the ICO era, but I don’t think it will happen soon.

Many projects have completely failed to deliver any results, their tokens are useless, but Pump & Dumps still occur. These are most likely money laundering schemes or traps looking to capture retail investors. It takes very little to keep zombie coins alive. In the last year or so a couple of very old coins that were essentially dead have been brought back to life. I don’t know how it stops on the global level, but I think there is some level of responsibility to call out the scams when you see them.

Thomas Pacchia was interviewed by Nick Schteringard

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