Ben Strack

<div id="highlights-block_6112e73dfc28b" class="highlights">
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 <li>Off The Chain Capital uses its network of motivated sellers of blockchain assets to negotiate discounts and bolster returns </li>
 <li>The four models Off The Chain uses to value bitcoin each indicate that the cryptocurrency is undervalued</li>
 </ul>
 
</div>



With many different investment options providing exposure to a maturing cryptocurrency market now available to investors, Blockworks is asking fund managers about the strategies they employ for their clients.&nbsp;



One such firm is <a href="https://offthechain.capital/about/" target="_blank" rel="noreferrer noopener">Off The Chain Capital</a>, which was founded as a family office in 2016. The company expanded beyond just serving family and friends in 2019 by opening up the fund to qualified outside investors.



To learn more about what makes <a href="https://cms.blockworks.co/off-the-chain-capital-announces-160-million-fund/" target="_blank" rel="noreferrer noopener">Off The Chain Capital’s</a> fund different from other investment offerings in the space, Blockworks recently spoke with Brian Estes, the firm’s CEO and CIO.



Strack: How would you describe your fund to a prospective investor?



Estes: “If I was an institutional investment consultant and I looked at what we were doing, I wouldn’t classify what we’re doing as a blockchain fund. I would classify it as a value investment fund with a specialty niche in blockchain assets.



“We’re looking for undervalued equity and mispriced digital assets, so we’re using … the Graham and Dodd value metrics &#8211; Warren Buffett uses these same metrics &#8211; to find undervalued value opportunities. We’re just focused on finding those in the blockchain space.”



Strack: What are the goals of the fund? How do you achieve those goals?



Estes: “The two primary goals are to outperform bitcoin and to do it with less volatility. There’s only two funds over the last four years that have outperformed bitcoin. Our fund is one of those, and the other one is <a href="https://privatefunddata.com/private-funds/polychain-fund-i-lp/" target="_blank" rel="noreferrer noopener">Polychain Fund I</a>.&nbsp;



“It was a big decision for us to actually open up the fund to outside investors because what I’ve told people for a long time is just buy bitcoin … and hold it for the next 10 years and you’ll do just fine. I didn’t feel comfortable charging people to manage their money when they can just basically do it for free by owning bitcoin. But once we figured out how to outperform bitcoin and do it with less volatility, that’s when we opened up the fund to outside investors.



“Our strategic advantage is [our] network. I’ve been in this space since 2014 and I have a pretty expansive network to help us source people who are forced or motivated sellers of blockchain assets. These are people who are early seed investors or early employees at blockchain companies, and these companies have been around like three to five years. Now they’re post-A round, they’re profitable, they have little or no debt, and they’re on a path to liquidity.&nbsp;



“What we’re looking for is those types of companies, but we want to buy those from early employees or seed investors who are needing liquidity or are motivated sellers so that we can negotiate a nice discount on those.”



Strack: How is your strategy different from others out there?



Estes: “If you look at where the money’s flowing and where the crypto assets are being managed, it’s almost all in the venture space. There are new venture funds popping up all the time and the existing venture funds like at Polychain, Pantera, Paradigm and a16z.



“a16z just raised 2 or 3 billion for <a href="https://cms.blockworks.co/andreessen-horowitz-launches-2-2b-crypto-fund/">their new crypto fund</a>, but all of that money is chasing a limited supply of new startups in the blockchain space, and we’re doing the opposite of that.&nbsp;



“We’re the only value manager I know of that we’re waiting for these new ventures to play out. We come in three to five years later when these early seed investors or employees need liquidity and then we’re buying basically at the same valuation from three to five years ago.”



Strack: Can you share an example of Off The Chain buying at a discount?&nbsp;



Estes: “Our first entry into <a href="https://bitpay.com" target="_blank" rel="noreferrer noopener">BitPay</a> we bought about nine months ago. BitPay has been around for 10 years. It’s the oldest surviving blockchain company, and our first investment was at the seed round valuation 10 years ago.&nbsp;



Their B-round was in 2018 and there were some sellers who wanted liquidity, so we were able to secure a significant discount on what the B-round was three years earlier.



Strack: What is a common misconception about your firm?



Estes: “People think we’re a bitcoin fund and we’re not. We have exposure to bitcoin’s performance but we’re doing it in such a way where we’re getting a discount on bitcoin.



“I’ll give you an example &#8211; 7% of our portfolio is in Mt. Gox bankruptcy claims. Mt. Gox was the largest custodian of bitcoin back in 2014. <a href="https://www.reuters.com/article/us-bitcoin-mtgox-bankruptcy/mt-gox-files-for-bankruptcy-hit-with-lawsuit-idUSBREA1R0FX20140228" target="_blank" rel="noreferrer noopener">They went bankrupt</a> and the bankruptcy trustee was able to recover 141,000 bitcoin, so if you had bitcoin at Mt. Gox, you’re due your proportional amount of the 141,000 bitcoin that they’re custodying today.&nbsp;



“These Mt. Gox bankruptcy claims they’ve been illiquid for seven years, and we started buying these two years ago. Our average cost is $1,247 per claim and there’s about $6,000 worth of assets in each claim if you count the bitcoin, the bitcoin cash and the currency.



“The bankruptcy is coming to an end. The trustee is making arrangements to distribute the assets and within the next year, we’ll be delivered $6,000 bitcoin, bitcoin cash and currency. So that’s what we’re looking for. That’s a way we get exposure to bitcoin but we’re getting like a 70% discount on bitcoin doing it that way.”



Strack: What do you think is a common misconception of the crypto space more broadly?&nbsp;



Estes: “You have to think differently about how to value blockchain assets, because we’re all used to valuing companies using a [price-to-earnings] ratio, or price-to-cash flow or price-to-book. Or we’re used to valuing bonds using credit analysis or real estate using cash flow or location analysis.



“But with blockchain assets, like bitcoin, these are networks, and the way you value a network is different from the way you value traditional assets like stocks, bonds and real estate. We have models that help us value bitcoin based off of network. One of those models is called Metcalfe’s Law, so we have this Metcalfe’s model that helps us value bitcoin.



“The misunderstanding that people have is they don’t know how to value bitcoin, and that’s the first thing you need to understand. Before you determine what price that you’re going to pay for it, you need to know what the value is. We have four models that we use to value bitcoin, and all four of these models tell us today that bitcoin’s undervalued, so now’s a good time to be buying it.”



Strack: Do you plan to launch other funds or strategies in the future?



Estes: “The answer is no, and the reason is that our competitive advantage is the network that we have to source these special opportunities. If we have a second fund, it’d be kind of a similar fund, and then we’re having to decide which fund to put these special opportunities in.



“There’s only a certain number of shares or dollar amount that we can source and we have plenty of capacity in our current fund to bring in new money. We could raise another $200 million in the fund and put it to work in the next 30 days.



“If we had a different strategy &#8211; and we’ve gone through this in our planning committees &#8211; what would that strategy be? One strategy is just to be a bitcoin-only fund, but that doesn’t do anything for investors. You’re charging people just to own bitcoin and they can just go buy bitcoin at PayPal or Coinbase or the Square CashApp or Venmo now. Why compete with that?