BY JUDY CARMACK BROSS
Dan Patterson and Andrew Steinwold will launch Polynexus Capital this fall, a cryptoasset hedge based here in Chicago. Friends since they attended the Forest Bluff Montessori School in Lake Bluff at six, they kept in touch despite attending different high schools and colleges, visiting one another while both worked in Asia.
For the past year, Dan and Andrew have been structuring and fundraising for the fund, putting legal and other guidelines in place while furthering their research on the cutting edge financial asset class.
We asked Dan and Andrew to tell Classic Chicago all about the cryptoasset phenomenon. As Andrew says, “The potential applications of this technology are only beginning to be understood.”
Bitcoin, at its most basic, is a digital asset (commonly referred to as “digital gold”), that enables seamless storage and transfer of value around the world. The blockchain is a type of public ledger that records the history of all Bitcoin transactions. New Bitcoin are generated, and added to the ledger, roughly every 10 minutes when a person wins a race to solve a complex mathematical puzzle. The solving of this puzzle is what provides security to the entire network, as all participants must agree that the puzzle has been answered correctly before moving on to the next. The total quantity of Bitcoin ever to be minted is 21 million, and the rate of production decreases over time. As of today, ~17.2 million Bitcoin are in circulation. The network is “decentralized” in that any person in the world can open their computer and participate directly in the operation of the network, without needing approval from a central authority or governing body. It is this “permissionless” characteristic that is revolutionary and grants Bitcoin the opportunity to become the internet’s first native digital asset.
How did you decide to get involved with this emerging industry? What about it caught your eye?
Andrew: I first became involved in this industry in 2013 when I was bit by the ‘Bitcoin bug’ and began accumulating a small position. But it wasn’t until 2014, while living in Dubai, that I began to grasp the real-world applications of this technology. The realization that blockchain enabled the transfer of value across any border at fractions of a penny, with no one’s approval, sold me on its future potential. I haven’t turned back since.
Dan: I discovered Bitcoin during its run-up at the end of 2013 that corresponded with a number of newsworthy events. During October and November of 2013, the BTC price rose from around $100 to over $1,000, driven by new wave of retail interest. I was enthralled by the technology’s potential but inherently skeptical of its grandiose claims. Acknowledging the immense risk-return profile of such an asset, I began investing small amounts to learn more about, and gain exposure to, Bitcoin.
Have you always been interested in being on the cutting edge of something new and exciting?
A: My love affair with cutting edge technology spawned from my interest in blockchain, the technology underpinning Bitcoin and other cryptoassets. I explored a number of blockchain-related projects over the first couple years, focusing primarily on remittance and payment networks. Those experiences were invaluable as they taught me about the headwinds that new crypto projects face and some of the difficulties associated with their operations.
D: As an engineer by training, I have always been fascinated with the latest in emerging tech. Some of my favorite investing trends to follow over the past few years have been 3D printing, graphene materials, quantum computing, and, of course, distributed networks. This innate interest found me working a summer at Boeing in an automated composites R&D lab. While I appreciate the value of getting my hands dirty, especially in carbon fiber, I learned that my skills are best suited allocating capital to these exciting fields, rather than operating in them myself.
Are you both from Lake Forest?
D: Yes, we are both Lake Forest natives, born and raised. We met as kids back at Forest Bluff Montessori when we were six. Our collegiate and professional lives took us far from the Chicagoland area, but we are excited to be back to launch our firm.
What are you backgrounds and how did you end up in the cryptoasset space?
A: My background is in operational management, specifically construction management (Ethiopia) and hospitality management (Saudi Arabia and the United Arab Emirates). It was during my time abroad that I began spending time educating myself on cryptoassets and meeting everyone possible in the space. In 2016 I moved back to the United States to focus full-time on this emerging industry.
D: After graduating from Duke in 2014, having studied mechanical engineering and finance, I moved to Hong Kong to work for a private equity firm focusing on outbound Chinese M&A into transportation and logistics sectors in Southeast Asia. I spent a lot of time learning to diligence, value, and optimize small and mid-cap companies in the region.
I was first introduced to Bitcoin in late 2013. It was a fun time to be investing, as any media attention was extremely rare and always negative. The movement was high energy, grass roots, and held lofty ideals. By 2016 my crypto evangelizing, and subsequent returns, pushed a number of friends and colleagues into asking me to invest on their behalf. Around that time, I was lucky enough to find Andrew working on similar projects. The rest fell into place from there.
What do you think is most exciting or promising about this new technology?
A: We are incredibly excited about this new asset class, as we believe it represents a technological paradigm shift away from centralized and permissioned markets. We view the coming decade as a generational investment opportunity, similar to the likes of the railroads and internet. The advent of Bitcoin and distributed ledger technologies has produced a means of transmitting value and information faster, more securely, and more openly than previously possible, without the need for a trusted/central authority. The potential applications of this technology are only beginning to be understood.
How do you think about investing in this new asset class?
D: Given the immaturity of these markets, it can certainly be a daunting endeavor for the uninitiated. While we continue to learn more each day, we are fortunate to have tested and refined our investment strategies over the past few years.
At our core, we are fundamentals-driven investors that take a venture capital-style approach to investing across this emerging asset class. However, we rely upon a number of characteristics and indicators that are uniquely relevant to diligencing cryptoasset opportunities. We are keenly aware that a majority of these projects will fail in the long-term, but through structuring a diversified portfolio with rigorous investment standards, we aim to capture the economic upside as blockchain technology is more broadly adopted around the world.
To get into an emerging industry must take many skills in addition to being curious and a quick learner. What would you advise people who want to do something in the field or something similar?
A: A lot of people falsely believe that you need a PhD in computer science or cryptography to succeed in this industry. While those subjects are certainly applicable, they are by no means required. Anyone willing to spend the significant time and energy to dive deep into the technology and explore the crypto landscape will find their niche.
The industry needs problem solvers, designers, writers, operators, and more. Start reading, go to meetups, invest some money, and be curious. Almost everyone we meet in crypto has a unique story about how they first got involved. This field was created less than 10 years ago; we are still in the very early stages of this technology.
How can one best get a feel for and best learn about this new industry?
D: The best way to get a feel for this industry is to get involved. We suggest that a person head to Coinbase and purchase $50 of Bitcoin. Then, try sending that Bitcoin to a friend or a dedicated wallet. These actions alone will provide a useful and informative introduction. Also, there are host of fantastic education resources online.
Some of our favorites include:
- Any material by Andreas Antonopoulos, an early crypto evangelist
- “Beyond the Bitcoin Bubble,” an NYT piece by Steven Johnson
- Resources provided at lopp.net, curated by Jameson Lopp, an early bitcoin developer
Lastly, we are passionate about educating people new to the space and regularly give talks at conferences and companies. We are open for questions, so please shoot us an email.
Where is the cyptoasset/blockchain industry flourishing the most? Is there much international work in what you and your partner are doing?
D: The short answer is a resounding yes. Bitcoin and other digital assets represent the first truly global marketplaces. Unlike traditional exchanges that are open from 9 am to 4 pm in a specific jurisdiction, these assets trade 24/7/365 around the world. The US is certainly one of the major development hubs, but teams all over the world (particularly in Asia) are building top-quality products. Our personal networks overseas are valuable, giving us local perspectives on international news and projects happening abroad.
I imagine that your clients will be worldwide, though you’re based here in Chicago.
A: Dan and I are headquartered here in Chicago. However, given the global nature of our target investees, we are often on the road. The fund is domiciled offshore as we intend to draw capital from a variety of jurisdictions outside of the US.
What are some of the most common questions you get from potential investors?
D: Perhaps the most common question we get revolves around the critique that cryptocurrencies have no ‘intrinsic value’ or are considered ‘fake money.’ A longer discussion is needed to properly delve into this topic, but I will leave you with a couple of ideas.
What gives a person the confidence that the dollars in her wallet are worth more than the paper they’re printed on? Since 1971 the US Dollar has lost over 80% of its value. More globally, governments (Greece, Venezuela, Spain) have built an astonishingly bad track record of preserving the value in fiat currencies.
With regard to digital money, over 90% of the USD is already digital and only exists as numbers in the database of a bank (not as notes in a vault). Furthermore, what gives us the confidence that gold held in a safe will retain its value in 10-100 years? Only approximately 10% of gold supply is used for any industrial purpose. The vast majority is used to create jewelry or held as a long-term store of value. For millennia gold has been used to transact value due to its durability, fungibility, and scarcity. Cryptoassets, and specifically Bitcoin here, are trying to create a new social contract of value, but one that does not rely on having faith in an institution or state to support.
A lot of the people we speak with voice concerns over the volatility of this young asset class. Firstly, this volatility is a hallmark of any truly novel and game-changing idea. For this reason, we look for patient capital that can bear the near-term swings to profit off the long-term adoption of this technological transformation. Secondly, the volatility in these markets provide return opportunities not available in more traditional asset classes. However, we always stress that cryptoassets represent an extremely high-risk investment proposition and should be considered as such.
Best piece of advice?
D: One of my favorite pieces of advice is taken from Wences Casares, the founder of Xapo: The second worst thing you could do is to hold more Bitcoin than you can afford to lose, and the worst thing you could do is to not own any.
As you look forward, how do you see your career evolving over the years?
A: Even though I have only been involved in this industry for 5 years, I feel like I have found my passion. I plan to be involved in this industry, doing what I am doing, for the rest of my life.
D: We are at the very beginning of what we expect to be a long and eventful ride. I am confident the industry will continue to challenge us in new and unforeseen ways. My goal is to build a firm, of lasting value, than will be a prime enabler and beneficiary of this technological revolution.