This is an update to the chapter on investing in The Blockchain Economy digital book.
“Muppets” is the derogatory term coined by Wall Street for the “dumb” retail investors. The people who invested early in Bitcoin and Ethereum are retail in the sense of being individuals and not part of the Legacy Finance world. Yet they are now (even at these bear market prices), seen as smart wealthy investors.
This is a huge inversion. It now looks like “dumb money” from retail muppets has become “smart money” (which used to come from institutions). The reality is that Bitcoin & Ethereum “investors” could evaluate tech and market risk. They might have known nothing about investing but they did know that the technology was feasible, the team was good and if the team developed something that worked it would change the world and make a lot of money. That is normally the job description of VCs, but after Sand Hill Road became more like Wall Street, VCs ran from such early stage risk, leaving the field open for technology oriented investors who put money into Bitcoin and Ethereum in the early days.
Warren Buffet in his early days was another dumb retail muppet – who made a fortune. There are many other famous examples; these were all from an earlier era; for some reason it is viewed as impossible today. Here is an interview on Daily Fintech with a recent example who is not famous (and made money lending not equity investing).
What all of these dumb retail muppets share is that they have no explanation risk. If a “smart money” intermediary makes a bet that goes wrong they have to explain themselves to their investors. If a retail investor makes a bet that goes wrong they have to learn from their mistake and move on; mistakes are part of the learning process.
Family Offices are like retail investors in that they make their own decisions and have no explanation risk. The difference is obviously that Family Offices invest far bigger sums than classic retail investors. Family Offices are Retail investors with clout. Watch what Family Office do in Blockchain Finance to see the future.
Let’s look at a recent example – the pre IPO round for Silvergate Bank.
We wrote about Silvergate Bank when they first filed for IPO at end November 2018.
The recent news is a pre IPO round. Forget the usual roster of Big VC Funds. This deal was done by a Family Office:
“The Witter Family Offices announces its investment in Silvergate Bank, in advance of the bank’s Initial Public Offering announcement. Silvergate is a provider of innovative financial infrastructure solutions and services to participants in the nascent and expanding digital currency industry. The Company filed documentation for an initial public offering on November 16, 2018, to raise up to $50 million.
Sherry Pryor Witter, Managing Partner, Co-founder and CIO of the Witter Family Offices, welcomed the opportunity to partner with Silvergate. Given the explosion of digital currencies and blockchain technology in recent years, Sherry was aware that the space was ripe for opportunity.Taking an equity stake in Silvergate was a way to invest in digital currency with less risk of the volatility often associated with the emerging technology. “We believe that finance-related technology and solutions need to continue to advance to support future economic, demographic and global changes,” Sherry said. “One area that we are looking at is crypto, not only the asset itself, but the supporting infrastructure to increase its velocity and application. We believe that Silvergate saw an opportunity to bank cryptocurrencies by providing technology solutions to exchanges and crypto companies when others only saw risk.”
Getting into the Pre IPO round of a leader in Blockchain Finance is not easy
Big VC sell their access to deal flow as a USP. Getting access to quality deal flow in Blockchain Finance is a big deal because Blockchain Finance is Version 3 of Finance:
- Version 1 was Analog Legacy Finance. This was the era of investors such as Warren Buffet and Peter Lynch, when stockholders painstakingly researched the fundamentals of individual companies and held those stocks for a long time.
- Version 2 was Digital Legacy Finance. This is what is often called Fintech; our definition at Daily Fintech includes Version 3. Digital Legacy Finance was when computers took over trading and long term hold meant more than a second. In this market, the individual retail investors were derided as muppets and individuals invested through institutions rather than directly. Due to Buybacks and Mega Private rounds, there were fewer individual companies to invest in and the whole game moved to trading indices based on reading Central Bank tea leaves or front-running retail investors using High Frequency Trading.
- Version 3 is Blockchain Finance. One key difference is that in Version 2, everything changed except the business of investing, trading and value exchange. In Version 3 Blockchain Finance, the Funds themselves are having to deal with disruptive change to their own business. This is when we will see tokenised assets go mainstream and when the old fund intermediary model (first raise funds, then invest) will be disrupted by an inverted model (first invest, then get passive investors to follow you for a fee).
Family Offices feel no threat from this disruption because they invest direct and are not trying to make money as intermediaries.
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.
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