Home / Business / These young investors are still betting big on cryptocurrencies and taking Harvard and Stanford for the ride

These young investors are still betting big on cryptocurrencies and taking Harvard and Stanford for the ride



Aggressive Bitcoin trade has sent the Paradigm cryptocurrency store flying out the gate. But Fred Ehrsam and Matt Huang aim to do more than generate outsized returns for their blue blood supporters – they want to bring alternative currencies into the financial mainstream.


ORIn a secluded back patio of the luxurious Ventana Big Sur hotel, several dozen of the world’s leading cryptocurrency experts are playing a special after-dinner game. It̵

7;s a lively night of the week in November 2019, and attendees gather around tall stoves to sip wine and hot chocolate and question each other – a nerdy, real-life retelling of a computer science concept called the Byzantine Generals Problem, imagining a leader passing orders to lieutenants of unreliable loyalty.

Putting their deductive skills together, the participants successfully eradicated three players charged with lying. They illustrated, in low-tech form, the power of the blockchain, which combines massive amounts of processing power to create a dynamic, yet effectively indestructible, decentralized public ledger. It is the technological innovation behind cryptocurrencies such as Bitcoin and Ethereum.

The game is a clever icebreaker for a secret, unrecorded conference intended to unite different factions of the highly stubborn and short-tempered crypto community. Away from the flaming attitudes and wars of Telegram chats and Twitter threads, hosts from Byzantium, an investment firm called Paradigm, are trying to remind this elite group that they are more alike than not – all united by a common goal, to see crypto become more mainstream.

“There are challenges that everyone is facing,” says Paradigm cofounder Matt Huang, who launched the company with Coinbase cofounder Fred Ehrsam in 2018. “Many of these people are building things that have a completely different shape than that. that’s in the fairway. Sand Hill Road, “adds Huang, invoking the street for the tech world’s most famous fundraiser, where he once worked at the prestigious Sequoia company.

They may disagree on the merits of Bitcoin over Ethereum or on the role of tech giants like Facebook in setting the agenda. But the point of Paradigm is simple: Compared to an outside world full of crypto skeptics, these high-level entrepreneurs, researchers, and academics are more alike than not. “I think people will look back on this as one of those rare moments in history, where it’s like Lockheed Martin’s Skunkworks team, or Pixar, or the Apollo program,” comments Ehrsam’s close friend Brian Armstrong, CEO. Coinbase billionaire. “When a small group of people got together for a brief moment, they did something quite impactful and then it had all these huge effects downstream.”


Doubling

Paradigm transferred all $ 400 million of its starting capital into Bitcoin in 2018 at bubble-blown discounted prices of less than $ 4,000, converting it back into greenbacks when needed for individual investments.


Almost a year later, that mission remains a work in progress. When the coronavirus crashed global stock markets in March, cryptocurrencies like Bitcoin also collapsed, despite advocates’ insistence that such coins were a safe haven operating independently of old-school financial trends. In a world facing more pressing concerns – a pandemic, a presidential election, lives turned upside down by the sudden shift to digital and remote work – cryptocurrencies have not emerged as a unifier, at least still. When Armstrong announced in September that Coinbase would not tolerate political discussions outside of its financial mission, five percent of its workforce left.

All the more fuel for Paradigm, a new-looking investment firm that has quickly emerged as a leader in the cryptocurrency category but has greater ambitions than outsized financial returns. Combining traditional pedigrees and cryptocurrency pioneers, Ehrsam, 32, and Huang, 31, convinced top institutional investors like Harvard and Stanford to give them $ 750 million to invest in a market they were too blue-blooded to touch directly. The vehicle was strange, an open fund with more time than usual to return it. Then they did something even more unusual: They invested everything in cryptocurrencies, mostly Bitcoin, at a time when prices were languishing at post-bubble lows. He was aggressive and could backfire badly. But it was not so. Bitcoin’s value has tripled since Paradigm’s investment, which means that, apart from any other bets he has made, Paradigm’s initial bankroll is already worth 3 times.


Both were raised when the Bitcoin bubble burst in early 2018. Amateurs, daily traders and daily Bitcoin price updates on CNBC are out.


“They started their business at exactly the right time. They convinced some of the smartest investors in the world to let them buy Bitcoin and Ethereum and get paid for it, “says Mike Novogratz, the former hedge fund manager and crypto personality.” Hats off to the team that they get paid for it. this.”

But Paradigm Investors Expect More From Ehrsam And Huang Than From Another Expert Cryptocurrency Shop. With their company in fast-hiring mode, its first outing behind it, and some of its startups showing signs of breaking up, the Forbes A couple of under 30 alumni insists that they are alone in front of a curve that will soon make you also interested in cryptocurrencies and its global potential. “We believe there is a leverage effect in pouring fuel on the fire,” says Ehrsam. “But we certainly didn’t create fire.”

If Paradigm’s timing was perfect, anything but accidental. At the height of 2017’s Bitcoin craze, Ehrsam had already stepped down from his role as president at Coinbase, the $ 8 billion cryptocurrency market he had co-founded with Armstrong five years earlier. Tall and lanky with an old-fashioned part in his brown hair, the Duke graduate and former competitive player – as well as, briefly, a Goldman Sachs trader – walked anxiously around his apartment, filling his days by writing blog posts and investing in. startup. With Bitcoin surpassing $ 19,000 in December 2017, an increase of nearly 2,400% in just one year, cryptocurrency insiders were as baffled as everyone else. Also in Coinbase board meetings, in which Ehrsam is still director, insiders marveled at the price craze and asked: “why is this happening? “

It was a question that even the big venture capital firms in Silicon Valley were asking. In Sequoia, the company known for investing in companies from Apple and Google to WhatsApp and Stripe, Huang was watching the space closely. A former entrepreneur who took up a social analytics business through startup accelerator Y Combinator and sold it to Twitter, Huang – black-haired with a sober “reluctant sneakerhead” style – had personally owned Bitcoin since. 2012. But like Ehrsam, he was put off by “parabolic” prices and a wave of unknown companies issuing their own tradable tokens via a questionably legal quotation called an “initial coin offering” or ICO.

Both were raised when the Bitcoin bubble burst in early 2018. The amateurs, daily traders, and daily Bitcoin price updates on CNBC are out. For Ehrsam and Huang, those who remained represented the most attractive long-term investments: people who would look smart and build big businesses when the hype cycle picked up. Ehrsam and Huang addressed the institutions in a contrarian tone: it was time for them to invest in their new company that would come up with a crypto strategy that would win in the long run.

Nonprofit endowments from top universities represent the most powerful – and difficult – stamp of approval for new venture capital fund managers. The “public confusion” of 2017 has not been lost, Huang says, but allocation managers were reluctant to touch cryptocurrencies directly or trust its early credentials investors. With Coinbase backed by top VC companies and a well-known Sequoia reputation, Paradigm seemed more secure. “Crypto is a bit full of these hothead personalities, and there is a common thread between Fred and Matt where they are really calm, cool and collected,” says Garry Tan, an early investor at Coinbase and partner of Initialized. a San Francisco-based company VC Store.

The step worked. In October 2018, three of the most high-profile endowments, Harvard, Stanford, and Yale, had joined Sequoia to invest in the mysterious new company, their first major forays into supporting a crypto-focused fund. (All three declined to comment on this story.) But Paradigm was even more unusual as an “open” fund, which meant that its partners had more time than usual, 12 years, to return the proceeds to their supporters. most typical is standing at 10). And Paradigm will also invest differently from a normal venture capital firm: around 60% in alternative assets such as digital tokens and currencies themselves, the remaining 40% in the usual startup shares.

Then Paradigm quietly made its boldest move. VC investors usually “call”, or request by wire transfer, the money they have raised in batches when it is needed, for example 10% at a time. Ehrsam and Huang called all $ 400 million of their first floor upfront, then put it all into Ethereum and Bitcoin, using one of their startups, the crypto-focused trading desk Tagomi, to identify the cheapest places to convert. pieces in fiat currency as needed when investments required antiquated dollars.

In one fell swoop, Paradigm had given universities and other elite supporters like Huang’s old Sequoia company, limited by their cards for buying too many cryptocurrencies, far more exposure to Bitcoin at a price below $ 4,000 ( today it is trading for $ 11,400). And with Paradigm doing detention, their supporters would maintain a degree of separation and deniability if the trade went wrong. It was a nice trick that made it easy for Paradigm to secretly raise another $ 350 million from the same investor pool last year as a complement to its first fund.

“If it works, it has enormous potential. If not, it’s a manageable allocation so it’s not the end of the world, ”Ehrsam says.

T.two years is not long to judge a risk fund. Given its mix of investments, Paradigm works closer to a health trade than the crypto market itself. In this regard, Ehrsam and Huang seem elated when they reconnect Forbes at the end of July on Zoom. Forget the March price drop, they say, focus instead on Bitcoin’s 80-day run above $ 10,000, an ongoing record. And look at the unlikely new allies of space, they argue: billionaire Paul Tudor Jones, announced he was buying Bitcoin as a hedge against inflation in May; important institutions including J.P. Morgan, Mastercard and Visa, all of which announced encryption plans over the summer. And Square invested around $ 50 million in Bitcoin earlier this month.


Overall, 13 of Paradigm’s 28 investments so far have already collected or circulated tokens at higher valuations.


“You saw us at a time when cryptography was still a little dark, where it was a bit of a downward cycle,” says Ehrsam. “We feel now, and it is always difficult to predict these things, but we feel like we are at the beginning of another period of strong growth for cryptocurrencies.”

Paradigm has also been busy hiring a second researcher, a legal advisor, and, in October, a cryptographic security expert, bringing his team to 15. One of its first investments, Tagomi, the New York startup Paradigm uses to trade its coins, was acquired by Coinbase in June for more than $ 75 million (a courtship Ehrsam refused). Others have reached significant size in a short time, including the Compound lending platform, which has issued a digital token now trading with a market capitalization of $ 460 million. In Uniswap, which creates more efficient markets for buyers and sellers of digital assets from Ethereum to rights to a branded pair of socks, the total volume of capital pledged on the spot has risen to $ 2.9 billion from $ 20 million a year. does.

Overall, 13 of Paradigm’s 28 investments so far have already collected or circulated tokens at higher ratings. This has helped the company establish itself as an elite player alongside companies like Pantera Capital and Andreessen Horowitz’s semi-independent crypto funds, where Coinbase former investor Chris Dixon says the scene looks similar to when VC companies early stage collaboratives made their way into the establishment more than ten years ago.

But even in Silicon Valley, where investors have often personally profited from early bets on Bitcoin and the like, skepticism about long-term crypto specialists abound. At the popular VC Kleiner Perkins store, partner Monica Desai used to work for a Coinbase competitor, Blockchain, but now sees herself as a generalist investor. Companies like Paradigm have an edge when it comes to deeply technical and infrastructure-centric opportunities, he says. But traditional VC companies will still have a crack in the rest. “Every cryptocurrency business is also a business, or a consumer, health care or fintech company,” he says.

Ehrsam and Huang say cryptocurrency is broad enough as a new asset class to keep a company busy with full-time opportunities. But will those opportunities be good? At the Founders Fund, investor Keith Rabois claims to have made seven cryptocurrency investments; his company, founded by Peter Thiel, is fascinated by the potential of cryptocurrencies and owns some Bitcoins, he says. But the company doesn’t see the same quality of talent flowing through space as it did several years ago. “Entrepreneurs are just more interested in other topics,” he says, including climate change and healthcare.


“If we had an easy job, the opportunity wouldn’t be interesting.”


Paradigm’s betting crypto is still where “the smartest people are hacking on weekends,” as Huang puts it, even in a pandemic. But among the uninitiated, Paradigm has only scratched the surface when it comes to its mission to bring the industry mainstream. At Harvard Business School, associate professor Marco Di Maggio, himself a consultant for a South Korean crypto startup, says its MBA students and executive trainees agree: “They believe cryptography is, at the moment, very sensational.”

Paradigm’s founders are rock stars in the cryptocurrency world, but for the industry to go mainstream, they may have to do more than drive financial institutions to behind-the-scenes profits.

Faced with COVID-19, a second game is on hiatus this year at aperitif time for the generals of Byzantium. But Ehrsam and Huang say they are busy for the long haul. “We believe it is still a rather unshared view that cryptography is going to be a huge trend, but in our view, it is the most important technology trend of the next 20 years,” says Ehrsam. “If we had an easy job, the opportunity wouldn’t be interesting.”

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