In the Arena | July 1, 2023
Updated: Jul 28
Arena Digital Capital Management was founded in January 2022 by three experienced traditional finance hedge fund professionals who have been deploying personal capital in the digital asset ecosystem since 2018. The team has managed billions of dollars of capital for high net worth individuals, family offices, and institutions ranging from pension plans and endowments to sovereign wealth funds. We have worked closely with institutional consultants, RIAs, and other advisors in serving their clients.
In May 2022 we launched Arena Digital Capital Partners, with the goal of providing a multi-strategy investment vehicle to access the digital asset ecosystem. Our mandate is to offer broad exposure across the growing digital asset and blockchain sector with an appropriate level of diversification, professional oversight, and manager selection. Our collection of skill sets and our history in the business allows us to understand, assess, and engage with the practitioners of this nascent asset class with a level of diligence required to be responsible stewards of capital. We are happy to periodically share our observations with you.
“It's really just the US” – UK the latest jurisdiction to welcome Web3/blockchain innovation
We have noted in past newsletters that rather than shunning blockchain technology, jurisdictions outside the United States are welcoming innovation with clearly defined regulatory regimes and incentives designed to foster development. Investors and developers are responding accordingly. Most recently, venture capital stalwart Andreessen Horowitz announced the opening of its first office outside the US, setting up an office in London to focus on crypto, blockchain and digital assets. UK Prime Minister Rishi Sunak expressed his determination to “unlock opportunities for this technology and turn the UK into the world’s web3 centre.” Popular media makes it easy to think that the US regulatory crusade against crypto technology in the US is going to halt the commercial development of blockchain technology. We think that it is important to stress this is not the case. Development, capital and innovation is simply moving to friendlier jurisdictions, including those in the developed world, and offer investors significant upside exposure to commercial success.
“And, it's really just the regulators in the US” – BlackRock files for iShares Bitcoin Trust (ETF) BlackRock, the world’s largest asset manager, filed a registration statement with the SEC in mid-June for a spot Bitcoin ETF. The iShares Bitcoin Trust will provide institutional and retail investors the ability to invest in Bitcoin without having to custody the underlying Bitcoin or having to endure premiums or discounts to the underlying Bitcoin due to the mechanics of closed end funds like the Grayscale Bitcoin Trust (GBTC). While the SEC has rejected spot Bitcoin trading vehicles to date and is engaged in two high profile enforcement actions against Coinbase and Binance, it is notable and encouraging that BlackRock (who’s record of getting ETFs approved by the SEC is 575-1) filed for such an investment product. BlackRock has addressed a number of past SEC concerns in its trust structure, including a surveillance sharing arrangement with Nasdaq to guard against market manipulation. We highlight that pent up demand for an institutional product could have a significant positive impact on the demand for and price of Bitcoin.
Favorable risk-reward dynamics – contextualizing the asymmetry to the upside
We often refer to the asymmetric investment opportunity in the digital assets and blockchain sector in conversations with current and prospective investors. We have noted that the digital asset market at a ~$1.2T market capitalization is a fraction of existing addressable markets like global digital payments (~$5T), gold (~$12T), global M2 (~$100T), global bonds (~$120T) and global equities (~$125T). We recently came across two exemplary calculations from a digital asset manager that further highlight and contextualize the asymmetric upside to an investment in the digital asset sector. Looking at Bitcoin as
digital gold, it should capture some percentage of the “store of value” use case for gold. Assuming that 20-25% of above-ground gold (~$2.5T) is held for investment purpose and Bitcoin ranges between 15% and 75% of investment gold’s market cap ($375B to $1.875T), then at its current market cap of ~$585B, there is 35% downside against 2.2x upside in an investment in Bitcoin. Similarly, if Bitcoin, Ethereum and other smart contract blockchains take share from legacy payment rails and banking infrastructure, one could posit a market share on the order of 50% of global M2 or ~$50T, which is ~50X its current market
cap. Accordingly, a small allocation of 1-5% of an investment portfolio to digital assets and blockchain technology is very favorable risk-reward exposure to potential commercialization.
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Arena Digital Capital Partners is a liquid evergreen fund open to monthly subscriptions. We are always happy to discuss further with you or investors you think may have an interest in the sector. Please reach out to Bill Cline at email@example.com.
The Arena Digital Capital Management Team
Michael Schwartz, Michael Prober & William Cline