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  • Writer's pictureMichael Schwartz

In the Arena | March 1, 2023

Updated: Jun 1, 2023



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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.

 

Early Investment Opportunity. We are still in the early innings of blockchain development, implementation and commercial use. Three primary use cases have been developed and amount to ~72% of the total ~$1.1 trillion market capitalization of all digital assets (Bitcoin ~$454 billion, Ethereum ~$201 billion, and Stablecoins ~$134 billion). There are only ~$300 billion of digital asset tokens that represent an interest in technologies with significant upside on commercial application and adoption. To put this in perspective, $300 billion is on the order of the market capitalization of just one company such as Chevron.


Risk Management. We gain our exposure to the development and commercialization of blockchain technology primarily through our Fundamental-driven managers (“FD Managers”). We have observed that these managers tend to be significantly long-biased regardless of the volatility in the digital asset markets. We had anticipated this and launched the portfolio in May 2022 with close to an even balance of capital allocated to our FD Managers and Market Inefficiency-driven managers (“MI Managers”). Through the 2022 drawdown, the MI Managers performed and managed capital exposures better than

the FD Managers. That out-performance and preservation of capital has allowed us to re-allocate capital to the FD Managers at attractive entry levels and position the portfolio (65/35 at February 1, 2023) to capture more upside on a recovery in the digital asset markets.


Thinking countercyclically, we would anticipate the reverse to hold true in a strong up-cycle and expect to re-allocate capital to our MI Managers. While timing such decisions may be challenging, we believe the long biased nature of fundamental investing in the sector justifies our process.


Attractive Entry Point. Digital asset market capitalization grew from ~$190 billion at the start of 2020 to ~$2.25 trillion at the end of 2021. Over 2022, it pulled back to under ~$1 trillion. We believe this is an attractive entry point and offers asymmetric upside relative to the risk underwritten. We note that ~$1 trillion is a fraction of most addressable markets blockchain technology may disrupt.


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 williamc@arenadigital.capital.


Sincerely,


The Arena Digital Capital Management Team

Michael Schwartz, Michael Prober & William Cline

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