Starting in 1998, I have worked in the financial services industry. I cut my teeth at a large money center bank, followed by a large regional bank and an alternative asset management firm where I find myself today. Being a masochist of sorts, I also thought it would be fun to spend three years becoming a Chartered Financial Analyst (CFA), all while two toddlers occupied my house. In addition to gainful employment, I find the investment process fascinating. Success requires a weird mix of rational thought and awareness of human behavior. It also includes the bonus of great wealth if done correctly.
There is certainly no shortage of talented folks throughout the industry. At the core is an incentive structure that creates a “heads I win, tails you lose” paradigm and too much pressure to dance so long as the music is playing, as Citigroup CEO, Charles Prince, said just before the Great Financial Recession.
Like an invasive tumor, financial services has grown unabated and today comprises a much larger portion of U.S. GDP than it did in decades past. Much of that “domestic product” comes from intermediaries rent-seeking via fees of every description. Yet, in 2008, at the same time Wall Street was pushing the country almost to the point of a full-blown depression, a pseudonymous author named Satoshi Nakamoto published an eight-page paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” and the game changed forever. Thirteen years later, blockchain technology and decentralized finance (“Defi”) appear poised to flip the financial world on its head and re-plumb the entire system from front to back.
If this occurs, it will trigger the most significant wealth transfer event of our lifetimes as Millennials and those tech-savvy enough to “get it” capture billions of dollars in friction costs currently Hoovered up by the Wall Street fee machine. Like Amazon or Google before it, this new technology will benefit from network effects. Metcalfe’s Law states that a network’s value is proportional to the square of the number of connected users. The network effect ensures a Hunger Games, with a Power Law distribution among winners and losers.
An investor looking to navigate this landscape faces some unprecedented challenges and opportunities. As the world speeds up and access to information democratizes, the signal-to-noise ratio broke the meter some time ago. Access to information is no longer a competitive advantage. The ability to filter the wheat from the chafe and turn the grain into bread is the ballgame.
This blog is my attempt to do just that. It is an effort to sort through the lessons learned in commercial banking and private equity trenches. Incorporate the seemingly endless stream of books, articles, podcasts, and CNBC white noise in search of a coherent, actionable investment philosophy. I have chosen to focus mainly on blockchain technology’s disruptive impact for two reasons. First, particular aspects of financial services are within my “circle of competence,’ and second, I believe that the blockchain and Bitcoin, in particular, represent the most asymmetric risk/reward investment opportunity that will likely occur in my lifetime.