Cedric Jeanson, chief executive officer and founder of BitSpread, a blockchain asset hedgefund, discusses the company’s investment strategy, how the valuation of bitcoin has been affecting the business, and his views on initial coin offerings and regulations of cryptocurrencies.
Here is the transcript:
Emmanuel Daniel (ED): I've been going around, meeting different players in the cryptocurrency, bitcoin, blockchain world, universe. Today I'm very pleased to be able to speak to Cedric Jeanson, a founder, the founder of BitSpread, which is a blockchain asset hedgefund. It's a hedgefund in this new asset class, which is still growing in terms of its usage. Cedric there is a lot for us to talk about today. So, let's start by asking what does a hedgefund in cryptocurrency do?
Cedric Jeanson (CJ): Hi Emmanuel. We've been working in this industry for many years, most of our people in the team were from the banking industry. We realised very early the tremendous opportunity of the blockchain ecosystem, especially the bitcoin at that time. And eventually all the kind of blockchain. We developed a fund to bring money from the traditional investor into this blockchain ecosystem. We started that strategy around 2012. But the idea was to provide liquidity to a selection of digital currency exchanges around the world. It took us something like 12 months to do our own judicious at that time to understand with whom do we want to work with. And we realised that there was a need for this ecosystem to receive some liquidity. That liquidity, obviously, was necessary to grow the e-commerce ecosystem, willing to capitalise on the fast and easy way to receive payment throughout...
ED: But when you look at liquidity, you are not looking at it in the way someone trading in FX would look at liquidity. Here, the liquidity is still in its early days. You need as much funding yourself to build your reserves and... what is liquidity in crypto world? And what is the source of income for you in providing that liquidity?
CJ: The outer books of those changes are relatively seen in terms of notional... obviously, what people call the currencies... if you have to sell funds, $10 million worth of a value, it's not gonna affect the price of this currency. With bitcoin right now…. are relatively seen so if you want to buy and sell a certain number of bitcoin on some exchanges, you might actually move the price a little significantly depending on your size. So, the idea of BitSpread, this is the name actually, BitSpread, spread because we're courting two-way prices on some exchanges to make sure that people find this liquidity. This is a growing progress that we started this year ago. I think we are threading across to a billion dollar every month on digital currency exchanges. This is a substantial, notional. Changes are happy. The ecosystem is happy because they receive liquidity and they will now be able to use digital currencies or blockchain assets in general, in a much more...
ED: You say notional. This sounds almost like a derivatives trading universe... what is the actual, netting, netting on a daily basis, what is it like?
CJ: So turnover, I would say on a monthly basis, in terms of turnover of digital currency, we are turning roughly a billion dollars now.
ED: Okay, that is very good. And the income for you as a... and therefore that makes you a wholesaler?
CJ: Indeed. So, how, you said, the income from the fund is coming from the bit offerer, basically to spread on those basic exchanges, we buy on a certain price, we set up a different price, but we continuously create trade in the market.
ED: Now, how was the rise in the valuation of bitcoin been affecting your business? And the pushing of the frontier into areas like ICOs, for example, in terms of usage? I can imagine there are governance issues, there are risk issues, then there are liquidity issues. And there's also the settlement aspect of it in terms of... Let's not even go into areas like payments and infrastructure itself and what bitcoin is supposed to be used for. What are some of the big themes that are affecting your business right now? Maybe shaping opportunities, but things you need to look out for.
CJ: Okay. So, one of the first thing that we had in mind in this ecosystem at the beginning when we started was, we want to ensure that we work with people who have an appropriate policy in terms of AML-KYC. That was the fundamental thing for us. The money that we want to bring into this ecosystem is money that is a legitimate money, going through a severe AML-KYC process. And we want it to be, our partner in this ecosystem to follow the same kind of processes. So after twelve months of due diligence, we selected a few names in the ecosystem, which, today, we can see that a lot of regulators around the world have actually helped us to improve all the AML-KYC, the entry point of all those blockchain, which is a very good news. And, we basically, we were able to stop with those whistles exchange and trading significant volume, and helping this ecosystem. Now, the strategy that we initially developed was a pure market neutral strategy. We are buying, we are selling. We never take any directional bet on the price of bitcoin. So, we are not like what people call a crypto fund where, promising that the price of bitcoin goes to $10,000, $20,000, people will make a lot of money. Our strategy has never been like this. When the price of bitcoin was $200, $8,000 right now, it doesn't make any difference. We are just buying and selling. So, this strategy is purely market neutral. This is why, this is the reason why we are able to actually receive money from traditional investors because they are not afraid about whether the price of bitcoin is going up or down. That's none of their concern. What they are interested in is bringing liquidity to legitimate business and to develop this ecosystem.
ED: Right. But as a hedgefund, your returns have to be, well traditional hedge funds are leveraged and they, the returns are superior. So, how do you make up for those?
CJ: We don't do any leverage trades. So, it's only, the capital that we are running is not leveraged at all. It's a continuous offering of a bit of accounts on those markets. We earned the money through those spread, as being a market maker. I would say this is the best definition of the strategy, of this market neutral liquidity strategy. We are a market maker on a selected number of exchanges. And through this market making process, we provide, we turn to our investors on those liquidity to these ecosystems so that we could truly say that blockchain asset, bitcoin, or ethereum are becoming digital currencies as such.
ED: So now, as the market, as the valuations themselves go up and as ICOs happen, there will be lots of exchanges coming to ask you for liquidity, looking for liquidity. Is that a source of, is that that point where you profit from that process or it doesn't cause issues?
CJ: What we think is that the value of all these digital currencies is clearly, as I've said, for global e-commerce business. And you see in a lot of countries now that people don't have necessary the means to export their goods and services. They might export their goods and services but they don't have necessarily the means of receiving payments because their currencies are not the currency that people might be to pay with for those goods and services. Now it's so easy with bitcoin or all those digital currencies. You just need to have your address on your website and people from all around the world can send you actually a certain value in bitcoin.
ED: But how real is that ecosystem now? I mean, what amounts are being traded on that?
CJ: There is a significant amount now. This is why, I think, there is significant number of transactions on the network. And this is why we have, recently, so many debates within the community on the size, the block size, which, in a sense, is, how many transactions can the network process within ten minutes. So, I think this is, by itself, all this issues should ensure that this is growing. Nobody now can ignore bitcoin or the blockchain network. I think, those are network run by people, for the people, and accessible by the people. So, it's something which is, as revolutionary, as the internet at the beginning.
ED: We want to get your opinion aspect of our conversation. But before we do that, just a little bit more about what you do. What are some of the next steps that can happen or should happen or you wish would happen in order to give even greater comfort to your business model, and a relevance, and perhaps would upsize your business model?
CJ: We welcome, obviously, all the impact of the regulators all over the world. Because we think that we have to have more and more in each of the country, local exchanges, that can exchange bitcoin to their local currency and the regulators of those countries will greatly help. We will help. Obviously, they are local economies, because clearly, people will have to be offered decent living, and whether they have some extraordinary skills. Now, they could actually these skills to develop an international e-commerce. So, the regulators, I think, have a very positive impact by regulating some of the entry points of some of those exchanges. So it helped. On a lot of emerging countries, we'll see more and more exchanges appear. That's one of the things that we very welcome. Second thing is on the technology, the protocol itself. I think the increase of the size of the capacity is definitely an important factor. We need more capacity on those networks. And I guess, we are in the beginning of an era of those new blockchain... I will compare it to potentially Lycos or Alta Vista of the early ages, of the search engine community. Now, we don't know who is going to be the Yahoo, Google of the future, but we know certainly, this is in this ecosystem.
ED: What about regulators, "cryptocurrency-ing" fiat currency? Is that a welcome function? China, Singapore, and I can't remember which other countries have actually expressed desire to come up with a crypto version of their currencies? Do you see that as a parallel development that is good? How do you think that will work out?
CJ: I think it is a fantastic opportunity for the government to know basically everything about their money, the supply, and demand of their money; where the money goes? So, there's nothing better than a blockchain actually in terms of transparency. I've been talking a lot about AML-KYC; well there's nothing better than a blockchain. At least, you know where the money goes, where the money come from. So this is a fantastic opportunity, I think, for governments to use the blockchain, so that people can actually change between themselves. Also, do you know the accuracy?
ED: Now, let’s go to the opinion part of our conversation. What is your take on what banks are doing in crypto at the moment? Some of them have their heads under the sand. Some have stated that they don’t even want to own bank accounts of crypto players and so on. There seems to be a lot of defensiveness there. But are they formulating their own strategy to come back into the crypto space? And when you look at what banks do on the blockchain aspect of their businesses, a lot of initiatives seem to focus on blockchain as a distribution channel for themselves. It’s not even an ecosystem that they feed into. Or at least that’s how I see it in a way. What is your take on how banks, their opinions and their initiatives in blockchain?
CJ: I think banks see blockchain as an intranet by actually delivering some services or some easier settlement to some of their major customers, I think, especially the major customers of those banks who are really pushing to have a lower kind of time, form of settlements so it’s easier with great benefits. So, I think that’s the view of the banks to potentially service some of their clients but it’s as close as an intranet. The value of bitcoin as a network, it’s an intranet, run by people, accessed by people, and this is for people. So, it’s a complete different vision. Banks today, I think, had some, their business is to receive money from people, to lend it to others, to make spread on this money. Now this centralised network is obviously an issue for them because of the change of business for all, but it could be, we’ve seen that in the past years with all the broker or banks at some points are forced to evolve and they will potentially try to find a stake in this ecosystem; an entry point that will actually benefit from this new technology. But it is natural for banks to be established for a long time or have a certain business model, that there is certain reluctance… to market for them to adapt or to adapt themselves to this new technology.
ED: Do you see specific banks or banking initiatives that are making breakthroughs, other banks that you like?
CJ: We hear a lot of banks working on blockchain projects. Actually we’ve been hearing that for how many years. I would say that I’ve seen this would be working at a certain phase. I’ve seen on the other side the phase of bitcoin has been tremendous, we’ve seen the emergence of so many blockchain who has a market capitalisation today of more than $220 billion, which something five years ago didn’t exist. We’ve seen all over the world an interest by people, which have been tremendous. So, we see a real momentum there that nobody can ignore this momentum anymore. The market capitalisation of let’s say the major blockchain today $220 billion.
ED: The top 3, 5?
CJ: I would say more than that if you look at the probably…
ED: …the amount of investments into blockchain…
CJ: Yes, the value. The price times the number of offer…
ED: …but to the extent that this are driven by financial institutions, almost all of them are just participating in order to see there is proof of concept rather than roll-out because the moment you’re ready for a roll-out you can almost imagine that some of these consortiums will break up and they will go back to their own playing field.
CJ: I think you are right. One of the things that let’s not forget is that banks are in competition between each other. So, today, we start saying that some of the banks have a certain better networks than others. That is not the will of cooperating. I don’t think of something on such a global scale on how easy would it be to coordinate all the banks in the world into a single network, I think it’s a bit realistic, and especially banks have a lot of regulatory cost right now. The budget that can be spent into this kind of project is really, to my mind, limited. On the contrary, you see those networks, those blockchain networks, and internet network that didn’t exist couple of years ago, that take the energy of hundreds of thousands of the brightest software developers around the world. We’re trying to develop something or develop something from scratch, from the white paper, obviously. This thing is quite impressive, and for me it’s like water that you cannot stop. People want this network, they want to use it, they want to develop it, and there’s nothing you can do against that, it’s a will. This is also very interesting, I think, for countries and for governments because it creates progress.
ED: Going back to your business model, being a wholesaler in that regard, do you hold inventory?
CJ: No, we don’t. We continuously buy and sell on this fund. So we continuously make sure that actually the price of bitcoin, whether it’s 10,200, and whatever the base of which the price of bitcoin evolve, doesn’t in fact impact the return of the strategy, that’s absolutely pretty close so that people can actually assure that whatever the price of the bitcoin I can push some liquidity to the system. I will make money based on the spread but not on the price appreciation or depreciation.
ED: Is there a temptation to set-up a mining division so that you’ll get cheaper sources? Having said that, where is mining going right now because, I think it is sort of all moved to China for a while because it’s the cheapest place to mine? And, mining is an important activity in crypto at the moment, or at the whole time since the time digging for gold. Are you interested in mining, is there something that you should be in, and do you talk to miners?
CJ: Our model is absolutely not mining because what we try do is bringing liquidity is what we focused on, so this is the activity we are focusing only.
ED: Not at all mining, also because of there’s a focus in terms of your training skills, but also, is it also because mining is a complete different skill set?
CJ: Different skill sets, clearly, which require a lot of investment right now in terms of capital so we don’t want to deploy this capital in mining.
ED: What if it becomes too expensive to mine? I mean, you know, all the freelancers sitting out in their garages in the US today find that mining is very expensive. So it’s sort of move and move and so on. How do you think that rule will play out?
CJ: Oh we’ve see the emergence of the pools obviously of mining in the past few years. When we started in 2012, obviously you could be mining on your computer at home, potentially hoping to break the algorithm and receive a bitcoin as a reward to validate some projection. Now, I think that is very difficult to do that at home and you have to participate in some pools of mining to increase your chance of return. Mining is obviously critical in the entire blockchain ecosystem because this is the validity, this is the security of this network, so this is extremely important. And one of the things that people sometimes are confused of is, we love blockchain, but we don’t like bitcoin, but this is a same thing. Bitcoin is actually the currency to pay miners for their work. There is no blockchain without reward therefore without the digital currency of the blockchain. So it’s something that I think everybody needs to understand clearly that this is bitcoin, for the bitcoin network, for blockchain is the unit that actually make people work, mine and secure the network. If you don’t have digital currencies, there is no security, there is no blockchain. That doesn’t exist.
ED: So, in then regard the wholesale aspect, who are your competitors? What sort of companies do you have?
CJ: We have no competitors on the market control.
ED: There is no enough of?
CJ: Well because I think it’s been a strategy, which is complicated to course, three years to put in place. We’ve seen the markets of all the funds that have positioned, as you mentioned, either most of the time this is a long position on the market and on top of it; they try to do some market making. But for a truly dedicated as a pure market maker, we haven’t see that in the market and that is the unique value proposition of each spread of this business, why this business is running as well. So well, since the early ages of those blockchain.
ED: What are the protection do you think is we need to put in place for that blockchain or even bitcoin, bitcoin more than blockchain, doesn’t become a Ponzi scheme?
CJ: I think, today, people are asserting, announcing that it is a Ponzi scheme.
ED: No. But then it can always lend itself to become the ICO markets in a way, it’s just people chasing up the price by…
CJ: Using gold as a Ponzi scheme? No, there’s a value of investment. Do we think that real estate, the prices of real estate is a Ponzi Scheme? No, there’s a demand. And why is there a demand? Because there’s a value of bitcoin? There’s a value of transacting BitSpread through bitcoin throughout the world in a fast and very efficient way. So, who can send money to anybody in the world in a matter of ten minutes? Bitcoin can. So there’s a value in this token and people see sometime too much as an investment that hopefully will rise --- yes! It’s like the early ages of the value of the shares of LinkedIn, or Facebook… That’s maybe true that it is undervalued, then there’s no dispute about that. But people need to understand that there is a value in those token. This is the value of transferring money, or transferring any kind of presentation of this token efficiently between people all over the world.
EJ: Final point, your opinion on global themes like Japan, the ICO market in Switzerland. What do you like about Japan? Where this in terms of blockchain and crypto, and the ICO world? What needs to happen to stabilise that market?
CJ: I’ve been extremely impressed about Japan to be honest. Because they’re obviously the one of the early exchanges, Mt. Gox was in Japan. And the world knows that these exchanges had some issue that went down. Now Japan didn’t say ‘we’re leaving this ecosystem’ but actually created rules around this ecosystem to make sure that this business can grow in a safe manner, in a transparent manner, in a trustworthy manner. Japan has introduced a legal bill in June this year (2017) to actually legalise the payments using bitcoin or digital currency as a whole. So, now it’s legal to pay with digital currency in Japan. So I'm extremely impressed about the way Japan has actually handled this situation. Saying, “Yes! We recognise the value; there have been mistakes in the past. Let’s regulate it. And let’s make it a big market, a big business on this transforming economy.” And I'm sure a lot of countries will follow on this example because this is the will of the people.
ED: And the ICO market at all?
CJ: I think the ICO market has --- we’ve seen a bit of different kind of ICOs, ICO which have been interesting at the protocol level, so basically, coins, to run a blockchain, and, I think, that was very appreciated by the community. Now, we’ve seen as well some ICOs where people raise too much money too quickly, creating obviously strong conflict within the organisation. We see raising $200 million or $400 million, which will make you probably attract the wrong crowd and create some problem within your own organisation, so that’s one thing. We’ve seen as well a company who has absolutely not re-delivered a certain business plan or something credible and the only valuable proposition that they’re offering is well, you may get a 60% discount if you buy my token right now rather than waiting for the ICO. So, we think that there is some regulation that needs to be imposed into this market. China has done it so well. We understand there’s a strong demand something interesting that could be done in this business by raising capital but we need to follow some rules. We need to do it this way.
ED: Well, we have an exciting time right now and you are in a very good position to see the developments unfolding and you’re a player providing liquidity in the marketplace. And Cedric I hope you’ll be able to contribute some of this conversation in the future.
CJ: Thank you.Categories: Financial Technology, Transaction Banking