Q&A with Andrew Woodruff of Black Lotus Capital
Chief Investment Officer
Black Lotus Capital manages an institutional grade long / short fundamental hedge fund focused on digital assets.
Our mission is to extensively research the universe of investable digital assets in order to filter and invest in a long-term portfolio of the best assets with the highest asymmetric upside return potential, and hedge out most of the portfolio risk by shorting the worst assets.
Our proprietary deep research and data analytics processes enable us to discover and invest in liquid tokens and attractive presale investments with a clear path to 1) widespread user adoption, 2) sustainable competitive moats, and 3) token value capture.
We then hedge our long exposure by shorting tokens we believe have the worst fundamentals and clear downside catalysts in order to minimize drawdowns and maximize risk-adjusted returns across all market conditions.
Blockchain & Crypto Assets: Revolutionary or Scam?
How do family offices get the extraordinary venture-like returns of digital assets without suffering the massive drawdown and counterparty risk we saw in 2022?
Andrew Woodruff, Chief Investment Officer of Black Lotus Capital, addresses these key questions to help investors better understand crypto and blockchain investing, separate truth from the excessive noise, and safely gain access to this high potential asset class.
March 08, 2023 at 2:15pm-3:15pm EST
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Revolutionary or Scam: Do blockchain and digital asset tokens (e.g. cryptocurrencies) have a fundamental reason to exist and capture sustainable investment value over the long-term?
Blockchain and digital assets have true disruptive potential for many specific use cases across almost every industry where blockchain technology (by using cryptographic algorithms and realigned tokenized incentives) is conceptually cheaper, faster, and/or safer than incumbent technology (which heavily relies on inefficient humans and centralized, overly redundant entities and constructs).
Most of the value created and captured from blockchain disruption will come in the form of cutting out and replacing “middleman” rent-seeking corporate entities and infrastructure that technology has slowly been making obsolete.
Examples of which middlemen rent-seeking entities or functions within industries that can potentially be replaced with more efficient, effective blockchain technology over the long-term:
- Tech: Most of the major internet companies are middlemen aggregators
- Finance: Exchanges, Borrowing & Lending, Equities, Fixed Income, Derivatives
- Risk: Insurance, Betting Markets, Legal
- Entertainment: Movies, Music, Gaming, Social Media
- Marketing: Advertising, Agencies
- Real Estate: Title, Mortgages, Brokerages, Databases
- Governance: Boards, Co ops, Mutuals, Clubs, Governments
Digital asset tokens play a critical role in allowing for the decentralization, capitalization, micro value transfers, and realignment of incentives for specific use cases, which allows middlemen rent-seekers to be cut out and the economic savings and governance power (cheaper, faster, safer) to go back to the end users instead.
What is the truth behind all the crypto headline noise; the good, the bad, and the ugly through an honest inside perspective of the industry and asset class?
We believe most tokens are worth nothing, but the few exceptions are worth everything. We do an extensive amount of research to find those hidden sustainable gems that we believe will be our >100x returns over the next decade; projects and tokens that we think most institutions will own once they become aware or get access to them.
We then hedge that long exposure by shorting much of everything else.
We believe most blockchains and digital assets will become commoditized and bring no long-term sustainable value to investors, and thus most are great long-term shorts. Most of the bankruptcies in 2022 were due to lack of regulation combined with a large number of inexperienced, risk-on investors that lacked risk management expertise and processes. Almost all of these blow-ups were due to human mistakes (e.g. fraud, fad, overleverage, excessive counterparty risk), not blockchain fundamental issues. These are easy to spot for experienced fundamental hedge fund managers actually doing thorough research.
We're still in the “wild west” phase of this new technology adoption curve, and thus short-term over-speculation combined with immense technological complexity has caused an abundance of scams, Ponzi schemes, and copycat projects that will almost certainly trend to zero. Just like with private startups, most crypto projects will fail. However, unlike with private startups, you can short this high failure rate in crypto to hedge and generate alpha.
How can I get exposure to the massive upside of digital assets without taking the excessive volatility, drawdown, counterparty and black swan risks in this asset class?
The same way top hedge funds have successfully done so for decades in other asset classes through 1) extensive proprietary research and diligence, 2) an extreme focus on risk management, and 3) taking a longer-term perspective and time horizon… but methodically adapted for crypto’s unique features.
For excessive volatility / drawdown risk, diversified longs give you exposure to potential unicorn returns. Diversified shorts significantly hedge these longs by significantly reducing your volatility and drawdown risks. Zoom out and let the longs compound and the shorts trend to zero over time.
For counterparty risks, leading custodial solutions Copper and Ceffu have a mechanism called ClearLoop and Mirror that allow you to get exposure to exchanges without having to move / expose your assets or collateral to the exchanges. Your assets stay in your custodial wallets that are legally and technically only controlled by you, and are separate from the exchanges and custodial entity itself. So if the exchange or custodian goes bankrupt, it is both legally and technically impossible for them to touch your assets.
For black swan risks, in addition to the short portfolio, you can add a highly liquid circuit breaker short or put option limit order at a specific sudden drop in price (e.g. >20%) in order to help minimize just about any sudden catastrophic drop in price regardless of the catalyst.
Andrew Woodruff of Black Lotus Capital
Chief Investment Officer
Before co-founding Black Lotus Capital, Andrew was a founding member of the specialized research team at Slate Path Capital, a multi-billion dollar long / short hedge fund. His investment research experience ranges across equities, crypto, commodities, and macro, with his personal investment experience in crypto dating back to 2017. He also helped lead the build out of Slate Path’s crypto investment research and processes.
Prior to Slate Path, Andrew was an investment research analyst at Fielder Capital, Arch Capital, and Hawkshaw Capital, and spent 3+ years working at J.P. Morgan Chase in their Global Emerging Markets trading division.
Andrew is also an active angel investor and advisor to a collection of startup organizations, both in and outside of crypto, and holds a BS from Syracuse University and an MBA from Columbia Business School, including achieving the designation of Chartered Financial Analyst.
Contact Andrew: firstname.lastname@example.org