Polychain Capital is at the vanguard of cryptocurrency investing, attracting backers from prominent ventures capital firms like Andreessen Horowitz, and betting on companies that might define the next generation of blockchain. Earlier this year, Polychain became the first crypto fund with more than $1 billion in assets under management, according to a regulatory filing.
That figure is from February and comprises cryptocurrency assets, equity in companies and unspent cash pledged from investors. (The total may have dipped below $1 billion in recent months given how the price of Bitcoin and other cryptocurrencies have fallen since February. The total could also have increased, in part because the fund is still taking new investments).
Olaf Carlson-Wee, the founder and CEO of Polychain, is relentlessly upbeat about not just Polychain but the state of the blockchain industry and what’s coming next. This is unsurprising given that he’s a man who believes in Bitcoin so much that he once spent years trying to live off it.
Carlson-Wee is not just fervent, however, but deeply knowledgeable about crypto, thanks in part to his time at Coinbase, which he joined as the Bitcoin exchange’s first employee. Fortune caught up with him to learn more about Polychain and how he perceives the future of digital assets at a time when big VCs are experimenting with different investment structures. Our conversation has been edited for clarity.
What’s Polychain’s investment strategy?
Carlson-Wee: We're long only. There are no algorithms or quantitative strategies, which is what a lot of people think when they hear the words “hedge fund.” We invest fundamentally based on what we view as the best technology that allows for novel behavior on the blockchain--for example, novel on-chain governance mechanisms that allow token holders and users to vote on changes in protocol.
How did you raise all that money?
We've had pretty incredible growth from pretty humble beginnings. Our first base of investors was high-profile venture funds, which is unusual for the industry, but crypto is esoteric enough they valued our unique skill sets.
I can’t reveal the identity of all our limited partners, but they include Andreessen Horowitz, Union Square Ventures, Founders Fund, Sequoia, Bain, and Bessemer.
What Is Polychain Excited About Right Now?
The team is pretty excited about Dfinity [a decentralized “Cloud 3.0” that aspires to challenge Amazon Web Services]. We’re big on novel mechanisms for smart contracts, and the use of Wasm compilers to open up more programming languages. This will open up the gates for hundreds of thousands of developers. Also, threshold relay techniques, which offer a quicker consensus mechanism for blockchains.
That Sounds Really Complicated. How does Polychain Keep Up?
It takes a lot of technical sophistication to understand some of these projects. I’m the chief investment officers leading decisions but we also have an incredible team of people I call crypto native. They’ve been in this world for a long time.
We spent most of our time reading white papers, and reading specs. The key is finding projects with a clear blueprint. Once you have that, you can begin getting it built out.
Prices Are Down and Fewer People Seem Interested in Crypto These Days. What’s Up With That?
Prices have slumped but it’s important to step back and get some perspective. When you look at the entirety of the ecosystem, it’s been the most aggressive growth of any asset class that has ever existed.
If you want to talk about growth in users, one of the ways to measure that is transactional numbers on networks--that line is healthy, and up and to the right. I'm talking about the major networks like Bitcoin and Ethereum.
We've seen a retrenchment from the days of last September to December. But look back a year ago, and markets have grown substantially. It’s easy to zoom way in on the short term. Volatility has been small in the six months compared to what I've seen in long term. This is a natural part of porting all the assets of the world onto Internet.
Do Funds Like Polychain Mean Blockchain Is Now More About Institutions Than Individuals?
I would push back on that sentiment. If you think about who trades on NYSE or NASDAQ, it's almost exclusively institutionally managed pools of capital -- that's the vast majority of trade volume. If you look at managed pools of capital for crypto, that’s definitely the minority of markets. Today it's mostly crypto enthusiasts and technologists trading their assets.
While the pendulum has swung away from at home hobbyist traders to more professional traders, I do think it’s relatively small compared to almost any financial market.