Rasheed Sabar Managing Director and Portfolio Manager at Ellington Management Group

WHAT DO YOU MAKE OF CHINA CRACKING DOWN ON BITCOIN TRADING?

China has always had an ambivalent relationship with bitcoin. It has "cracked down" on it multiple times in the past, banning customer withdrawals from exchanges only to reverse those decisions months later. It has also telegraphed its intention to develop its own state-sponsored cryptocurrency. On the one hand, as a nation with capital controls, it will remain opposed to bitcoin. On the other hand, as a hub of bitcoin mining and to the extent bitcoin becomes a (non-dollar) global currency, it will support bitcoin.

WHY IS BITCOIN AN ATTRACTIVE AS AN ASSET?

It is valuable as a "state-less" money system. It is not tied to banking system or monetary policy of any one country. This is especially valuable for citizens in countries with bad monetary policies or corrupt banking systems.It is also an asset that exhibits reflexivity (a theory of markets developed by George Soros), in which increased prices trigger more infrastructure development which in turn triggers increased adoption and then increased prices. Finally, it can be conceived as "digital gold", i.e. an asset that appreciates in times of low government trust or banking crises with low correlation to traditional asset classes. That being said, there are many cons, including that it is still a maturing technology and one that will inherently have a conflicted relationship with governments and central banks.

WHAT IS THE CURRENT OPPORTUNITY SET?

There are opportunities both in asset management and in infrastructure investments . Within asset management, there are alpha opportunities (short-term and event driven) as well as beta opportunities (risk premia products). There are also opportunities to create income streams from crypto assets through lending products .

WHY WOULDN'T AN INVESTOR SIMPLY BUY BITCOIN THEMSELVES NOW THAT IT IS MORE ACCESSIBLE, AS OPPOSED TO INVESTING IN A FUND AND PAYING THE FEES?

Investors who want to do it themselves should need to solve (a) coin selection, (b) execution, (c) security, and (d) risk management. With respect to coin selection, the space is larger than bitcoin, and new tokens come out each week. Execution is non-trivial given that bitcoin trades on 50+ exchanges, all at different prices. Security is not easy given that any funds stored online are vulnerable to theft. Also, dynamic risk-managed strategies may suffer smaller drawdowns than passive buy and hold strategies.

IN YOUR OPINION, WHEN DID BITCOIN BECOME A CREDIBLE CURRENCY TO TRADE?

Any asset that has sufficient liquidity and volatility is "credible". Traders make money off of volatility.

GIVEN THAT BITCOIN TRADING IS A NEW FRONTIER WITH A LACK OF TRACK RECORD AND COMPETITORS, WHERE DO YOU LOOK TO HITE FROM TO STAFF YOUR FIRM?

We look for folks at the intersection of technology and finance.

DO YOU FEEL THAT THIS CAN BECOME AN INSTITUTIONAL PRODUCT?

Something about the space feels inevitable, though the path for how we get there is unpredictable.

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William Vranos Founder and Portfolio Manager, Green Key Partners

WHAT IS BITCOIN AND WHY IS IT ATTRACTIVE AS AN ASSET?

Bitcoin is the first decentralized digital currency, and a store of wealth, akin to precious metals or oil. Because bitcoin uses a PoW (Proof of Work) protocol to solve the issue of distributed synchronization, it is incredibly secure but it probably won't scale efficiently enough to be a viable global micro transaction system. What's nice about bitcoin is that it's decentralized. Many laud it as a "hedge against governments" but I'd argue gold has already been an effective doomsday indicator for some time. Unlike gold, most bitcoins are already in circulation and the supply is not dependent upon price action. The supply growth of bitcoin is fixed, self-adjusting, and slowly decreasing , therefore it's a secure, decentralized store of wealth with an established growth rate.

WHAT DO YOU THINK OF CHINA CRACKING DOWN ON BITCOIN, AND OTHER NAYSAYERS?

Bitcoin actually has done very well in countries with tight capital controls. China looks to be cracking down on bitcoin exchanges due to concerns of citizens expatriating funds. To the high profile investors that claim we're in a bitcoin bubble; you may be right. This could be similar to a .com bubble where the vision is spot-on but the valuations are too optimistic . But bitcoin can't be stopped by a government or powerful investors - it will only die if interest in it dies - and this isn't happening any time soon.

WHY WOULDN'T AN INVESTOR SIMPLY BUY BITCOIN THEMSELVES NOW THAT IT IS MORE ACCESSIBLE, AS OPPOSED TO INVESTING IN A FUND AND PAYING THE FEES?

Depending on the management fee charged, a fund which is simply long bitcoin isn't a great deal. For example, Grayscale offers a Bitcoin Investment Trust that just holds bitcoin , charges 2% annually, and shares of it have easily traded at a 40% premium to the actual bitcoin price. This makes it clear that some investors are willing to pay a fee not to have to worry about exchanging and safely storing bitcoins. Even those who are willing to handle bitcoin themselves are still very exposed , making a portfolio of cryptocurrencies a more attractive offering.

IN YOUR OPINION, IS BITCOIN A CREDIBLE CURRENCY TO TRADE?

It depends on your risk tolerance and liquidity demands . We've seen exchanges hacked in the past, and users have no guarantee that lost cryptocurrencies will be honored. Some exchanges protect dollars with FDIC insurance, but the government has made no indication that it will be insuring digital assets any time soon. Further, the lack of derivatives may not matter to a casual investor, but it may keep large institutions at bay. There's currently no good way to short bitcoin , and the inability to hedge exposure is an important hurdle for bitcoin to jump on its path towards legitimacy.

GIVEN THAT BITCOIN TRADING IS A NEW FRONTIER WITH A LACK OF TRACK RECORD AND COMPETITORS, WHERE DO YOU LOOK TO HIRE YOUR STAFF? WHAT TYPES OF BACKGROUNDS MAKE GOOD BITCOIN INVESTORS/EMPLOYEES?

Since nobody is incredibly experienced in this particular space, I have found success in hiring people whose experiences are most directly compatible with my needs. For example, I knew I would need to leverage Amazon Web Services, so I found a partner who worked in this department at Amazon. Another partner of mine has very strong math and programming skills that can be applied in a variety of ways.

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Jay Berg Founder and Portfolio Manager, Private Key Capital

WHAT DO YOU MAKE OF CHINE CRACKING DOWN ON BITCOIN TRADING?

Banning trading and exchanges will have little impact on bitcoin price. New exchanges in Korea and Japan are already being used by as an alternative to Chinese exchanges. However, if China were to ban bitcoin mining, it would have a significant impact on short term liquidity of bitcoin.

WHY IS BITCOIN AN ATTRACTIVE AS AN ASSET?

Bitcoin can't be replicated using any combination of gold, US sovereign bonds, or foreign currencies, and is not strongly affected by the macroeconomic factors that drive most asset classes. It can be a part of passively held, long only portfolio. It is a hedge against harmful geopolitical events due to its decentralized nature. Bitcoin is uniquely positioned to hedge against geopolitical risks but remains unaffected by the macroeconomic factors that drive other store of value asset

WHAT IS THE CURRENT OPPORTUNITY SET?

The basic investment opportunity is to gain exposure to the dollar price of bitcoin with a buy and hold strategy. Another strategy is to earn additional bitcoins with a basket of alternative coins (alt-coins). Since these coins are traded against bitcoins, alt-coin appreciation may earn you bitcoins independent of the USO price of bitcoin.

There is also the ability to short bitcoins against USO, or to short alt-coins against bitcoin. A long / short portfolio of alt-coins can also be employed, with the possibility of remaining market neutral.

Finally, there is the Initial Coin Offerings or ICOs, which offer the highest risk/reward . Bringing ICOs to market, or "pre-lCOs" are very lucrative opportunities, but has still unknown regulator risk.

WHY WOULDN'T AN INVESTOR BUY BITCOIN THEMSELVES NOW THAT IT IS MORE ACCESSIBLE, AS OPPOSED TO INVESTING IN A FUND AND PAYING THE FEES?

Bitcoins are meant to be controlled by individuals. Most people who invest in bitcoin will likely manage their own wallets and run bitcoin full node software . Other Investors who are less technically savvy, or possess very large bitcoin holdings, are susceptible to a loss/ theft or hack, where their entire bitcoin investment can just vanish without a trace, therefore investing in a fund may be appropriate when the fund managers themselves are well versed in bitcoin, and bitcoin security. In this case, among other benefits, the investor is paying fees for potentially increasing the safety of their investments.

IN YOUR OPINION, WHEN DID BITCOIN BECOME A CREDIBLE CURRENCY TO TRADE?

Bitcoin is not necessarily a viable currency at this moment in time, but it is a real solid store of value. Bitcoin has always been a credible and investable asset as a store of value, and its properties as a borderless, scarce, and instantaneously transactable asset with a history of being used as a hedge against geo-political and economic uncertainty make it a "new gold". Also, due to emerging payment system technology , holders of bitcoin and other currencies can now use Cryptocurrencies at nearly any retailer with point of sale conversion technology. Advances like this make Bitcoin a much more viable currency. In essence, the currency becomes more credible as technology is developed / improved.

GIVEN THAT BITCOIN TRADING IS A NEW FRONTIER WITH A LACK OF TRACK RECORD AND COMPETITORS, WHERE DO YOU LOOK TO HIRE FROM TO STAFF YOUR FIRM?

In my opinion, the best place to source talent is through industry referrals. The cryptocurrency community is very tight knit and typically industry insiders have the best information on talent.

WHAT TYPES OF BACKGROUND MAKE A GOOD BITCOIN INVESTOR/EMPLOYEES?

Software developers, hackers, coders, technologists.

DO YOU FEEL THAT THIS CAN BECOME AN INSTITUTIONAL PRODUCT?

Yes, because cryptocurrencies have the potential to replace precious metals as the premier store of value asset in institutional portfolios.

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Chris Cutler CEO, Senior Hedge Fund Due Diligence Analyst at Manager Analysis Services

WHY WOULD CRYPTOCURRENCY FUND BE POTENTIALLY INTERESTING?

Diversify across numerous badly engineered cryptocurrencies [please excuse my sarcasm].

HOW DO YOU DUE DILIGENCE A STRATEGY THAT IS ENTIRELY NEW, CONSIDERING THAT MOST OF THESE MANAGERS HAVE A PROGRAMMING BACKGROUND, NOT A PM BACKGROUND?

Actually I would like to see managers with both technology and payment systems/regulatory backgrounds. Investors in and creators of cryptocurrencies often underestimate the long-term competitive hurdle posed by the complexity and safeguards built into the existing payments systems. For modern payments systems, illicit payments can often be tracked by police authorities, payments reversed, crime deterred, theft detected. With cryptocurrencies, all of these are problems. The Mount Gox scandal, with over $400 million of bitcoin stolen, is just the tip of the iceberg. Other thefts of bitcoin have occurred and haven't been widely reported. In fact, bitcoin's "keys" would be easily mined in a post-quantum technology framework. Many investors are looking at cryptocurrencies the way they look at venture investing. Most investments will return zero, but only one needs to be successful to make the overall allocation wildly profitable. That may be true. However, many of the white papers I've read offer just a bag of bolts and I suspect most investors will be very disappointed.

DO YOU THINK THERE IS LONGEVITY IN THE SPACE?

Yes I do. A few keys to success long-term are for the cryptocurrency to:

• Have a sensible governance process. Bitcoin's splitting into three camps shows it does not have a very sensible governance process. Moreover, changes to technology and to future security needs that may not be anticipated today would necessitate some sort of human decision-making body in the future. That would require a governance process that I haven't seen in any of the white papers I have read.
• Have speed of execution and verification, so there is a reasonable prospect for it to be used as a currency without taking even minutes to clear and process transactions.
• Allow for effective security protocols. I am left to wonder how many bitcoin holders have not yet realized that their primary number keys have been solved for and their bitcoins stolen .An effective audit trail for law enforcement to assist in recovering funds, and to prevent the crypto currency's use as the preferred vehicle for terrorists, extortionists, rogue states, and other criminals, will be critical to a cryptocurrency's successful legal adoption in many countries.

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