Nathan Cox is the Chief Investment Officer at Two Prime, an investment firm specializing in digital assets offering clients exposure to Bitcoin and Ethereum. Before joining Two Prime, Nathan served as the Chief Investment Officer for Prana Capital Group, where he developed and managed derivatives, futures, and equity strategies for the volatility-focused hedge fund.
Can you tell us generally what investment services Two Prime offers?
Put simply, we offer a suite of customized solutions for a number of investor classes. Two Prime helps institutional investors, high net worth individuals, family offices, and corporate treasuries gain exposure to the growing market of digital assets. Our fund takes a holistic approach to understand the specific needs, goals, and priorities of clients to deliver best-in-class digital asset investment solutions and performance.
Our primary offerings include risk-managed exposure to Bitcoin and Ethereum with added yield, holistic consultation and portfolio analysis for family offices, corporate treasury management, and medium- and long-term Bitcoin investment strategy.
We serve our clients by managing risk and directing capital towards goals based upon time horizon, risk tolerance, current financial position, and the movements of the financial market.
Two Prime says that its asset investment products “leverage volatility to maximize upside while reducing downside risk.” We all know that crypto is a volatile investment vehicle, how does Two Prime reduce the risk associated with such volatility?
Two Prime offers an actively-managed BTC- and ETH-long fund, focusing on wealth preservation and a secondary focus on growth. There really aren’t any other hedge funds doing what we do right now.
We employ a number of methods to reduce risk. Through a combination of high yield lending and derivative management, we capture upside returns while protecting against downside volatility, and programmatically rebalances for optimized wealth preservation and long-term growth. Our derivative hedging strategy allows the fund to profit from short-term volatility events while maintaining an upside correlation.
To identify upcoming drawdowns we use a combination of on-chain metrics, quantitative market signals, cross-asset correlation, and stock-to-flow as risk indicators. By understanding the inherent volatility of digital asset markets, we protect our clients’ wealth by hedging risk.
Can you give us some more detailed information about Two Prime’s Digital Asset Fund such as minimum investment, lockup periods, etc.?
The minimum investment in our fund is $1 million with a one year lockup. We return quarterly redemptions. As of March 2021 we have more than $100 million AUM.
The crypto market has seen a lot of growth since early 2020; many analysts point to the recent increase in Bitcoin derivatives as an indicator of growing popularity amongst institutional investors, and that those institutional investors are helping to fuel the recent meteoric rise. What elements do you believe in the past year have led to Bitcoin hitting almost $60k?
There are a number of elements leading to this recent BTC run and they’ve affected both retail and institutional adoption.
Just last month we saw the second oldest bank in the United States, BNY Mellon, add support for Bitcoin on behalf of its asset-management clients. When landmark financial institutions start supporting Bitcoin it's a clear signal that it's becoming a bigger risk not to invest in digital assets.
Then we’ve seen companies like Square, Tesla, Microstrategy, and others start adding Bitcoin to their corporate treasuries. These are all just signals that we’re in the early innings of corporate adoption. Digital currencies are beginning to play a larger role in robust balance sheet management.
COVID has also played a huge part in the digital asset narrative. Pandemic lockdowns accelerated the adoption of all things digital – from Zoom to Robinhood to crypto – and governments worldwide were forced to print money as local economies were crippled. This also brought a lot of people who were watching from the sidelines onto the playing field.
After the 2017 bull run, Bitcoin lost steam and all its gains by 2019. Do you think a similar thing will happen with this current bull run, and why or why not?
Bitcoin has been around long enough for us to observe and understand that Bitcoin moves cycles. There are many data points to consider when assessing how long a bull market will last, and no one knows the answer. We can, however, come up with a rough idea.
Every Bitcoin halving cycle requires 210,000 blocks to be mined and takes about four years to complete. Historically, each halving cycle’s first 70,000 blocks represent the bull run’s strongest period, accounting for a logarithmic move higher. This equates to roughly 16 months post halving when the bear market runs its course.
We estimate that most of our current bull cycle will be completed in the first half of 2022. At this point, we would expect considerable volatility to return to the market.
Of course, this is not an exact science. We could easily overshoot the 70,000 block target if industry giants like Apple or Oracle add Bitcoin to their balance sheet, or if sovereign wealth funds add it to their treasury reserves. We could also undershoot it if corporations stop buying and governments decide it’s too late in the cycle to start buying.
As we are all aware, Elon Musk has been a very vocal proponent for Bitcoin and recently led Tesla to purchase $1.5Bn worth of Bitcoin when the Bitcoin market cap was around $600Bn. Do you think that Tesla’s recent Bitcoin acquisition will inspire other high-profile CEOs to adopt Bitcoin as an investment vehicle or do you think we will see more of a “watch and see” approach?
Almost immediately after Tesla’s purchase, Twitter’s CFO Ned Segal publicly said they’re exploring the possibility of adding Bitcoin to Twitter’s balance sheet. Not too long after that, Square and Microstrategy made sizable investments — not their first — in Bitcoin.
Corporates are clearly buying Bitcoin to hold for the next several years to weather a hyperinflationary environment.
The bottom line is that we’ve been having a lot of conversations with corporates to discuss creating clear Bitcoin and Ethereum strategies for their treasury reserves as a hedge against inflation. Announcements like these from Elon Musk, Jack Dorsey and Michael Saylor serve as a signal of what’s to come.
The crypto market sees a lot of pumps and dumps of useless coins but there are certainly some altcoins that are quality investments. Aside from Bitcoin and Ethereum, which crypto do you believe has the qualities to potentially perform like Bitcoin in the future and why?
There are a number of very useful coins and tokens out there on the market. Right now we’re primarily focused on tracking the performance of BTC and ETH, but there are certainly some great projects doing important things for the industry. We’re definitely paying attention to what’s going on in the world of DeFi.
Very recently, Canada approved the first two Bitcoin ETFs in North America which are now traded on the Toronto Stock Exchange (TSX). Although the SEC has yet to approve ETFs in the US, it is expected that once Bitcoin-friendly SEC Chair nominee Gary Gensler is appointed that some Bitcoin ETFs will finally be approved in the US. What are your views on Bitcoin ETFs and what benefits and/or disadvantages do you see?
ETFs are certainly attractive investment vehicles for passive investors. Bitcoin ETFs would allow the average, everyday investor who is crypto-curious to get involved in digital assets in a fairly convenient way. More people are familiar with investing through ETFs than they are through crypto exchanges.
US regulators want to keep as much money being invested in crypto onshore, and more stateside investment could fuel greater gains in the BTC market. Generally, for broad mainstream adoption, Bitcoin ETFs are a good thing.
Is there anything else you would like to share with the readers?
It’s important that we keep things in perspective when talking about the meteoric rise of digital asset prices. It’s been the case that the two largest digital assets tend to take turns stepping higher, usually marked by large adoption announcements and news cycles. Right now, Bitcoin is in the spotlight with major corporate treasury adoption, but we expect both assets to see significant upside in the near future.
Ethereum is powered by its passionate development communities. As the price goes up, more dev talent joins the Ethereum network, which in turn will shorten the length of time it takes to upgrade the network.
We expect ETH to continue its move higher, with periods of volatility along the way, and regular consolidation as we digest new price levels. Ethereum has significantly different use cases than Bitcoin, and for that reason, we anticipate continued price appreciation.