Tuesday 21 November 2017

Another Angle: Bitcoin set to be the biggest bubble ever - but it'll be addictive nonetheless

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Erik Schatzker

Mike Novogratz is reinventing himself as the king of bitcoin. The swaggering macro-manager, who flamed out at Fortress Investment Group is starting a $500m (€426m) hedge fund to invest in cryptocurrencies, initial coin offerings and related companies.

Novogratz will put up $150m (€128m) of his own money and plans to raise $350m (€298m) more by January, mainly from family offices, wealthy individuals and fellow hedge fund managers, said a person familiar with his plans.

At that size, the Galaxy Digital Assets Fund would be the biggest of its kind and signal a growing acceptance of cryptocurrencies such as bitcoin and ether as legitimate investments.

For Novogratz (52), the fund marks a comeback to professional money management after humbling losses at Fortress and almost two years of self-imposed exile from Wall Street.

Novogratz declined to confirm or deny that he is raising a fund, citing regulatory constraints.

He did talk at length about his recent experience with digital assets and why he is eager to trade them.

"This is going to be the largest bubble of our lifetimes," Novogratz said.

"Prices are going to get way ahead of where they should be. You can make a whole lot of money on the way up and we plan on it."

Just this month, bitcoin hit a record of almost $5,000 then plunged 30pc in two weeks as buyers weighed the impact of a Chinese ban on initial coin offerings and domestic trading in virtual currencies.

"I sold at $5,000 or $4,980," he said. "Then three weeks later, I'm trying to buy it in the low $3,000s. If you're good at that, it's a lot of fun."

The fortunes being made and lost are just one reason Novogratz likens the cryptocurrency market to the Wild West. Digital assets like bitcoin need more regulation. In the meantime, some initial coin offerings, or ICOs, will prove to be fraudulent "get-rich-quick schemes," he said.

While the technology community has embraced the libertarian ideal of a decentralised, open-source payment system, in which a fixed money supply is determined by computer code, financiers are taking a more cautious approach.

Only two other hedge funds have raised tens of millions of dollars to invest in digital assets - Polychain Capital and MetaStable Capital.

Novogratz's fund will have a broader mandate, including market-making, arbitrage, stakes in internet coin offerings and venture capital-style investments in digital-asset development, said the person familiar with his plans, who asked not to be named.

He also brought on as partners two traders with years of experience in hedge fund investing and compliance: Richard Tavoso, the former head of global arbitrage at RBC Capital Markets; and David Namdar, who worked at Millennium Partners, Marto Capital and UBS, the source said.

Most large institutions have steered clear of the cryptocurrency market out of scepticism about its legitimacy or concerns that the mostly unregulated instruments are too volatile.

JPMorgan Chase CEO Jamie Dimon captured the prevailing view on Wall Street earlier this month when he called bitcoin a "fraud" and said he would fire anyone at his bank for trading it.

Where others see volatility and liability, Novogratz, a former Goldman Sachs Group partner, smells opportunity.

"In a lot of ways, this is a market like any other market," Novogratz said. "You see the psychology of fear and greed in the charts the same way you'd see it in charts of the Indonesian rupiah or dollar-yen or Treasuries.

"They are exaggerated because of less liquidity and because you can't get short."

Novogratz estimates that he now has about 20pc of his net worth in digital assets. "Remember, bubbles happen around things that fundamentally change the way we live," he said.

"The railroad bubble. Railroads fundamentally changed the way we lived. The internet bubble changed the way we live.

"When I look forward five, 10 years, the possibilities really get your animal spirits going."

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