 Live from Nassau in the Bahamas, it's theCUBE covering Polygon 18, brought to you by PolyMath. Hello, welcome back. We're live here in the Bahamas for the Polygon 18. This is a cryptocurrency tokenization event. It's really about the future of work, future of infrastructure, and all the top entrepreneurs and investors are here. I'm John Ford, my co-host Dave Vellante, it's theCUBE coverage. Our next guest is Mike Busella, who's a partner at Blocktower, a progressive hedge fund doing amazing work, really putting the stake in the ground, making investments and taking a new model of finance, taking some old school techniques applied to the new school. Mike, welcome, thanks for coming on theCUBE. Thank you for having me. We were just talking before we came on that you from Goldman, your team has expertise. What is the philosophy of the landscape now? As you guys, the young guns look at this landscape. It reminds me that the old days of PC generation, everyone was poo-pooing the PC generation. Oh, they just toys, I mean, they heard that from Mike, you know, you know, deck guys. This shit's working, I mean, isn't it? Yeah, so it's interesting, you know, when I first delved into cryptocurrencies, I'd say probably 90 plus percent of market participants didn't exist that due today. And when you go from old world finance to new world, you kind of get this little skeptical look from people. And that was last year. Now, simply, six months later, you know, it's obviously taken a massive leap forward, both from adoption from the broad investment community, institutions, some of the large old world players in the broker-dealer community, who are all kind of dipping their toes in this space as well. So it's certainly grown quite a bit in the last year. I mean, there's two reactions to crypto, and one is, and token economics is, that's the future, I'm all in, I'm long on the game, and then the other half is, man, there's a bunch of scams out there. I mean, I get two reactions from really smart people, you know, the risk conservative ones or risk management oriented. There's all us scams in there, it's an implode to go take that hill. I'm long on Bitcoin and blockchain. Yeah, I mean, as with any new technology and new industry, there are going to be bad actors in this space, but you kind of try and bifurcate the community and understand who is actually driving the technology forward, right? Because, you know, I very much appreciate what the technology represents. I am part idealist, but I'm also part capitalist and realist where I understand the reality of the situation right now. There is a lot of inflated valuation in the market. There are a lot of players in this space who shouldn't necessarily be operating in this particular area, but see the allure of capital markets. But I think, you know, as the investment management area grows, you're going to continue to see a bit more, I guess, diligence on the behalf of investors looking at particular projects and understanding the risks associated with those. I was talking with Dave last night. I heard some of your hallway conversations when we were bantering last night at the video coin event and throughout the evening. You have a philosophy and most successful investors have a risk management view. Can you share your thoughts on that? Because I think there's a way to do it and there's a way to be a pro. You guys are pros. What's the pro tip for you guys as you talk to investors and say, hey, young people coming up or seasoned investors, here's the pro tip on risk? Sure, and as we sit in a conference like this, an amazing regulated token conference, registered token conference, and Acra Capital, and any other conference you've seen, if you take a step back and kind of put yourself in the broad community again, you have to understand that this market is not without its risks. You have to understand that investing in cryptocurrencies takes on an enormous amount of volatility and risk that you need to solve for. So as you're investing across your entire portfolio, you have to think of crypto as a sleeve, as an allocation of your risk capital. And within that, it's going to be one of the most volatile, most cyclical asset classes you're going to invest in. So you need to, I guess, you want to gingerly approach it and you want to account for that risk in some way. And as fund managers, you should also be accounting for that risk as well. We can talk a bit more about looking at ICOs versus looking at the broad publicly listed cryptocurrencies, but there are very different risks associated with each one of those underlying investments. What's the risk that scares you the most? It's a good question. I continuously ask myself, what could crater this market? What could completely degrade network value and cause the downside, which is absolute zero in this space? I had said for a long time, globally regulated coordination of market participants, they can't regulate the tokens or the technology that can regulate participants, which could degrade network. I would have to say that continues to be the biggest risk, although I think we're seeing with Clayton and Giancarlo's recent testimony that the U.S. is looking to be helpful. They're looking to stop a lot of the bad actors in this space, but they're looking to be helpful for the broader community. It was a competitive imperative. I mean, I would think, but presumably there's an investment premise that's not just short term, I'm going to buy low sell high. What is that fundamental investment premise, which presumably you're optimistic about? Yeah, I think you could approach it from many different angles, right? When you think about investing in cryptocurrencies, more broadly, you should think about it in different types of exposures, passive exposure, right? So where you have a small piece of your portfolio with the highest expected return in tokens that you think will generate the most value over time, store of value, privacy coins, base level protocols. Like, you know, obviously a big Canadian network here, Ethereum was created out of a group in Toronto. Then you think about the next level, which is more VC oriented. So, you know, folks who are investing in early stage projects, the next Ethereum, the next Bitcoin, something that will displace the leaders of the incumbents of the current market. You could think about more risk managed approach, folks who are actively managing the space to both take advantage of an inefficient nascent market, which in the likes of which many of us have never seen in a long time from the traditional asset world. And then you think about private investments in things like exchanges, mining operations, the entire ecosystem. There's a lot of private equity opportunity as well. So you kind of want to diversify your exposures amongst those levels of the ecosystem. So those inefficient markets are the ones that are most likely to get disrupted, right? Everybody talks about, you know, banking as one of the potential areas where blockchain I'm just going to drive through. But generally speaking, the banking industry hasn't been radically disrupted as well as talk about it, people are kind of expecting it. What are the inefficiencies you see and what makes banking sort of ripe for disruption and why hasn't it been more disrupted? Is it because of the regulations, the risks associated with that? Sure. So, you know, banks do have large working groups looking at blockchain and how it can be implemented in their business. I think, you know, as large banks do, they're taking their time and doing a lot of diligence before implementing anything. That's not to say they haven't been investing in this space. If you look at, you know, Goldman Sachs invested in Circle in its early days. Circle is one of the largest OTC dealers in cryptocurrencies. Circle recently purchased Polonix, one of the larger exchanges in the US. And so they have their toehold position in this space and they'll be gathering information and data to understand exactly how it could potentially disrupt their existing businesses and how they could evolve and become more, I guess, more disruptive in the ecosystem as well. I want to get your reaction to some feedback we've been hearing and we've been commenting on it. On theCUBE here and on the shows, you see a pattern emerging in ICOs. Certainly, we've had enough data to see kind of what people have been doing. Certainly, the SEC's been helping. The SEC's been helping with the utility, kind of poo-pooing the utility. The shift to securitized tokens is a great thing. Makes the paperwork go faster. It's all above board. It's vehicles people are used to. But now you start to see companies that are basically startups doing a big land grab, raising obscene amounts of capital by startup standards. I mean, you go venture capital, you raise a Series A and you don't have a product, you get five, maybe 10 if you got a rockstar team. Okay, here you're raising $50 to $100 million with no product. So you got startups. And then you got the other one in the spectrum, complete pivots. I mean, we're going out of business. Throw the Hail Mary, right? That's raised $50 million. And then you got the growing companies that are ripe for token economics. So to me, everyone's focusing on those growth areas versus the pivots and the startups because the startup's got to be nurtured, board meetings, have to make decisions. It's like a nightmare. I mean, not nightmare. It's hard, as hard as hell. So what's your thought, your reactions? Do you agree with that? You have any commentary reaction to that? I think crypto currencies, digital assets represent an opportunity for the very early stage projects who have very smart technology teams, right? Guys who want to focus on the underlying code and development but aren't the types of folks who can go out and raise capital and have the two dozen, three dozen VC meetings where they have board presentations and they have to present their full scope of what their project's going to be. These are guys who really are, their time is much better well spent coding and developing their project. And I think crypto currencies and what we're seeing here at the conference and the ecosystem surrounding it helps smart individuals with good projects to happen to the funding markets, right? So you say community is the new benchmark for operation, operating a startup because that makes sense. Why spend my time going through all these hurdles and hoops when I can just go to the community for feedback. Exactly. And governance. Right. Okay. Mike, can you talk about, just from a company's perspective, they got to see, well, that's a bad route because the SEC's going to regulate that or falls under some umbrella of regulation. So here's how to get around that. But at the end of the day, I mean, why not? Why not absorb those, you know, adhere to those regulations? I mean, is it a just cost of doing business? Pay a hundred grand a year for an audit? What are you seeing as the logical alternatives for companies? Sure. So there is a very lengthy process to doing a traditional listing in an IPO or, you know, for some folks, it's a matter of selling equity on their cap table. Right. Versus selling a token that's unassociated with any of the capital structure. Sure. You know, I think regulated, but regulated or regulated tokens, right? So what the future of this business will be are necessary because, you know, there's a- It's inevitable, right? It's inevitable, right? And I think for this market to achieve the scale that it needs to, you need to have a framework in place for large institutional participation. And I don't think you're going to be able to get there without some sort of regulatory- You need guardrails, but you can't over tax the institutional investors. I mean, you got to let- And the SEC's doing that. They're not clamping down. They're just kind of sending signals. Right. I mean, they're just- And the SEC's doing it, I think, in the right way. Where they're saying, listen, we're going to do our diligence in this space. We're going to understand exactly what the token economics are. Why you decided to list the utility token and why you went through an ICO process versus an airdrop. They're- The airdrops are interesting. Talk about that. I mean, how does that view? Well, I mean, now obviously that's come into play quite a bit and people are debating whether or not they want to be doing the traditional ICO process or the airdrop. The airdrop, obviously, there's a lot less economics associated with that in terms of the capital raise. But, you know, I would say, again, I think what the regulatory agencies are trying to focus on is, for those, like we just said- What to look at? Why exactly have you gone through a token process versus going to traditional route? That's interesting. So, I mean, I mentioned tax consequences. It's a big thing that's slowing things down a bit. I won't say it's towards breaching all, but it's causing people to take pause because, you know, I'm slinging APIs around. I got Bitcoin over here. I got integrated wallet. Selling Litecoin across over the top is another currency. And all taxable. Yep. So, like, you guys have done hedge funds before as pros. Come into this new market. How conscious are you of that? And is the industry doing its thing? Are people going to go out of business because they misfire on their allocations? Or, I mean, there's a lot of nuances in being a fund. Yeah, I think the biggest mistake you can make as a fund manager in this space is not taking the most conservative approach to regulatory issues, taxation issues, and operational issues like security. I think you want to take a hard line. You want to have both your outsourced service providers. And you also want to be in touch with some of the largest accounting firms in the world who have large working groups in this space, right? The big four accounting firms are obviously doing a ton of work here. And you want to constantly take in new information and be prepared for what the next iteration of tax policy could be. So, you need to frame what you look for in an investment and what you say, you don't walk, you run from that investment. What are the parameters? Yeah, so, I mean, I would say broadly speaking, I don't want to touch on block-tar specific, but broadly speaking, you know, there's many different ways you can attack the markets, right? There's, you know, I said you can kind of squeeze the orange in any different ways. And like I said earlier about the different types of underlying exposures, right? Passive, VC, active, those are the ways you think about it from an investor standpoint. As a fund manager, it's much different, right? You are managing assets on behalf of an individual and you are their exposure to the market. Hopefully, you are one of their exposures to the market as I think any responsible investor in this space should think about it in a sort of cross-list of risk. Come March 16th, Bitcoin will go up. That's the prediction. Pay taxes and then back on the saddle. Getting shorted. Mike, block-tower, capital, congratulations, great firm. Really, put the stake in the ground. You're seeing institutional money coming in. That is a great sign for a healthy ecosystem. A lot more work to do. Thanks for sharing your insights here in theCUBE. We'll be back with more live coverage after this short break. I'm Jaffer DeBellante. Thanks for watching theCUBE.