Leave it to a Millennial to come up with a way to disrupt disruption. Olaf Carlson-Wee, 27, was working as head of risk at Coinbase, a San Francisco–based exchange for buying and selling digital assets like Bitcoin, when he noticed several new developments in the nascent cryptocurrency sector. “I thought, ‘As an investor, how can you best take advantage of these trends?’” recalls the founder of hedge fund firm Polychain Capital.
Over the past year the distributed ledger technology that powers cryptocurrency transactions — specifically, the ever-growing blockchain database — has begun to move far beyond the Bitcoin digital payment network. Financial tech–savvy entrepreneurs are hitching their digital payment wagons to several sectors and trying to raise money for their efforts via cryptocurrency.
Data storage network and electronic currency Filecoin, for example, allows users to rent out extra space on their computers for file storage. Tech companies that might previously have used an initial public offering to raise funds have begun holding so-called initial crowdfunding offerings, issuing blockchain tokens instead of stock.
Carlson-Wee aims to capitalize on these shifts with Polychain, a long-only firm he launched this month to build a diversified portfolio of blockchain-based cryptocurrency platforms such as Bitcoin and Ethereum.
“I view investing in the blockchain itself as the best way to take advantage,” he says. “That way the risk is not consolidated to an individual person, company or legal jurisdiction — you just bet on an open-source program. Any individual can go under, but a protocol can continue, as we’ve seen with Bitcoin.”
Industry observers have warned of the hype surrounding blockchain technology, and many venture capitalists and other investors are wary of new currencies whose value is determined by a small, though growing, market. But Carlson-Wee, who grew up in Minnesota across the river from Fargo, North Dakota, is a true believer.
At Vassar College, where he earned a sociology degree in 2011, he wrote his undergraduate thesis on distributed networks and financial cryptography. After graduation he spent several years living mostly on Bitcoins until the influx of new blockchains and distributed ledgers made it complicated. His salary at Coinbase, where he was the first employee and worked for three years, was paid in the cryptocurrency; although his savings are in dollars, he still uses Bitcoins whenever possible.
In addition to his role at the head of Polychain, which has no employees yet, Carlson-Wee is the managing member of Cryptographic Financial, a limited partnership in a fund operated by Numerai, a San Francisco–based hedge fund firm whose capital is run by artificial intelligence. Richard Craib, Numerai’s founder, is a friend of Carlson-Wee and an investor in Polychain.
So far, much investment in blockchain technology has been through the currencies built on top of the database’s protocols; Bitcoin and Coinbase are two of the biggest and most successful examples.
Polychain’s thesis is that no matter which of the new technologies — including Filecoin; Augur, a decentralized prediction market built on the blockchain-based computing platform Ethereum; and blockchain-based social media platform Steem — grow and succeed, betting on blockchain as a whole will pay off as the phenomenon evolves.
Still, Carlson-Wee has been surprised by the healthy investor interest in his new firm. Blockchain has been a buzzword in financial circles for a couple of years, but its ins and outs are so esoteric that few investors are willing to put much weight behind strategies like Polychain’s.
Most of those who have ponied up are the same kind of people who would use a cryptocurrency: early adopters, many of them high-net-worth individuals. Carlson-Wee hopes that after Polychain’s launch — which took place this past Thursday, with about $5 million — the fund will get more attention from institutional investors that want to take a position on blockchain.
Carlson-Wee likens the cryptocurrency environment to the Internet in its early days. “If you’re betting solely on Bitcoin right now, it’s sort of like putting all of your money into a single Internet company instead of a number of different companies, knowing the technology will grow exponentially for many years,” he says. “The Internet did grow, and blockchain will too.”
Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.