The CIO of a crypto hedge fund breaks down why bitcoin could rally as high as $400,000 in 2 years — and explains why he's also bullish on DeFi and NFTs
- Ari Paul is the co-founder and chief investment officer of crypto hedge fund BlockTower Capital.
- Paul breaks down why he thinks bitcoin could rise to $100k-$400k over the next nine to 24 months.
- He also shares the prospects and investment merits of decentralized finance and non-fungible tokens.
- See more stories on Insider’s business page.
Like many investors in the traditional finance world, Ari Paul was dismissive when a smart friend emailed him in 2011 saying “bitcoin is interesting, take a look.”
“I responded definitively, bitcoin will never have value because value comes from either long-term historical appreciation of value like gold or fiat backed by guns,” Paul said in an interview.
That e-mail now serves as a humbling memory for Paul, who is the co-founder and chief investment officer of crypto and blockchain hedge fund BlockTower Capital.
Back then, as a derivatives trader at Susquehanna International and later a risk manager and portfolio manager for the University of Chicago’s then $7 billion endowment, Paul was skeptical of bitcoin.
Over time, as he began to learn more about bitcoin, blockchain, and the crypto space, he fell into the proverbial rabbit hole, but it was the resilience of the digital asset that finally turned him around.
After witnessing the shutdown of the black market Silk Road and the hacker-inflicted demise of the Tokyo-based crypto exchange Mt. Gox in 2013 and 2014, Paul bought his first bitcoin in mid-2014 for about $400 to $500 apiece.
“Bitcoin clearly was surviving and thriving in spite of that,” Paul said. “Even though the price was correcting, I thought maybe this is a good entry price. At least I’m not buying the top, I’m buying a 70% discount from the top.”
Bitcoin could rise to between $100,000 to $400,000
Paul’s experiences working as a trader and asset allocator explain why he was drawn to the world of cryptocurrency.
He said in traditional finance, trading has become extremely competitive where traders are constantly fighting over milliseconds of latency or the second decimal point of models.
However, crypto trading is still “very blue-ocean” and wildly inefficient.
“It’s a very level playing field where you are not competing against incumbents like a Citadel or Renaissance Technologies with many years and many billions of dollars of sunk cost into their hardware, infrastructure, and their expert networks,” he said.
From an investment allocation perspective, Paul was excited by the “100x” potential of the nascent asset class versus the traditional buy-and-hold investing approach used by university endowments, for example.
Aside from its investment merits, he is also attracted to the decentralized and defensive nature of bitcoin in that it could help individuals hide their wealth from the reaches of totalitarian regimes.
“This is a technology that empowers the individual against an army or a state or a mob,” he said. “Someone with a desktop computer or an iPhone can encrypt communications in a way that the state government can’t read. Bitcoin is the money version of that and it empowers people living under a totalitarian state to flee that country with their wealth.”
The appealing attributes of bitcoin have sent the digital currency to as high as $61,000 a week ago from $20,000 last December, but they have also contributed to its notorious volatility. Bitcoin is hovering around $58,500 in Friday afternoon trading.
Paul believes that the volatility is a natural byproduct of bitcoin’s growth phase.
Specifically, as more institutional investors such as Morgan Stanley and BNY Mellon come to embrace bitcoin, the bitcoin bulls would bet on the price of the digital asset and sometimes in a levered way, leading the price to appreciate dramatically.
The flip side of that is once the price goes down a little bit, investors would rush to liquidate, causing a fast and sharp correction in price.
“As long as bitcoin is still in this growth phase and until it reaches maturity where basically the entire world is choosing actively to be long it or not,” he said, “it’s probably going to keep following this curve of extreme volatility as it goes higher.”
Because of bitcoin’s wild fluctuation, instead of setting a specific price target for bitcoin, Paul is estimating that the digital token will rise to between $100,000 to $400,000 in the current crypto bull market that is likely to last another nine to 24 months.
Bullish on DeFi and NFTs
BlockTower Capital applies almost every traditional hedge fund strategy to the world of crypto, which means betting on catalysts, making event-driven trades, or betting on which protocols and projects could accrue usage and value over time, according to Paul.
As a result, he is also bullish on two of the hottest trends in the crypto space right now — decentralized finance and non-fungible tokens.
At the most basic level, DeFi is comprised of decentralized exchanges and decentralized lending, which together have locked in billions of dollars of value.
On the exchange side, the bull case has become extremely compelling since Robinhood and other brokerages decided to restrict retail investors from buying GameStop shares after its short squeeze-fueled run-up, Paul said.
Even before that, the laborious process of transferring assets among different exchanges, whose closure during the weekends adds to the inefficiency, has made the modern exchange infrastructure feel “very outdated.”
“What email was to communication — instant, free, global, 24/7 — bitcoin is that for money; you could transfer it anywhere in the world 24/7,” he said. “And DeFi is email for exchanges, for lending, and for banking.”
As for NFTs, despite the skyrocketing interest in digital art and sports collectibles, Paul thinks that the broad concept of NFTs can be applied to everything from real estate ownership to equity and debt ownership.
But the NFT frenzy among internet-native millennials and Gen-Z is worth noting. In a world where fake goods and fabricated items can look as good as the authentic ones, a cryptographic signature that proves the authenticity and exclusivity of something is “incredibly important,” Paul said.
“It’s really tough to be comfortable buying a $40,000 watch when I know that I can’t tell the difference between that watch and a $2,000 knock-off even on close inspection,” he said. “If I can’t tell the difference, how do I justify paying the extra $30,000? So I think cryptographic authenticity and provenance are also meaningful improvements.”
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