The co-founder of ETF giant WisdomTree shares how the 2008 financial crisis opened his eyes to Bitcoin — and breaks down the 2 types of digital assets his crypto hedge fund is betting on

Rayne Steinberg headshotArca

Summary List Placement

Rayne Steinberg sees a lot of similarities between exchange-traded funds and digital assets

In the early 2000s, Steinberg worked with his elder brother Jonathan Steinberg to build WisdomTree Investments, a new type of asset management company that would solely focus on ETFs. 

"There was a lot of resistance to founding an ETF company back then from traditional asset managers," Steinberg said in an interview. "When we were trying to launch low-fee investor-friendly products like ETFs, they had high-fee products. Imagine how disruptive that was and how hard it was to do. This is what we are doing now in digital assets."

Today, WisdomTree has grown into a $70 billion ETF giant, but Steinberg has moved on to set up yet another new type of asset management company: a crypto hedge fund called Arca

From the financial crisis to his aha moment 

Steinberg's interest in digital assets goes all the way back to the 2008 global financial crisis. 

He had helped raise over $3 billion in assets for WisdomTree and felt good about the progress the company was making. But when the crisis hit, WisdomTree's stock was knocked all the way down to 70 cents from around $10 a share, according to Steinberg. 

"This was completely just being caught up in that drawdown of everything," he said. "There was nothing that was going on at WisdomTree that suggested that the asset was impaired like that."

As investors deleveraged and sold everything, some distressed investors almost bought WisdomTree if it were not for hedge fund manager Michael Steinhard, who had previously invested in the company and helped steady the ship.

"That experience of nearly being destroyed and seeing a decade's worth of work going out the window, that made me very sensitive to this idea of systemic risk," he said. "Even though you might not be very aware of it, it can be quite disruptive in your life."

In response to the crisis, the Federal Reserve expanded its balance sheet by about $3 trillion from December 2007 to November 2013, according to the St. Louis Fed. In the meantime, a new and finite kind of money called Bitcoin emerged out of the mists as a potential solution to the central bank's rampant money printing. 

"The idea of decentralized programmatic money as a way to correct the political pressures and the reasons to print more money was fascinating to me," Steinberg, who first read about the digital token in 2011, said.

He immediately figured out how to acquire some Bitcoins and bought a bunch of them while they traded in the $30 to $40 range. In 2013, Bitcoin shot above $1000 but Steinberg thought it was all getting pretty frothy, so he sold all his Bitcoins, and the price slumped right after his exit. 

"I made a nice amount of money at the time and I kind of congratulated myself on timing that," he said. "After that, I returned to the traditional financial world but I've always kept up with digital assets."

In 2016, Steinberg founded another company that specialized in selling construction materials to people who use them for agricultural and cannabis-related purposes. Even though recreational use of cannabis was legal at that point in California, traditional banks were wary of doing business with his firm and closed their bank accounts. 

"We ended up starting taking payments in Bitcoin and it was actually a better experience," he said. "And this was kind of my aha moment that I should return to digital assets and re-examine it."

A crypto hedge fund with three arms

The re-investigation into digital assets led to the formation of Steinberg's crypto investment firm Arca, which manages $200 million in assets. 

The firm is comprised of three arms: the Arca Digital Assets Funds, which are long-biased, special situations hedge funds that aim to capture alpha from small- to mid-cap digital assets where competition is less fierce. 

Led by Arca's chief investment officer Jeff Dorman, the hedge fund team makes research-based investments. They start with a top-down thematic process and then home in on the companies and tokens that best help express those views. 

In an email response, Dorman said he looks for tokens that accrue economic value when the companies succeed, which are most often in $100 million to $1 billion asset-backed tokens and pass-thru tokens.

Some of the companies and their respective tokens the Arca team is invested in include: (1) Centralized exchanges (CeFi) such as Binance (BNB), FTX  (FTT), and Hxro (HXRO); (2) Decentralized finance (DeFi) such as Uniswap (UNI), Sushiswap (SUSHI), Aave (AAVE), Nexus Mutual (NXM), THORChain (RUNE); (3) Infrastructure plays such as Chainlink (LINK), Band Protocol (BAND), Polkadot (DOT); (4) Digitization of fan experience, including  Rally (RLY) and Chiliz (CHZ); and (5) NFTs such as Axie Infinity (AXS). 

The other part of the firm focuses on creating funds that leverage blockchain technology. For example, the firm's Arca US Treasury fund invests in short-duration government bonds and issues its shares as ArCoin to harness certain efficiencies of blockchain technology. 

"You could think of that as analogous to an ETF, but instead of having to trade on exchanges like NYSE or the Nasdaq," Steinberg said, "it can be traded peer-to-peer, anywhere in the world, by anybody, in any size, so kind of that same step function that ETFs had over traditional mutual funds."

The firm also recently launched its Accredited Investor Bitcoin Trust, a passive fund that gives exposure to Bitcoin and custody with Fidelity Digital Assets.

Steinberg said the firm is joining the somewhat crowded space because there are still so many people who don't own Bitcoin and digital assets despite the continued momentum in the crypto market.

"The explosion of money printing and debt instruments is so outside of the norms of historical trends that you have to imagine a fixed asset that is expanding in narrative," he said. "More and more people are accepting the idea of bitcoin as digital gold and a play on inflation, but it's still early. That's why I see a very bright future and much higher prices for Bitcoin."

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