- Jeff Dorman is the chief investment officer of the $200 million crypto asset manager Arca.
- Dorman, a traditional finance veteran, shares three themes and ten tokens he’s betting on in crypto.
- He also walks through an example of how to execute special situations investing in digital assets.
Jeff Dorman seems to be the perfect person to bring fundamental investing into the crypto world.
Two decades ago, Dorman got his start as an investment banking analyst at Lehman Brothers. Since then, he has worked at Merrill Lynch, Citadel Securities, and a few debt-focused hedge funds before joining a fintech firm.
That’s where he first encountered Bitcoin in 2016.
As a seasoned debt investor, Dorman was already well aware of the need to be in inflation-protected risk assets due to the central bank’s expansionary monetary program. Working at a fintech company helped him connect the dots.
“We had 10 full-stack developers on our team. Those developers were mining for Bitcoin, they were using GitHub and open source code,” he said in an interview.
From there, Dorman joined the crypto world, and before long, he realized that there was so much more to this space than just Bitcoin.
"The majority of investors in the space still think that Bitcoin equals cryptocurrency equals the entire market," he said. "The reality is, Bitcoin is just one tiny component of what this asset class has become, there are different sectors, different token types, and different value drivers."
Today, as the chief investment officer of crypto asset manager Arca, Dorman invests in themes and tokens that extend way beyond Bitcoin.
To capture the areas where digital assets and blockchain are driving economic value, he designed his strategy in a way that exploits catalysts and inefficiencies overlooked by Bitcoin-only investors, algorithmic and quantitative traders, as well as early-stage venture capital investors.
The end result is the firm's flagship Arca Digital Assets Fund where 70% of the fund is invested in long-term assets and 30% of the fund is in event- and catalyst-driven special situations assets.
3 themes and 10 tokens he's betting on
Dorman and his team always start out by coming up with themes that identify where the crypto industry is going to grow as a result of blockchain technology and the use of digital assets.
Once they nail down the themes, they use everything from their network, third-party research, broker-dealers, and over-the-counter desks to news reports to identify companies and projects that fit these themes.
Finally, the team conducts deep-dive research into what problems these companies or projects are aiming to solve and whether their tokens actually generate growth and accrue value.
The three themes where Dorman and his team have unlocked value are centralized exchanges (CeFi), decentralized finance (DeFi), and the digitization of fan experience.
Among centralized exchanges that have seen explosive growth in trading volumes, Dorman and his team are most bullish on tokens including Binance (BNB), FTX (FTT), and Hxro (HXRO).
"The tokens are all designed very well in terms of encouraging their customers to own the tokens and use them on the platform," he said, "but also in terms of giving some sort of financial reward through either direct dividends or buying back tokens on the open market to basically increase the price per token."
In decentralized finance, Dorman is positive on Uniswap (UNI), Sushiswap (SUSHI), Aave (AAVE), Nexus Mutual (NXM), and THORChain (RUNE).
"DeFi is probably the best sector in terms of value drivers," he said. "All of these are growing entities where the token is either bootstrapping and helping facilitate that growth or directly capturing the revenue through some sort of a pass-through mechanism."
Even before the Covid-19 pandemic, Dorman and his team noticed the desire for fans to stay engaged from home. While the internet and social media have made it possible for fans to connect with their idols, blockchain has enabled that fanship to be valued.
For example, Rally(RLY) is a company that connects fans to social influencers.
Another company Chiliz (CHZ) has created a platform where they issue tokens on behalf of soccer clubs in Europe.
"If the fans bought the token, they could use that token to basically vote on what the team does," he said. "Anything from what Jerseys they wear in a game to who started a scrimmage to what music they play in the locker room, so it was connecting the fans directly to their team in the form of this governance token."
Special situations investing in the crypto world
Dorman said at the core of his token investing strategy is value investing, which also includes event- and catalyst-driven special situations investing.
"What that means is looking at a hard event, whether it's a software upgrade or earnings release to create some sort of a catalyst to unlock that value," he said. "Often, you're using mosaic theory to put pieces of publicly available information together to create a story."
For example, Bitcoin exchange Bitfinex issued an LEO token two years ago when it had $850 million seized by foreign governments.
Dorman said while the company was healthy and producing free cash flow, they were short on liquidity, so they had to issue a billion-dollar token to shore up that balance sheet.
Because Bitfinex issued the token in a distressed fashion, it had to accept onerous terms that were favorable to investors, he said. One of these terms stated that if Bitfinex ever received that $850 million back or recovered some of the Bitcoins that were hacked from its exchange in 2016, they would have to use the money to buy back the tokens.
Over a week ago, some of the wallets that were involved in the 2016 hack started to move around, which investors like Dorman noticed because of the transparency of the blockchain. In his view, the stolen funds are unlikely to be dumped that easily because those wallets have been blacklisted and tainted.
"They might be negotiating with the company to form some sort of deal to give the stolen Bitcoin back," Dorman said. "And that stolen Bitcoin is now worth over $6 billion, but the token market cap of LEO is only $2 billion."
That means if Bitfinex does have to start buying back the token after receiving the stolen Bitcoin, there are simply not enough tokens to go around at the current price unless its price goes up at least three times.
Dorman said while there is only a 5% to 10% probability that that scenario happens, he likes the limited downside and huge potential upside associated with the strategy.
"It's still a strong company with strong cash flow. Part of their revenues and profits are used directly to buy back tokens in the open market anyway," he said. "It's already an amortizing security. On top of that, you have this optionality of potentially three or four times return, if they actually get that money back."