Between2Chains B2C008: Unlocking Balance Sheet Value in Digital Assets (w/ Jeff Dorman)

Episode Summary

Feb 01 2021 . 39 MIN

B2C008: Unlocking Balance Sheet Value in Digital Assets (w/ Jeff Dorman)

This week, host Peter Hans is joined by Arca CIO Jeff Dorman to explore activist investing. A trend that’s been successful for a long time in the traditional hedge fund management industry, activist investing is just starting to make its way into the digital asset space. Hans and Dorman talk about the significant opportunities to unlock value through balance sheet valuation, helping management teams better think about their token holders and their stakeholders, better structures of companies, and more. The conversation opens up a lot of philosophical discussion, as activist investing in the digital asset space is a green field with no legal precedent. After the podcast, join us on social media to continue the conversation.

Visit to join the crypto revolution. You can reach out to Peter Hans on Twitter : @peterdhans82

Show Notes


Intro: [00:00:00] Welcome to the Real Vision Podcast Network.

Peter Hans: [00:00:10] Hi, this is Peter Hans. This week on Between2chains, I'm joined again by Arca CIO Jeff Dorman. We have a pretty quick conversation, but one that I think you'll really enjoy because we're exploring a trend that's been very successful for a long time in the traditional hedge fund management industry Activism Investing. Activism investing is just starting to make its way into the digital asset space and there's a significant amount of opportunity to unlock value through balance sheet valuation opportunities, as well as just to helping management teams to better think about their token holders, their stakeholders, better structures of companies. And because there's opportunities in governance around DOWs and working with different boards and other stakeholders, it's really a green field. And the other interesting thing is there's no real legal precedent for it. So we're just starting to explore this. I think you'll really enjoy it. It opens a lot of philosophical conversations and discussions, which we hope to engage with you and on Twitter and through other mediums. So enjoy the episode. Thanks.

Disclaimer: [00:01:13] Before we get going, we want to remind you that Jeff Dorman is the co-founder and Chief Investment officer of Arca Funds and Peter Hans is Arca Fund's managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of Arca funds or its affiliates and are subject to change for any reason without notice, any discussion of investments or investment strategies within this podcast are for informational purposes only, and not be construed as a recommendation to buy or sell any particular investment, security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal. And now enjoy the show with your host, Peter Hans.

Peter Hans: [00:02:00] Hi, this is Peter Hans and welcome to this week's episode of Between2chains, joined by Arca CIO Jeff Dorman. How are you doing, Jeff?

Jeff Dorman: [00:02:07] Great. How are you doing, Peter?

Peter Hans: [00:02:09] I am. I'm doing well. Happy birthday to your daughter Riley today.

Jeff Dorman: [00:02:13] Yeah. Four year old. She's going to look the same as you did yesterday, but she's very excited.

Peter Hans: [00:02:18] That's good. Yeah. It's a good age. That's a very good age. And it goes by, my my youngest daughter is six, so it definitely goes by quickly, but enough to hold two old guys talking about the age of their daughters.

Jeff Dorman: [00:02:32] My daughter does own half a bitcoin, though, so she's involved.

Peter Hans: [00:02:35] Does she

Jeff Dorman: [00:02:36] Yes.

Peter Hans: [00:02:36] That's interesting. That is Bitcoin is the sponsor, not bitcoin persay.

Peter Hans: [00:02:41] The there is a there is a Arca.

Peter Hans: [00:02:46] You just say, Arca is the sponsor of my daughters, both of my daughter's softball teams. So I appreciate that. Thank you Arca, West University Softball Association also appreciates it. Always nice little shout out there. The Pythons is my 10 year's team and the Penguins is my six year old's softball team. I love it. And we can turn this into a girls youth softball podcast if if there's enough demand.

Peter Hans: [00:03:11] But I don't think there will be so. Right enough of that. Let's talk about a trend that I think is really interesting.

Peter Hans: [00:03:19] And one of the things that, you know, this podcast focuses on is obviously the migration or adoption, I would say, with the digital asset class by more traditional investors who use a number of different techniques to find value and opportunities in the market, whether value based or various inefficiencies or structural trades. And one of the things that I know you have had success with that at Arca and really, frankly, credit to you, Pioneered this movement of kind of activism. And, you know, as the audience knows, activism in traditional markets is really built around very defined processes and kind of legal precedent, where you have boards of directors that in essence, you make decisions of the company and the boards of directors are set by the shareholders and votes. You have these proxy fights. You have entire businesses built upon, you know, gathering proxy votes and running expensive campaigns so that activists can can find and seek value. And there's countless examples of extremely successful and lucrative activism campaigns by very, very smart hedge fund managers and their teams and not even exclusive to hedge fund managers, but large, long only and mutual fund managers.

Peter Hans: [00:04:39] And you know that that really has never existed in the digital asset space until very recently, you know, with with you and Arca and what was realized with with Gnosis. But more importantly, I now I think one of the trends that we're seeing is because of the massive increase in price that we've seen over the past few months of Bitcoin and Ethereum and the fact that many protocols and whether, frankly, they have value as a business or not, you know, raised quote unquote, money either in the form of Bitcoin or Ethereum in twenty seventeen are sitting on a lot of this. And because of the appreciation and value from the time of that ICO, these companies protocols call it what you want to have, you know, far in excess of the dollar equivalent value that they raised and might have a token price trading at a fraction of their quote unquote book value or Treasury value. And there's a lot of opportunity for investors who, you know, let's just call it, know what they're doing to an extent to try to unlock that value. And, you know, it's a lot more complex than than that because there is questions of, you know, legal precedent and how this works. But, you know, that's that's a pretty fair summation of the opportunity in your eyes, Jeff.

Jeff Dorman: [00:05:59] Yeah, for sure. And I think to go further, I think sometimes activist investing has a negative connotation behind it. Right. Because some of the ways that activism comes about in the traditional equity world can be malicious or can be hostile. Right. But the word activism itself is just change to just you as an activist investor are really just an agent for change. And there's really no other industry out there like digital assets that is more ripe for change. Right. I mean, we see the evolution of this asset class every day. Tokens started in 2017 as a promise to build something. And now tokens have evolved to being quasi equity and sometimes asset backed and all types of different shapes and sizes. So this asset class changes every day anyway. It is completely ripe for a quote unquote activist investor to come in and try to dictate and force some of that change. And again, it doesn't have to be hostile. You know at Arca we've never done anything hostile.

Jeff Dorman: [00:06:55] We've gone to companies and work with them every day in an activist setting Directly with them saying this is what we think you should do to accrue more value to the token. But ultimately what I think of activist investing is really just value investing, right? Everything that we try to do is how do you unlock value? And this is just one way of unlocking that value is trying to tie the tokens more directly to the balance sheets of these companies.

Peter Hans: [00:07:20] Yeah, that's a good point. And I also think it you know, it is a it is a major kind of misnomer. And when you talk about activism, whether it has a it's fun, it's actually a funny word because in many cases you think more societal activism and it's a very positive connotation. Right? It's it's you know, it's changed. You know, someone who's an environmental activist. Right. That's not a that doesn't have a negative connotation. Do it. It has an extremely positive connotation to it. And in investing, which, you know, is certainly very narrative based, and now we have a lot more information at our fingertips.

Peter Hans: [00:08:00] But if you go back into, you know, the 80s and 90s when when there was less when it was more kind of PR and narrative driven and you had companies that were the targets of an activist campaign and they have larger PR budgets than the than the asset manager seeking that change.

Peter Hans: [00:08:23] You know, it can be painted in a more negative light, like look at these vultures coming in and trying to just make money. Like that's all they care about is making money. Well, that's all anyone cares about, who's running a company or investing in a company or the shareholder of the company. The fact of the matter is the activism investor is getting involved because they're in their eyes. At least there are massive inefficiencies or, you know, ranging all the way to flat out fraud, but caused by, in many cases, poor management or poor governance by the board of directors.

[00:08:57] So, you know, hostile really just means that the management team doesn't agree with what the with what the investor is trying to do, which. No kidding. Right. Because if you know a very astute investor, like take someone who I have a lot of respect for, like third point, who's had many, many successful activist campaigns, you know, and some are more hostile than others. Right. Like a like a Sotheby's. Well, you know, there's a case where the company and I I'm not going to go back off memory right now and try to reset everything. But there was certainly elements of, you know, mismanagement, wasteful spending. Right. Not delivering the highest return on invested capital and who suffers, shareholders. Right. Who gets big bonuses and big payouts and things that probably aren't aligned with shareholders, management team. So, of course, the management team is going to push back on that activism and paint it as, quote unquote, hostile. Right. But it doesn't necessarily mean it's bad. Right? In fact, when activism campaigns work well, the stock price goes up and shareholders benefit. You know, so this whole idea of activism in a negative light in my mind, like couldn't be further from the truth because frankly, you don't see activism campaigns on PayPal and Netflix and Tesla and Apple and really well-run companies because the stock is already working and they're really well managed. Do you see it on stuff that's being mismanaged to flat out, you know, fraudulent? And I'm sure in many cases.

Jeff Dorman: [00:10:32] And that's why this is so ripe in the digital asset space.

Jeff Dorman: [00:10:34] Right. So you think about how this industry was born. I'm not talking about Bitcoin or Ethereum that were decentralized launches from the start. I'm talking more centralized companies who issued a token for a form of financing and didn't necessarily have a great plan. And ultimately, they may or may not become decentralized in the future. But the reality is these are run by individual people, right? These are these have management teams. They often have a board of directors. These are companies that used tokens for a way to raise capital. So when you think about the 2017 ICO boom I ,it was a money grab, right. It was easy financing. There was no proper governance. There was no oversight built into the tokens. They were done quickly, often without proper details. And basically as investors in these projects, you're basically giving these project leaders or the CEOs or the boards the better for the benefit of the doubt that as the project matured, it would self govern. And part of the maturation of the ICO as a fundraising mechanism is the establishment of frameworks. Right. What what rights do token owners have and how do you get to those proper frameworks? Well, sometimes it's happened organically. There's a lot of great projects and companies out there in the space that have organically done right. By token holders. Right. They continue to try to seek value for token holders. They tried to seek input from token holders. But unfortunately, that hasn't happened everywhere. In a lot of cases, token holders are left with very little recourse on how to force companies and their management team to follow through on their initial promises. And I think that's ultimately all that we are trying to do in the space is. Give digital assets investors some of the same protections that they're used to in the equity market. Now, to your point, there is no legal precedent yet, so you don't have legal protection, but that doesn't mean you can't have checks and balances. And investors are part of that checks and balances process to ensure that management doesn't go haywire with how they're spending and how they're running a company.

Peter Hans: [00:12:19] Yeah, that's a good point about. The the legal precedent, and I don't know that that means now, look, I'm I'm not a lawyer.

Peter Hans: [00:12:29] You're not a lawyer. In fact, I'm so not a lawyer that in undergrad I dropped constitutional law because the midterm conflicted with the first day of the NCAA tournament, which I think was just horrendous planning on the professor's part.

Jeff Dorman: [00:12:41] But that makes sense on your part.

Peter Hans: [00:12:44] Yeah, of course. I was a senior. I was already out. But anyway, the but but the fact that legal precedent, I mean, in fact, the law in and of itself is open to interpretations. And the fact that there's no legal precedent doesn't mean that there's not legal protections in place. It just means that they haven't been defined yet. And I think that's a really important point because, you know, laws are set out there to protect right. To protect society, to protect stakeholders. And if there is instances where, you know, someone or some entity raised funds from a collection of individuals or other entities and has not delivered on any of the promises and, you know, a white paper could certainly be interpreted as something that's contractual, especially if there are no updates or changes to that. And that's not delivered upon. And now there's, you know, that that amount of of funds that was delivered is still there and in fact, potentially many multiples higher than where it was, you know, to just say there's no claim to that at all because it hasn't been done in the past or hasn't been debated in the past, is is kind of extremely shortsighted. Like that's just not how the law works.

[00:13:58] Absolutely. So so, I mean, for example, if a company raised one hundred million dollars worth of ETH in 2017 and ETH is up 10x and the companies token is flat. Right. All of a sudden you could say, OK, well, what's going on here? Right.

[00:14:13] The company has benefited tenfold in the sense that they have all this money, but token holders have not. There could be a legal argument that you actually still have a claim on those assets in some way because the assets are still there. They haven't been touched the same assets you gave them, but you gave them ETH in return for X, Y, Z token. That ETH is now worth ten X in dollars form, but it's still the same amount of Eth you gave them. There could be a claim. Now, we haven't seen it yet. Again, nobody has gone through the trouble of the legal process. This would take years to to enact some form of legal precedent, but it will happen eventually right there. Eventually there will be a case where there's enough money on the line and an investor who has the time and the resources and the wherewithal to do this where legal precedent will get set. So I do think we will see it at some point. But more importantly, it's also a really common misconception, I think. I think every time we we we tweet or write anything regarding like how to unlock value from some of these companies in the space, the most common feedback we get is tokens aren't equity. You have no rights. And it's literally the worst argument. And it just shows most of the investors don't understand how this works. Like to your point, if Apple has ten billion dollars of cash on the balance sheet, just because you own the equity or the debt of that company, it doesn't give you the right to that cash anyway unless they file for bankruptcy or they get purchased.

[00:15:29] Otherwise, it is completely up to the management team with regard to what they do with that money. And you don't have any rights to it just because you own equity or debt. You literally are subject to what they do with it unless you decide to go to the board of directors and raise issues and ultimately try to disrupt how the management team is running that money. So even having the legal protections doesn't matter in most cases. You are still making a bet on management to do the right thing with that money and to give it back to shareholders or bondholders or to spend that money in a way that creates a return on your investment. So the the argument of you are token holder, you have the coins makes no sense, just makes no sense from the start. Now, we again we need to establish these frameworks. We need to establish the legal precedent at some point. But the argument that you can't fight for how that cash is used to accrue value back to you as a token holder is just blatantly incorrect. And I think that's all that we've been trying to prove.

Jeff Dorman: [00:16:24] And some of the cases where we've done ,

Peter Hans: [00:16:27] I mean, even an equity holder technically doesn't have like an overt claim to the balance sheet of the company, especially for a company that has, you know, creditors and it has accounts payable and it has employees. I mean, there's a there's a waterfall of of of claims. Right. That then goes out. And, you know, Apple is probably not going bankrupt, but but there's many, many examples probably of where, you know, in a Chapter 11 or Chapter seven like this is going to court.

Peter Hans: [00:17:01] And then the judge is going to decide and the court is going to decide how the, you know, the liquidation occurs and what price on assets that goes to and and who is made whole first. Like, yeah, there's a you know, one of the reasons why I love this asset class is it's there's.

Peter Hans: [00:17:21] Tons of smart people in their right, but but it's just it's a different thought process and a different approach and the traditional investment approach and processes that can be applied to the asset class in, I would say an increasing velocity as the space matures has just not has not caught up yet. And, you know, this is this is this is a great example. And I think there's other really good examples and in policy and regulatory understanding, things that are extremely well understood in the in the hedge fund world, where they have employees of people who've spent 30 years on Capitol Hill and just know the ins and outs of everything that's going on.

Peter Hans: [00:18:04] So, yeah, I mean, the idea of the you don't have a claim because you're a token holder. It's like anyone can have a claim. Right. Like you just you know, that's what courts decide. Not not Twitter.

Jeff Dorman: [00:18:16] Exactly. And I think, you know, the way we see it is this industry is booming, right? It's grown beyond many people's wildest dreams, but it has been plagued by bad practices and bad actors and negative press. And I think our argument simply is it doesn't have to be this way. As investors in this new industry, we feel a certain obligation to be stewards of responsibility and transparency. And that means we have to hold companies or project leaders accountable for their actions. And if those promises go unfulfilled or spending is irresponsible or misreported or new endeavors are started and stopped without discipline or recourse, we as token holders can and should demand answers. And I think that's I think that's a positive thing. It's not a bad thing. It's a natural progression of what this industry should become as it as it is. In fact, I remember reading a report from McKinsey not too long ago where they were saying it's actually a really good idea for all companies to role play and think like activist investors to uncover their own internal blindspots, that they basically said an activist role play approach will substantially is substantially more provocative than a standard strategy review, because when the tone is aggressive or even confrontational, it actually sets the bar higher for operating improvements.

Peter Hans: [00:19:23] It's actually really interesting. Send me that.

Jeff Dorman: [00:19:27] It's a great report and it really talks about why you need external pressure once in a while. We've all we've all been in situations where you get too myopic or too blinded in what you're doing and you need someone from the outside to be like, what are you doing here? It's no different than at Arca, the hedge fund that we run. We've got a seven person portfolio team who's doing this Twenty four seven. But we have a completely independent risk committee who's not part of the portfolio committee, who challenges our assumptions. You need challenges. You need people to say, what do you doing and why are you doing this? And that unlocks a lot of the value that's in the space. So to me, this is the ethos of digital assets, right? It's decentralisation. It's community involvement. Token holders have rights. It may not be explicitly, explicitly laid out in the white paper or a court of law yet, but we do have rights to stand up to management teams and to project leaders who are making misaligned or sometimes even negligent decisions and pressure them through the court of public opinion to do right by their token holders in their communities.

Break: [00:20:25] You are to listening to a show Between2chains with your host, Peter Hans.

Peter Hans: [00:20:34] Those are those are a lot of really good points. I mean, I love the McKenzie one.

Peter Hans: [00:20:38] I'm just immediately started thinking back to, you know, running, running previous companies of mine and, you know, having that.

Peter Hans: [00:20:48] You know, people to challenge you, especially people on the outside, right, because it's very difficult to challenge a management team or CEO as an employee. It takes a certain level of comfort and personality. And, you know, not that it's better or worse than anything else, but, you know, there's a lot of people who gravitate towards telling your boss what you think they want to hear as opposed to actually challenging them, even though that's by far the best thing for the for the business and for everyone. So, yeah, I think that's that's a really interesting a really interesting point. I would love to read that paper. But the other the other the other thing that I kind of thought of is, OK, so, you know, activism and let's just really try to focus on what the word actually means and the positivity that it could that it can bring out for all stakeholders.

Peter Hans: [00:21:38] You know, and all anyone has to do is look at your Twitter timeline and read the Gnosis presentation that you put together. And I don't want to spend like I don't want this to be a case study. Right.

Peter Hans: [00:21:47] But I think it's a good example because, you know, there was a clear issue. Right. And and the if you can, given full credit to kind of both sides of the equation from an outsider's point of view, from my point of view, it seemed to be a very transparent and very healthy discovery. And ultimately, there was no need to go to court. Right. There was no need to challenge this and have legal precedent because both sides were aligned in creating value for the stakeholders. And what happened, like a massive amount of value was created. So, you know, it's kind of like if this is the first time it's ever happened in the asset class, you know, that's that's a that's a great start for sure.

Jeff Dorman: [00:22:33] And I mean, just just for quick details on gnosis, basically, they issued a token in two thousand seventeen. They raised twelve and a half million dollars in ETH, the ETh has exploded. The gnosis token did not. There was no explicit ties to the gnosis token or what the gnosis balance sheet was. But it was created all these different products, all these things that were growing but had no accrual back to the token. And our argument from day one was, you have to do one of two things. If you issue if you raise outside capital, you either have to create economic value through the price of the token or you have to create utility value through the use case of the token. And neither of those were accomplished. And ultimately, after a lot of back and forth, gnosis decided to create what's called a DAO. (Decentralized autonomous organization_. And the DAO basically put all of the gnosis tokens, put all of their balance sheet, their ETHs and their dollars on their balance sheet into this DAO. And, you know as the gnosis token holder now have an explicit claim on the assets in the balance sheet. We basically turned to worthless Token into a fully asset backed token. And I don't think I can understate how important that is. Right. We basically prove that you can take a token and morph it and evolve it into something that has real economic value. Now, the story is not over right now. They gnosis is still needs to deliver.

Jeff Dorman: [00:23:45] They need to use that capital wisely and not just give it back to token holders necessarily. But it's a start, right? It's a start that shows that we did have rights. We did force change. gnosis did the right thing. Gnosis is now a valuable company and they have basically now it's a call option on future growth of the company and floor to floor. Right, exactly. Book value investing is just setting a floor and you can say the same of other things. I mean, I recently tweeted about EOS. We're not doing anything at EOS right now at Arca, but like other than a small investment, the EOS is a very similar case , the company behind that built EOS block one, they're sitting on somewhere between one hundred and forty thousand , two hundred and forty thousand Bitcoin, which is somewhere between five and ten billion dollars. But the EOS network that they created has gone nowhere in two years because they haven't done much with it and the market cap is under three million. That's a prime candidate. And again, the usual suspects come out and say block one is not EOS and you're not an equity holder. You don't have the rights to that. It's like I'm not arguing for the legal rights to that money. I'm saying block one only has three choices. Now, they either give the money back, they create economic value or they're going to end up getting sued. And that's just how investing works, right?

Peter Hans: [00:24:50] That's exactly right.

Jeff Dorman: [00:24:51] And again, it's not about legal rights. I mean, ESG, which I know is something you care a lot about. Peter, the idea of environmental, social and governance, ESG investing is a good example of you don't have to have legal rights to be able to exert external pressure. BlackRock, for instance, one of the world's largest asset manager, once released an open letter warning companies that that that it would be increasingly disposed to vote against boards moving too slowly on sustainability. So basically, in their own words, if you're not if you're not doing more than just protecting shareholders, if you're not doing more to protect the environment, to protect other stakeholders like your employees and the city that you operate in, we're not going to invest. They're holding companies accountable simply by threatening that if you don't, you're going to lose access to one of the largest and best investor bases out there. They want management teams to protect more than just shareholders. They want to protect everybody, the stakeholders, the employees, the environment, the city, the social surroundings, you name it. Right. So there are plenty of examples where social pressure can force change, and I think this environment, like I said, the only goal that we have in this digital assest environment is to basically make it a better place, make it a safer place for investors who want to see this industry become more adopted and accepted by traditional investors.

Peter Hans: [00:26:07] Yeah, then I think I think you're spot on. And I actually and I think also, you know, something that a previous episode has focused a lot about is is kind of the massive turnover that we're going to see in terms of generational wealth transfer. And, you know, as that generational wealth transfer occurs, ESG investing, socially responsible investing, making the right ethical and moral choices for four businesses is going to be, you know, exponentially more meaningful to a company's valuation because it's just it's just a generation and generations that care a lot more about that than, you know, say, our parents, not our parents specifically, but our parents' generation did.

Peter Hans: [00:26:55] So, you know, and one thing just to touch upon very quickly, I know in previous episodes we've talked about the concept of of DOWs and decentralization and what that means. But just for the edification of the audience and anyone who might be listening to this episode and is relatively new, basically what you're doing there is, you know, in a traditional company, public or private, or you have a you have the governance from the board of directors, which typically includes management team investors, independent directors. And they're the ones making the the decisions in the case of a Dow or a decentralized organization, you don't have a board of directors. And the governance is handled pro-rata by the token holders, which is a really fascinating concept and something that I think we'll start to see a lot more of and potentially even hybrid situations where it could be a more traditional company with the traditional board of directors. But certain decisions are handled by the by the Dow portion of the company or by the token holders as more and more companies start to issue tokens. But you don't want to get off too much on that tangent.

Peter Hans: [00:28:03] One of the thing in terms of, you know, the Gnosis example, which I think is is important and you mentioned EOS. Right. It's really expensive to go to court, you know, for for for all sides. And and when you think about it, and especially in digital assets, like what is ultimately the motivation of both sides. And, you know, there's a narrative element where invariably one side is going to get painted as the bad guy that that neither one wants to. And then there's just the opportunity cost, like if your gnosis right. And you're basically you have a token that has no real economic value or really even no governance rights. And it's just kind of sitting there and then you have your your treasury or your balance sheet that you raised solely because of the token like it's pretty clear ethically and morally like what the right thing to do is. And I don't know the Gnosis management team personally, but everything I hear about them is that they are very good and honest people.

Peter Hans: [00:29:05] And so it wasn't, you know, about legal claim or strach or why would they be motivated to do this? Like they're motivated to do this because for the most part, most human beings want to do the right thing. Like there's kind of an innate moral compass that most of us have, not don't want to get overly philosophical. But but, you know, that is this isn't really the stretch that many people make it out to be.

Jeff Dorman: [00:29:32] Yeah, for sure. And again, I think it's a very positive thing to highlight blind or mismanagement or when a project veers off course again, to your point that most people trying are are not intentionally being bad guys.

Jeff Dorman: [00:29:44] Sometimes they're just so busy focusing on their business that they realize that they lose sight of what they ultimately raise the money for and what they need to get back. So all we're doing is moving this industry forward. And it's something that we at Arca feel really strongly about. Right. This is a core value about adopting best practices from traditional finance and adopting them to this new and exciting world of digital assets. And I think strong governance is one element of that. And until the entire world becomes decentralized, like you were talking about with decentralized autonomous organizations, until that happens, one of the ways to hold people accountable and for governance is simply to have a voice. And in this day and age, between Twitter and podcasts and all the different ways that you can have a voice, you can make change. In fact, probably everybody who has made it this far in the podcast should go look up.

Jeff Dorman: [00:30:29] Someone named Sahm Adrangi at Kerrisdale Capital. This is a traditional long, short equity fund and they coined the term soft activism. Soft activism means we're not going to go try to overthrow your board. We're not going to try to overthrow your management. We're not even going to take you to court. We're literally just going to highlight to the world how you know how the company has has done poorly by shareholders and basically create a groundswell and force change in that in that regard, it's actually a really interesting concept, right? We're not going to do anything. We're just going to make it obvious that you're doing the wrong thing and make you decide on your own to make positive change. And it works, right. The public pressure is a pretty powerful force in often cases, much more powerful than in the courts alone.

Peter Hans: [00:31:11] Yeah, actually, that's a good example. I didn't know that that Sahm coined that term, but I do like it a lot.

Peter Hans: [00:31:19] Did he really? So are you allowed to say it?

Jeff Dorman: [00:31:23] I don't know.

Jeff Dorman: [00:31:24] I give credit to some intelligent character that,

Peter Hans: [00:31:29] You know, and that's a good point, because, like, not everyone has, you know, Elliotts or Third Point's budget to build a beautiful website.

Peter Hans: [00:31:38] And you know or, you know, some of the stuff that Kyle Bass has done around around these really successful campaigns. But there's a lot of you know, I think of here in Houston, Voss Capital, which is had outstanding returns in small cap, long, short. And, you know, they do a lot of this. Travis does a lot of this kind of soft activism where he's putting out letters. And I think that's kind of the beauty of a lot of the mediums that are available publicly over the Internet is you can get your messaging out there and do it in a way that raises awareness as to, you know, what the opportunities are in these in these businesses if things are just kind of improved upon.

Peter Hans: [00:32:22] And, you know, one thing, I'm interested to hear your opinion, because, you know, both of us have been, you know, in hedge fund and investment world for a while now.

[00:32:31] And the whole argument that it always comes back to like, well, these guys are just trying to make a make make a buck. You know, these guys are just in it for to make money. It's like, well, you know, no shit like that, you know, what do you think? What's the motivation of the management team or the venture investors or everybody? Right. But like, we're trying to unlock value and and have you know, this is the opinion of the of the those doing the activism that the way to unlock value is ABC versus the management team who's doing X, Y, Z. So, you know, like, we're both trying to make money here. You know, if you don't want to make money, you get another industry. So, you know, I'm interested to hear what your point your view on that is.

[00:33:13] Well, I mean, look, I run a hedge fund strategy. Among other things. We do it Arca. And as a result, we have a fiduciary responsibility to our LPs or our investors. So obviously, the mandate is to create value and to increase their return on investment. I think the misnomer, though, is just because I do it in a way we're allowed and trying to unlock value, it doesn't mean I'm going to sell it right away. It means I'm going to the help set the company on a path towards sustainable growth and gains. So if we unlock value, even if it's loud and even potentially contentious, great. Once we figure out how to get them on the right path, we might stay in the investment for another five to 10 years.

[00:33:53] So it doesn't it doesn't mean that even if we are just making a buck, we're still a supporter of the industry or the business or the project. And again, forcing that change and forcing accountability and transparency and getting them back on a path towards sustainability. That's great if it makes all of us money, but it also can make us a ton more money if it's done correctly.

[00:34:16] Yeah, know. So what do you think in terms of where this trend goes in the in the asset class? You know, because you mentioned you mentioned EOS, obviously Gnosis was successful. Do you expect more managers in this asset class similar to to you in Arca kind of getting involved in this sort of thing? What's your prediction for it kind of going forward?

Jeff Dorman: [00:34:42] I mean, first of all, Arca is the first one to do it in a capacity that was loud, public and actually successful. Right. But we're not alone in this mission. Right. I mean, Messari is a great research and data firm that has been talking about transparency forever.

Jeff Dorman: [00:34:55] They even have a transparency initiative where they try to get companies to be more transparent with their treasuries and their plans and things like that. Right. The Block Delfi Digital, the Block Chain Transparency Institute, Chamber of Digital Commerce, I mean, you name it, there's organizations all over digital assets that.

Peter Hans: [00:35:10]  but none of these are actual asset management firms,

[00:35:13] Correct, Right. But it starts with the idea of first you to get that notion out there that transparency and accountability matters. Right. Again, this is for good or for bad. The digital asset industry was built by software developers and venture capitalism and trained algorithmic traders. And a lot of the reason you have so many misperceptions of what investing in this space is, is because of the type of investors that have gravitated here thus far. Right. Some are just betting on a future 10 years from now. One of these setting some are trading every tick every minute in an algorithmic quantitative way and couldn't care less what the underlying instrument is. So it takes it takes getting more investors into this phase to understand that not everything in this space is Bitcoin, some of these are real companies, and when you have real companies that real management teams, there's an element of of ethics and moral responsibility involved in doing the right thing. So I think ultimately, in terms of what will happen next, you know, what will happen next is as you see more and more success stories like Gnosis, like Digex, that actually we won't get into.

Jeff Dorman: [00:36:10] There was another case where it was a decentralized, autonomous organization and the token holders voted to dissolve the Dow and basically give all the money back. So there was a case of very small scale, but there was a case of a liquidation already in this case. Once you see more and more success stories, it will attract more and more strategies like that, you know Arca is not an activist investor, again, we are a value investor, this is just one of many ways to unlock value. But there will be specialist activist investors probably that come at some point specifically to unlock that value. Just like everything, investing, investing is just about repeatable processes. So once you see a process that can be repeated, somebody is going to repeat it. And with the amount of capital that is flowing into the space and the amount of education that is happening, it's only going to be three years from now, probably before everybody thinks about the rest of the digital assets based the way they're thinking about Bitcoin now. It took three to five years for people to understand what Bitcoin is. It can take another three to five years. For people to understand that the rest of this space has nothing to do with Bitcoin or money is really quasi equity. As a result, it's going to attract the investors who know how to extract about.

Peter Hans: [00:37:11] Yeah, well, it's a really interesting discussion and it's something that I think that is off to a great start. And to your point, I think we'll see a lot more of, you know, speaking of doing the right thing, why don't you go celebrate your your daughter's fourth birthday with her.

Peter Hans: [00:37:30] And, you know, thank you for for joining me this week to talk about this. I'm sure we'll have many other conversations on it.

Peter Hans: [00:37:37] So thank you, everyone, for joining us. I hope you found this conversation interesting. Jeff, tell everyone before you jump where where they can find your writing.

Jeff Dorman: [00:37:47] Sure. I write a weekly blog called That's Our Two Satoshi's, which is on our website at "" . You can also find me on Twitter at @jdorman81. And I am going to go celebrate now with my daughter because otherwise she's going to go activist on me and demand more presents.

Peter Hans: [00:38:04] Awesome. I'll tell Riley Happy Birthday from me and from the entire B2C audience. Thanks, everyone, for joining us this week. Take care. Thanks, Peter.

[00:38:22] If you enjoyed this episode, we hope you subscribe to the podcast, share with others, post about it on social media, or leave a rating and review. To catch all the latest from Real Vision, you can follow us on Instagram @RealVisionTV and on Twitter @RealVision. That's all for this episode. See you next time.



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