Interview with Christian Zulliger
I have long been fascinated by the far-reaching consequences and the great potential of the wave of new technologies and ideas that emerged with the crypto revolution. While most of us first came into contact with these concepts in 2017, this tectonic shift that is only just beginning has been in the making for nearly a decade. Now, we begin to see the basic ideas and tools take shape and give rise to endless exciting possibilities that can affect multiple sectors. The distributed ledger technology, the concept of increased efficiency by cutting out unnecessary middlemen, an emphasis on privacy and individual responsibility, as well as the overarching principle of decentralization and peer-to-peer transactions, have all played a crucial part in forming our expectations of what the future will look like.
To understand the implications, the full potential and the current state of the crypto sector, I turned to Christian Zulliger, who agreed to guide me through the most important questions and in the process, clear up many of the misconceptions and misunderstandings that still surround this budding industry.
Christian is a long-time friend and my go-to expert when it comes to understanding the finer points and relevant developments in the crypto space. Because of his long and diverse experience in the sector, he’s also developed a very sharp and discerning eye for new ideas, projects and ventures in this field. Today, he serves as the Portfolio and Risk Manager of the diversified actively managed multi-asset Crypto Investment Certificate (AMC) of Resilience AG, a Swiss Family Office and Asset Management company. This investment vehicle has a great competitive advantage in the combined experience of its management team, which, apart from Christian, consists of analysts and experts that have also been there from the start of the crypto revolution. Their deep understanding of the technologies, the long-established relationships in the sector and their positioning in the heart of the Crypto Valley in Switzerland allow them focus on quality, to identify real value and to navigate an investment field that many newcomers might be intimidated by.
Claudio Grass (CG): Given the fact that most people first heard of cryptocurrencies and the blockchain during the wild ride of 2017 and some thus may be rather skeptical, let’s start with clearing up some of the basics. Why do you think it is important to differentiate between cryptocurrencies and the blockchain technology and what potential do you see in each of these spaces?
Christian Zulliger (CZ): Cryptocurrencies are a medium of exchange like any other, like fiat currencies such as the USD, EUR or CHF, or like any precious metal. What sets them apart, however, is that they use encryption and consensus techniques in order to verify the transactions and to control the creation of the monetary units. Blockchain is a technology that enables and facilitates cryptocurrencies, but its use cases extend way further than that. These terms have entered the public consciousness around the same time, and in the mainstream and superficial coverage of the crypto sector, blockchain was often mentioned in connection to Bitcoin and other cryptocurrencies, thereby causing some confusion regarding the role and the capabilities of the technology.
Blockchain, as a decentralized ledger technology, can be used for any transaction in peer-to-peer networks. Depending on consensus systems, there is no need for an intermediary anymore. That brings a huge disrupting potential and many use cases in various sectors. It goes well beyond just the facilitation of financial transactions. It can be used to administer and manage voting rights, property rights, supply chain management, and it allows for all kinds of information to be exchanged and recorded without the need for a central institution or authority to oversee and control these processes.
It is therefore clear that the potential of the technology is immense. This is why it is important for investors in this space to not only invest in cryptocurrencies, but also in the underlying technology and its wider applications. Due to network externalities, most cryptocurrencies will disappear sooner or later. Thus, selection and active portfolio management are key, as is the understanding of the wider implications of the technology.
CG: What attracted you to this sector in the first place and when did you realize the true potential of these technologies?
CZ: I first became interested in Bitcoin in 2011. Seeing our monetary system from a Hayekian point of view, I began to realize that Bitcoin could easily become another type of private money, trying to compete with central bank money. Wondering how it works, I bought my first Bitcoin position in early 2012. Soon after that, we began to promote Bitcoin in some events we organized with our Hayek Club in Zürich, such as courses about monetary theory and money competition in private seminars at the University of Zürich, in the spirit of the Austrian school of economics. As a result, quite a lot of students became acquainted with cryptocurrencies at a very early stage, which proved very fortunate for them in the years that followed.
Of course, back then, there was no Crypto Valley, no associations and no hype around these concepts. There was only a handful of pioneers, who understood and believed in the potential of these ideas. They became members of the Hayek Club and founded the first companies in the Crypto Valley, and we organized meetups in order to bring pioneers and investors, such as UHNWs and family offices, in touch with each other.
It didn’t take long for me to realize the groundbreaking sea change that this technology and its applications are set to trigger. To me, the free competition of private money is absolutely essential in free societies. The central bank monopoly of money is the most dangerous of all state monopolies. Bitcoin was and is a medium of exchange without banks, without a central power controlling it, without counterparty risks. It renders central banks and power monopolies obsolete and irrelevant. It also works as a solid hedge, an investment with a skewed risk-reward ratio, the likes of which I have never seen before. On a larger scale, the blockchain technology enables disintermediation in various branches, an outstanding potential of not only changing monetary systems, but shaping business models and even the organization of societies themselves.
CG: Blockchain applications seem to be extensively versatile already, as companies are developing solutions for different industries, from law to finance and from data management to insurance. In which sectors do you expect to see the greatest impact of the technology in the next few years?
CZ: Basically in all sectors where intermediaries are not necessary or helpful – or where they actually present hindrances, unjustifiable costs and inefficiencies, which is the case more often that you’d imagine. As Ronald Coase explained in his “Nature of the firm”, different sorts of transactions (not just monetary ones, but also transactions of any kind of information) need different degrees of organization. So, while in some cases intermediation might be warranted and voluntarily chosen by the relevant parties, in many others, there’s absolutely no need for it.
For instance, a simple financial transaction between person A and person B does not require an intermediary. You definitely do not need a bank to pay someone a certain amount of money. In addition, with tokenization, you can basically digitize any sort of asset and transfer it directly, or peer-to-peer (“P2P”), to any other person. There’s also no need for a central authority or an intermediary for agreements and contracts between two or more parties. With smart contracts, you can create almost all derivatives you can think of, without any external authority involved. Licensing and IP are definitely another use case which makes sense. Accenture and Digital Asset are already working on a software license management application. Personal data and patient data in the healthcare sector is another great example, with solutions that will bring ownership of your own data back to you. Blackberry is working on this topic.
CG: How do you evaluate the so-called crypto-crash of 2018? From the standpoint of a “crypto layman”, it looked like a dramatic bubble burst, with some comparing it to the dot-com collapse of 2000. What do you think actually happened and what are the implications today?
CZ: In 2017, crypto markets finally got broader attention. It attracted many fools, scammers and former bankers wanting to make a quick buck. Limited free floats and rapidly inflowing fiat money pumped the market until it had to correct. Newcomers, speculators and even normal people who never even considered a mainstream stock or bond investment before, jumped on the bandwagon. Many of them, with no understanding of what they were buying, just kept throwing money at whatever had the word “blockchain” in its name.
By contrast, many of the early crypto investors stood on the sidelines once valuations became insane. It didn’t take long to realize where this crypto-mania was heading. I still vividly remember the very moment that this realization dawned on me. I was sitting at a Starbucks near the University of Zürich, when I overheard some students at the table next to me talking about their own ICO, and how they will raise millions of CHF.
Never be indifferent to bubbles, be it in crypto or anywhere else. Most people enter the market at very high valuations – and lose. It will be the same in the coming bull market, most investors will jump in when the smart money is already taking profits, being well aware of bubble formation and its stages. While it is essential to be able to recognize bubbles, it is also important to be able to separate the scammers from the doers.
What happened in 2018 is a necessary price correction – but not a true and healthy washing out of the crypto market as a whole. Most of the dead projects are still listed and valued insanely. When investing in this market, the selection of assets and actively managing crypto-asset investments is more important than ever. Passively buying the whole market will not work, since even in the top 20 and top 10 of crypto assets there is a lot of stuff I would never buy myself.
CG: You mentioned that passively buying the whole market will not work, but evaluating individual opportunities can be a daunting task to a non-expert. Just the sheer number of different coins and tokens is intimidating, while all the relevant documentation that outlines what makes each of them unique (or not) can often be highly technical and impossible to decipher. How should an outsider or a “conventional” investor safely approach the crypto space?
CZ: While many may indeed be intimidated by this “chaotic” complexity and the countless traps in this nascent sector, it’s precisely these factors that also make the crypto space extremely attractive. It is true that the selection process can be a great challenge. Understanding and evaluating white papers and assessing the different investment cases really does present numerous difficulties to those unfamiliar with the industry, while there are many dangers that lurk around, including fraudulent or misleading claims and promises. Another factor that many investors ignore or underestimate, is the power that communities can wield over the fate of a project. Overall, the industry is still young, bad ideas still mix with good ones and many investors and market participants can often be blinded by greed or unrealistic optimism.
However, when one understands these risks and knows how to navigate them, the reward that awaits on the other side can be extraordinary. There are many “diamonds in the rough” in this sector and groundbreaking ideas that can transform entire industries. Once you understand the real potential of these technologies, the investment case makes itself.
I understand that some investors may shy away from crypto because they think they don’t understand it well enough, but at the end of the day, when it comes to identifying and selecting the “winners” and managing a portfolio, the crypto sector isn’t really that much different from any other. When a responsible investor knows they lack the expertise to successfully navigate a sector they’re interested in, they don’t just cross it off their list. They simply turn to those who can and seek their guidance. For example, I sincerely doubt that all who have a biotech position or invest in new energy or engineering companies have a direct and deep understanding of the relevant technical issues, but that doesn’t mean they should miss out on these opportunities. In this regard, the most important thing is to get the right guidance, and to do your due diligence to find reputable and experienced professionals with a solid track record in this field.
CG: In your position as Portfolio and Risk Manager of the Resilience Crypto AMC, what are the main indicators or filters you use to navigate all the different options in the crypto sector? What do you look for in order to identify sustainable, real value and to avoid the myriads of projects that are doomed to fail?
CZ: As I’ve already highlighted, in my view, selection and active management is key. This sector is way too young and “wild” for a generic “blanket” approach and you really need to know how to separate the wheat from the chaff. To this end, we do use quantitative models, but we also rely on discretionary decisions, as our team’s experience and technical understanding has proven to be a very reliable “compass” in identifying real value and solid potential. Additionally, our experience has clearly shown that small reductions in downside exposure make a significant difference in long-term overall returns and therefore we place a great emphasis on this.
Finally, a point that is often overlooked but I have found to be extremely important in my position, is that one must never become complacent. Our performance so far has been solid and we’ve significantly outperformed the Bitcoin market, especially during recent selloffs. This has, of course, served as a confirmation that our approach works and that our analyses and predictions are accurate. On the other hand, I’m acutely aware of the fact that constant adaptation and fine-tuning is essential in order to retain and surpass those results and that a passive, static approach will guarantee our failure to replicate them consistently.
CG: A very common fear among investors who want to enter the crypto market but remain reluctantly in the sidelines has to do with security and fraud issues. News stories of hacked exchanges or missing millions have been effective in scaring many traditional, conservative investors away. Do you believe their concerns are valid and what countermeasures have you put in place to ensure asset safety for your clients?
CZ: The security issues do indeed feature prominently in some investors’ minds, especially those who are largely unfamiliar with the sector. Mass media reports tend to focus on exchange heists and other “horror” stories, without explaining anything about the nature of the security breaches and the actual risks involved. If they did, the audience would immediately see that there are simple and obvious steps one can take to minimize their vulnerability, for instance, not leaving their assets on the exchange.
Having said that, by no means do I wish to downplay the importance of security considerations. To the contrary, we take security extremely seriously, which is why we have established strict protocols and security layers for our Crypto AMC. Handling and storage of all crypto assets are only executed through trusted, experienced and market-leading partners, with a solid track record. Additionally, independent trade and position reconciliation processes have been implemented.
CG: The Zug Crypto Valley has been a hub of innovation, attracting great talent and a lot of successful entrepreneurs and pioneers from the sector. Do you find that having established relationships and a physical proximity to this international crypto-center provides an edge to your team?
CZ: We do have an extensive and solid network in the Crypto Valley, but we also maintain strong relationships beyond Switzerland and around the world, with experts, decision-makers and key people in the industry that have played a foundational role in its evolution. One factor that we see as an important advantage in this aspect is the fact that our core team has been there from the beginning, before the crypto sector became popular and before Bitcoin even entered the public discourse. Throughout the years, we’ve been able to establish close relationships with many of the pioneers and great innovators in this space. We were there when some of the most successful companies and projects of today were still on their embryonic phase and we’ve seen their development, the challenges, the failures and the successes up close. Very important lessons were collected that way and many of those experiences inform our decisions today.
The other clear advantage is, of course, the location. The Crypto Valley is indeed a hub of innovation and for a crypto investor, this definitely provides an edge. But it is also Switzerland itself that provides indisputably fertile ground. We have a very strong and very long tradition of wealth management, a centuries-old history of excellence in investments and finance. Thus, the accumulated expertise and specialization in the country is unbeatable and so is its track record when it comes to respect for private property, while its reputation for high-quality services also attracts high-quality investors. There are also jurisdictional and regulatory advantages. Especially for the crypto sector, the Swiss authorities have shown great foresight compared to other nations. Instead of fighting and resisting progress or hopelessly trying to centrally regulate a decentralized technology out of existence, Switzerland chose to embrace it and to provide a friendly framework, with checks and balances, that still allows for innovation to thrive.
CG: Institutional interest in crypto and in blockchain applications has been on the rise over the past couple of years and is now rapidly intensifying. A recent survey by Fidelity Investments found that half of institutional investors consider digital assets to be worthy of holding in portfolios, banking giants have also already partnered up with fintech companies to develop own solutions, and Facebook is now rolling out its own “Libra” coin. What do you think this massive shift says about the future of the sector?
CZ: I think it is clear that institutional investors have realized the immense potential of this sector. We’ve already seen countless efforts (some more successful than others) by big banks and even by governments to capitalize on it or to use the underlying blockchain technology to solve their own problems and improve their internal operations and processes. This shift is already underway for some time, and the so-called “smart money” has been increasingly flowing into the crypto sector.
I don’t expect this trend to reverse any time soon. To the contrary, as more “success stories” emerge out of crypto ventures and as we see more applications of the blockchain technology materialize and spread, the investment appeal will skyrocket. However, responsible investors must remain rational and cautious. Due diligence, meticulous selection and active management are essential, even as the sector matures and becomes a “mainstream” investment field.
As for projects like the Libra, I think it is only the first of many. Companies like Facebook clearly recognize the potential of bringing digital, private money to the masses. Even if they’re not offering decentralization, nor privacy, concepts like the Libra, due to the preexisting infrastructure of their issuers, could be met with some mainstream success, up to a point at least. So, I’m sure we’ll see more of these attempts in the future, in one form or another. Of course, this doesn’t mean that they’ll make good investments.
CG: Given the wider economic environment that we currently face, with rising geopolitical uncertainty and a global growth slowdown, what are your performance expectations for the next couple of years for crypto?
CZ: I think the current economic and political environment still presents a good entry opportunity for investors. From the outside, it may seem as though it’s been relatively quiet on the crypto front lately, after the Bitcoin spike we saw in the summer of 2019. However, this is not true – although we haven’t seen wild price fluctuations, the kind that tends to grab mainstream attention and make headlines, there have been a lot of interesting developments in the sector, of strategic importance.
At the same time, the cracks are beginning to show in the global economy. Political “solutions” and central bank interventions have so far managed to paper over these problems, prop up equities, especially in the US, and keep investors generally hopeful about the markets in 2020. And yet, it is highly doubtful that these measures will be enough to sustain the record highs we’ve been seeing, while there are numerous risks, both economic and geopolitical, that could trigger an avalanche at any point. In such a scenario, the right crypto investments could really shine.
Uncertainty and investor anxiety are generally great boosts for crypto assets, and thus the current relatively calm period is great for those who wish to build or expand their crypto exposure. Nevertheless, it is important to once again highlight that a refined selection process is key, while a blanket approach to the sector is very likely to backfire.
CG: Among the main advantages that both cryptocurrencies and the blockchain technology itself have brought to the table is the potential for a sharp turn toward more decentralization and privacy. Apart from the investment potential of the sector, do you also see a social or wider economic impact that these technologies can have?
Absolutely, there is a huge shift underway that extends way beyond the obvious changes we’ve already seen. For one thing, the very idea of private money and free competition in the monetary arena has the potential to change everything. Breaking up the state monopoly over money and introducing real free market challengers to fiat currencies can transform not just the way we go about our daily lives and the way we do business, but also the role of any central authority in those processes.
The push towards wider decentralization is also becoming more powerful and more meaningful too, as new ideas and solutions are emerging every day, providing the right tools for this transition from a theoretical realm to the practicalities of everyday life and business operations. Once there are real use cases, functioning alternatives and solid decentralized systems that people can rely on, it becomes obvious that there’s really no need for external interference and control from above. Thus, apart from the systemic shift that’s already in the works, there’s also a wider perception shift that lies ahead. This has immense potential for social and political changes. While it’s too early to predict what they might look like, it is safe to say they are bound to be significant.
CG: What is the profile of the investors that would be the best match for the Resilience Crypto AMC and what would be your advice in how they approach their investment, especially in regards to their investment horizon, risk appetite and the size of their investment relative to their total assets?
CZ: The Crypto AMC is intended for institutional and qualified investors. We structured it to mainly manage our own Family Office’s crypto exposure, but another Family Office and UHNWs are invested. It is open for qualified investors who understand both the potential of the sector and the risk it entails. In our active management approach, we invest in a carefully selected portfolio of coins, tokens, futures, and equities, and we place great emphasis on risk management and on controlling downside exposure. We also follow strict investment guidelines and apply active specific operational risk management to address crypto asset risks. That being said, the sector itself can be volatile and does present risks and thus investors should be cognizant of this fact and be prepared to accept a relatively higher level of risk in order to achieve superior returns. We recommend an allocation of 1-3% of total assets and a holding period of 5 years.
Claudio Grass, Hünenberg See, Switzerland
This work is licensed under a Creative Commons Attribution 4.0 International License.
Picture Source: Christian Zulliger