Challenges of Running a DeFi Fund
Part 2: Navigating the Stress of being CIO of Titan Moon Fund
When my partners and I set out to launch a crypto fund, none of us had a second of experience outside of investor relations. Fortunately, we had a crypto curious group of friends and family who trusted us to make good decisions and hopefully provide a decent return on their investment!
We had never set up the workflow of establishing an appropriate fund legal structure, working with a bank, trading OTC, and the list goes on. We were total newbs and self-taught/learned on the job.
Here’s the myriad challenges we experienced that will be invaluable in our future ventures.
Work/life balance was non-existent. This is likely due to a combination of COVID restrictions, the dynamism of the crypto industry, the price volatility, and having to carry a huge workload. Not to mention helping as much as possible with kids and trying to take time off. I admit, I spent way more time on my laptop and phone working than in any previous role, and loved every second of it. However, it does put a strain on what’s really important - spending time with loved ones. In the future, I’m going to be better about prioritizing physical/mental health and relationships, or at least carve out dedicated time for them.
Taking Profits in a 1-year fund was what kept me up at night. We ran this fund from a long only, thesis driven investment, but could have operated slightly differently to manage risk due to the shorter time frame. When news and sentiment are hot, products are working and getting adoption, and prices are pumping, it can feel like it’s going to last forever. However, crypto markets are infamous for volatility, so the best operators know when and how to take profits. Having some stablecoins is wise because overreactions to the downside present opportunities to buy back or buy more of an asset you have high conviction in.
Tax implications. Related to the above point, we had a heated discussion about taking profits/riding through the volatility, and the former won out through majority vote. This was partially due to a compelling argument that our LP’s wanted exposure to crypto for the duration of the year, and because we didn’t want to have an enormous tax burden in 2021 (spread it across two tax years).
Financial Modeling without a robust dataset is very difficult and leads to extremely high uncertainty. All of us are in crypto, so we’re comfortable being uncomfortable! I have used statistics in every role of my career, and believe it’s the most applicable skillset across all disciplines. I’d never generated a financial model or projected returns before, so it was fun and challenging assembling this for my team. Here was my process:
Base case dataset was Bitcoin returns since it’s ~10 years
I used monthly price to calculate expected returns and volatility
I applied a beta coefficient to the various token classifications (e.g. Layer 1s, DeFi)
I created a dataset using a Monte Carlo simulation of 1,000 months’ returns (a huge challenge/gap in the modeling was the fact there is a strong time correlation between crypto monthly returns due to the cyclicality of the market).
I then determined the efficient frontier, which points to the allocation % for the best risk-adjusted returns.
The model came back with aggressive returns and it scared me. I constantly challenged my own assumptions and tried to downplay due to a lack of a robust dataset - statistical significance is hard to come by in DeFi.
Staying focused amidst a myriad distractions is something every crypto builder and investor struggles with. Something new happens every day - for example, we ran this fund in the midst of many crazes and new primitives, like NFTs, OlympusDAO and all the OHM forks, stealth launches, and ConstitutionDAO.
Filtering signal from noise is an art when the best sources of alpha are anonymous Twitter personas. Learning how to separate the ‘Psyops’ from truthful information requires experience, and verification using the public tools available (Etherscan e.g.). Crypto Twitter teaches one how to be a skeptic!
Bookkeeping is a nightmare in DeFi. For example,
Managing multiple wallets, investing across multiple chains, contributing liquidity to 2 or 3 token pools, attempting to track impermanent loss/gain, attempting to track interest earned and spent, track transaction fees
There is no comprehensive tool yet. Zapper, Zerion, and Debank are doing a great job, but can’t keep up with all of the protocols across every blockchain. This is still a massive opportunity for development.
There are very good reasons to do our best meticulously tracking metrics. Obviously, taxes and returns, but benchmarking to make sure you exceed your investors’ expectations - see my previous blog post about Benchmarking:
Finally, paying myself (funding a startup with crypto) just a little something to cover insurance benefits for my family meant it was nerve racking. I missed the regular paycheck/deposit from an employer as we ground towards the fund finish line. A nice fee share is coming soon, and you can bet your bottom stablecoin a big chunk of that is going right back into crypto!
You’re a cryptoguru!
Thank you!
Although my "fund" is many zeroes smaller, nevertheless I can fully relate to many of the challenges described. Even in my SmolFund world, distractions, noise and IRL obligations challenge my focus.