As Bitcoin continues to make headlines, the famously grassroot and libertarian cryptocurrency ecosystem is becoming more institutionalized. Established financial institutions continue to dip their toes in the water and once scrappy start-ups have begun to transition into more institutional roles. HODL Capital, a cryptocurrency hedge fund founded by New York University alumni Thomas Pacchia, is one such firm.
Pacchia began his career after obtaining a joint J.D./LL.M at Washburn University and the University of Maastricht. Directly after law school, he joined Cadwalader, Wickersham & Taft LLP, focusing mostly on municipality swaps and derivatives. In his next position at BNP Paribas, he became interested in Bitcoin and technology investing, which led him to enroll in the dual-degree Master of Finance program in 2013 at NYU, where he split his time between NYU and the Hong Kong University of Science and Technology.
Pacchia’s first full-time role in blockchain was at Digital Asset Holdings, the software development company led by famed J.P. Morgan investment banker Blythe Masters. Pacchia was an early hire tasked with helping the company craft its early business plan and strategy for blockchain-based solutions to big banks.
After working at Digital Asset Holdings, Pacchia joined Fidelity Investments, where he was a director in their Bitcoin incubator, with a focus on legal risk and compliance issues for new product development. One of the projects Pacchia focused on at Fidelity was how to handle Bitcoin contributions to Fidelity’s charitable arm, helping to resolve their due diligence concerns around Bitcoin.
Pacchia praised Fidelity’s commitment to Bitcoin, remarking that “it was fascinating to see how they would approach really cutting-edge technology that creates existential ramifications for a large asset manager like Fidelity. There was also a willingness to really dig into the technology. I think that [Fidelity] is probably still on the cutting edge of traditional financial companies.”
After Fidelity, Pacchia decided it was time to launch his own fund, HODL Capital. His deep understanding of Bitcoin through years of experience in cryptocurrency prompted him to strike out on his own. After setting up the required legal structures, HODL Capital began accepting outside investors at the start of this year.
“As my understanding of the technology evolved, I realized that [Bitcoin] is next to unstoppable, and there was a real opportunity in the space for someone to provide [better] asset management services in more of a targeted way for family offices and ultra-high net worth individuals,” Pacchia said.
The unique nature of cryptocurrencies, with their varied governance structures and evolving use cases also encouraged Pacchia to start HODL. Pacchia says that the growing role of exchanges, such as Coinbase and Gemini, as well as the outsized impact of their decisions on the ecosystem created a natural place for an asset manager whose interests were aligned with those of investors.
“If you go to one of the centralized exchanges, they’re making political decisions on behalf of their customers as to what is and is not going to be Bitcoin going forward,” Pacchia said. “They choose to list certain assets and not list others. I saw this aspect of the community starting to evolve. I figured there was space for an asset manager who solely focuses on these things and builds an organization that’s nimble enough to work on behalf of the investor.”
HODL is built on a standard hedge fund structure with investment decisions grounded in the evolving regulatory environment critical for this particular asset class. More specifically, the HODL team has been cognizant of the fact that many newly issued tokens will likely be classified as securities in the future. This belief led Pacchia to eschew investments in these tokens despite their popularity given the belief that they will likely run afoul of future regulatory structure.
Pacchia takes a dim view of the recent ICO boom, questioning not just the viability but the legality of the majority of ICOs. “Ninety-nine percent of all cryptocurrencies out there are scams and will eventually go away … it is our view that the majority of these projects are taking advantage of retail investors,” Pacchia said.
Pacchia describes his investment philosophy as “Bitcoin Maximalist Plus,” which sets him apart from many members of the blockchain community as his firm steers clear of the ICO frenzy.
“A Bitcoin Maximalist is someone who views cryptocurrencies as eventually converging to one core protocol…. There may be a lot of trial and error and experimentation with other protocols, but eventually it’s going to come down to one and most people view Bitcoin’s network effect security and some other crucial technical attributes as pointing to it being the winner,” said Pacchia.
The “Plus” in “Maximalist Plus” refers to investing in protocols that could help resolve potential problems with Bitcoin. Pacchia and his team seek to identify systemic risks to Bitcoin and then identify and invest in potential solutions.
As an example, Pacchia cites a potential risk that arises from Bitcoin’s public ledger. Financial institutions are required to identify a client’s source of funds and ensure they are not coming from a sanction entity or source. Given the entire history of Bitcoin is available on the ledger, institutions will need to decide how far back they will review to settle on origin.
If inconsistent guidelines are implemented, it may be impossible to know whether an investor has “clean” or “dirty” coins, thereby threatening the entire ecosystem as Bitcoin begins to lose its fungibility. Pacchia views the inherent lack of privacy in a distributed public ledger as a potential systemic risk to Bitcoin.
“When you look at privacy as a potential systemic threat to Bitcoin, privacy coins such as Monero start to become … potentially attractive investments that fit the broader thesis,” Pacchia said.
As Pacchia and his team continue to build the fund, HODL is also busy building a research and development laboratory to help analyze the investment potential of various digital currencies. The laboratory will be modeled after equity research departments at traditional banks or funds, but the analyst roles will be fulfilled by software engineers who analyze the code of prospective investments.
Pacchia hopes to use the lab to give back to the community, noting that most of work that has gone into Bitcoin and the blockchain has been done on a volunteer basis. The development of Bitcoin and the broader cryptocurrency ecosystem has largely been a passion project for these volunteers. HODL plans to use the laboratory as a mechanism for contributing to the ecosystem in a systemic way. Moreover, HODL has been recruiting college interns to work in the lab to bring the younger generation into the space.
“The lab is an incubator for talent to continue to work on these open source projects in a more formalized way,” Pacchia explained.
Pacchia sees an enormous amount of potential for the space, stressing HODL’s long-term investment timeline, which are staged in five-year increments. “I think that the asset class that we’re talking about is still a very, very nascent technology that requires a lot of time and attention to understand, and it’s going to go through periods of amazing growth and painful corrections, which is why we like to look at the broader space over a longer time horizon,” Pacchia said.
“I think there’s going to be some really great movies about what we’ve seen over the last nine years.”