When Som Seif explains why he’s still bullish on cryptocurrency, despite a recent two-year bear market for digital currencies like Bitcoin and Ether, he is quick to invoke Jeff Bezos.
“I’m sure there were times where Bezos thought he wasn’t going to make it, you know? I’m also sure there are many people out there who regret not buying Amazon stock in the early 2000s,” Seif told The Logic. “But this is not an idea that was cool in the moment and is stupid long term. Blockchain is not going away.”
Seif is the founder and CEO of Purpose Investments, a well-known Bay Street investment firm that manages more than $9 billion. His side project, however, is Ether Capital, a company he co-founded along with Ben Roberts, an early adopter of cryptocurrency and the co-founder of another Ethereum company, Citizen Hex.
Digital currencies have rallied in recent weeks, reaching highs not seen since early 2018, driven mainly by investors seeking refuge in a non-fiat asset class during times of turbulence, coupled with growing signs of institutional acceptance. But while Seif’s optimism about Ethereum—a blockchain-based technology that is the pillar of the decentralized-internet movement—has never wavered, Ether Capital, with holdings mostly composed of ether, has been bleeding money for the past two and a half years.
Ether Capital, a company in the cryptocurrency space co-founded by Bay Street investor Som Seif, has seen its investments in Ethereum tank over the last two and a half years, negatively affecting the company’s stock and shrinking its digital asset holdings to a fraction of what they used to be. But Ether Capital, a publicly traded company, is one of just a few regulated ways in which retail investors in Canada can gain exposure to Ethereum, widely considered by crypto enthusiasts to be the next phase in the evolution of the internet. A recent rally in the prices of Bitcoin and Ether could spell a reversal of fortune for Ether Capital, but Seif and Ether Capital’s executives appear unfazed by short-term fluctuations—negative, or positive. “To be a long-term developer of deep and transformational technology, you need to be able to tolerate these moments,” he told The Logic recently.
Ether Capital’s weak performance is directly tied to the value of Ether—the cryptocurrency that powers the Ethereum network—of which the company owns large quantities. Wide-scale adoption of Ethereum technology, crypto bulls believe, could ultimately render obsolete the third parties that store digital data and financial records, providing more anonymity and security to everyday transactions on the internet.
Ether Capital went public on the Neo Exchange through a reverse takeover in April 2018, raising $42.2 million. A month later, the company used about 90 per cent of its available capital to purchase 42,587 Ethereum tokens, at the time worth an average of US$687 each. Eight months later, a single token was worth just US$83. Ether Capital’s stock followed the digital currency’s trajectory, plummeting almost 90 per cent between April 2018 and March 2019.
As of June 30, 2020, Ether Capital held $10.9 million in digital assets, an improvement from the $7-million figure at the end of 2019, but still a far cry from the $37.6 million it had initially stumped in Ether.
Seif admits that the company launched when investors were “euphoric” about anything to do with cryptocurrency, without necessarily understanding the nuances of the space—the difference between Bitcoin and blockchain technology as a whole, for example, or why the ether token effectively fuels the Ethereum platform. “Being a public company is always difficult. This happens a lot … capital markets are disjointed from the fundamentals,” he said, insisting that beyond the stock price and the price of Ether, there has been remarkable progress over the past two years with Ethereum technology itself.
When Ether Capital’s available pool of capital began dramatically shrinking in the summer of 2018 as a result of the drop in the price of Ether, Seif and Roberts rejigged their management team, bringing in crypto entrepreneur Brian Mosoff as CEO and former Cormark Securities investment banker Stefan Coolican as CFO in an effort to help the company navigate the crypto bear market.
The company has so far made two deals under Mosoff and Coolican: a US$1.5-million investment in Wyre, a San Francisco-based blockchain-based payment platform, and a US$1-million investment in MakerDAO, a decentralized credit platform built on Ethereum.
The moves are intended to diversify Ether Capital’s holdings, buying into what the management team deems are innovative fintech companies that have long-term potential but that still operate in the Ethereum space. “Ultimately, we would have liked to make a lot more investments, but you know, the market continued to be bearish for two years,” Mosoff said.
Coolican draws a comparison between the crash in Bitcoin and Ether prices to the bursting of the dot-com bubble in the early 2000s. “Crypto investors, like early-day internet investors, were a very small community. And then all of sudden, everyone gets excited about the space, you have this massive liquidity pouring in, and everything gets bid up. As soon as you see a bit of weakness, it all just collapses on itself.”
In Canada at least, there are still very few ways for investors to gain exposure to the world of cryptocurrency. One method—albeit a risky one because of how unregulated it is—is to directly buy crypto tokens from digital exchanges, like the now-defunct QuadrigaCX. The other is to invest in cryptocurrency miners—companies that actually own the servers that mine digital currencies.
Hive Blockchain, for example, which owns mining facilities in Sweden, Norway and Iceland, was one of the first miners in Canada to go public. Hut 8 Mining is listed on the Toronto Stock Exchange, but runs its operations out of Drumheller and Medicine Hat in Alberta.
Crypto-mining is an easier model for traditional finance to understand, said Coolican, which explains its appeal. “When I was a banker at Cormark, this was the way to play in the crypto space. But the problem with the miners is they have huge costs like electricity from all the servers that they have to use, so that’s always going to weigh on your ability to generate returns.”
Then there are blockchain-technology investment firms like Galaxy Digital Holdings, run by ex-hedge fund manager Mike Novogratz of Fortress Investment Group fame, and listed on the Toronto Stock Exchange (TSX). Galaxy, unlike Ether Capital, has an array of businesses ranging from trading to advisory services.
Ether Capital’s value proposition, according to Coolican, remains the same today as when it launched in 2018. If you’re an average retail investor who wants to gain exposure to blockchain technology, but you don’t really know what Ethereum is, or how to buy Ether, buy Ether Capital’s stock, instead.
From the get-go, Seif brought in Bay Street heavyweights to guide Ether Capital. John Ruffolo, founder of OMERS Ventures, sits on the board, along with Cam Di Prata, founder and managing partner of investment-management firm Gibraltar & Company. Seif was adamant that his foray into crypto have a clear sense of legitimacy to it. “I spent most of 2017 having conversations with Ben [Roberts], to really understand what was happening in the sphere,” Seif said. “And I thought, ‘Let’s put together a really smart, fascinating group of people and give the average investor a focused approach to crypto, especially at a time when there are so many sketchy and fraudulent crypto exchanges out there.’”
Di Prata, who has personally invested in Ether Capital, called the performance of the company to date “regrettable,” though he told The Logic he still believes in the long-term value of Ethereum, specifically the role it could play in banking and finance. “Of course it was a little bit unfortunate that we bought Ether at a certain level and then there was this massive correction, but I think everyone should have some exposure to blockchain technology. We’re taking a long-term view on this.”
There are various macro-level changes taking place in relation to digital currency that Ether Capital CEO Mosoff believes will gradually shift the traditional investor’s perception of the asset class. In early October, a group of central banks—including the Bank of Canada, the Federal Reserve and the European Central Bank—published a report assessing the feasibility of a publicly available central bank digital currencies, noting the speed of innovation in digital payments. PayPal also recently launched a crypto service, allowing users to buy, hold and sell Bitcoin, Ethereum and Litecoin on its platform.
Closer to home, a regulatory breakthrough in the Canadian crypto space took place when the Ontario Securities Commission allowed 3iQ, a Canadian investment fund manager, to launch a Bitcoin fund, setting a legal precedent for companies or funds that invest directly in digital currency to go public on a top-tier exchange. The Bitcoin Fund, as it is officially registered, went public on the TSX in April, as interest in non-cash assets like gold and Bitcoin started rebounding as a result of the pandemic-induced economic crisis and the resumption of quantitative-easing measures.
“We pushed and pushed and we won,” said 3iQ co-founder and CEO Frederick Pye. “We launched the first-ever regulated, closed-end cryptocurrency fund.” 3iQ’s fund will invest directly in bitcoin tokens and hold them—since its inception, the fund’s stock has climbed by over 30 per cent. Pye has already received approval from the OSC to launch a fund dedicated to purchasing Ether, called The Ether Fund, which is expected to go public imminently.
Mosoff doesn’t necessarily see The Ether Fund as a competitor to Ether Capital, mostly because of how restrictive the structure of a fund is compared to an entity that is registered as a corporation. For example, Ether Capital’s corporate structure enabled it to invest in Wyre and MakerDAO.
“It took Fred Pye years to push the Bitcoin fund through to regulators, so you have to give him credit where credit is due. It’s a win for all of us in the industry. But the problem with a closed fund is that they don’t have flexibility,” Mosoff said. “Our goal was never just to hold ether and sit back. The goal was to leverage the knowledge of the group of people we have around the table who are crypto natives and people in traditional finance and find ways to buy infrastructure in the space.”
The price of Ether has made a comeback of late, partly due to the performance of Bitcoin—both tend to move in tandem with each other, though Bitcoin is worth substantially more. Days after the U.S presidential election, Bitcoin reached the US$15,000 mark, its highest level since January 2018. At the start of the pandemic, the price of Ether hit a low of US$108; it is now approximately US$444. Ether Capital’s stock, too, has risen dramatically in the same period, from just US$0.14 to US$0.59 a share, a 321 per cent jump that effectively gives the company more capital to deploy.
Still, regulators have not significantly changed their tune on cryptocurrency since 2018, when the OSC and other provincial regulators teamed up with the SEC on “Operation Cryptosweep,” a crackdown on fraudulent crypto-investment products and initial coin offerings, the crypto equivalent of an initial public offering. In fact, the OSC approving The Bitcoin Fund was not an endorsement of investment funds based on a cryptocurrency model, according to a legal assessment of the decision. The Canadian Securities Administrators, a conglomerate of all provincial and territorial securities regulators, is still in the process of coming up with clear guidance on how retail investors should approach crypto investments, and what regulatory framework various crypto assets fall under.
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But none of Seif, Coolican or Mosoff are particularly interested or concerned with the month-to-month fluctuations of crypto prices or the company’s stock, even when it positively affects Ether Capital’s balance sheet. Their immediate next step is to get involved in a new concept known as “staking”—holding coins in a wallet in exchange for a reward in the form of more tokens. “Think of it as a passive income,” Mosoff said.
Seif, for his part, repeatedly emphasized how Ether Capital is investing in a blockchain space that’s still in its early stages, and that returns might only be seen in 10 to 15 years. “There’s a temptation to look at this company and say, ‘Wow, the stock is down from when it went public,’” he said. “But to be a long-term developer of deep and transformational technology, you need to be able to tolerate these moments.”