As longtime TechCrunch readers know well, Michael Arrington cofounded TechCrunch and Crunchbase, as well as the venture fund CrunchFund, which was later renamed Tuesday Capital. But In 2017, Arrington announced that he was shifting gears and becoming a full-time crypto investor, and despite a volatile ride since, he isn’t looking back, seemingly. As he said during an interview late last week, “I like reinventing myself and I think more people should do that.”
On the heels of new fund announcement earlier this month, we decided to catch up with Arrington to learn more about the hedge fund firm he has been building in recent years with longtime business partner Heather Harde; longtime investor-entrepreneur Ron Palmeri; and Ninor and Ninos Mansor, brothers whose crypto firm merged with Arrington’s Arrington XRP Capital in 2019.
Our chat has been edited for length and clarity below. You can hear that longer conversation here.
TC: You recently moved to Miami. Why?
MA: I visited Miami earlier this year for the first time in a couple decades and was here just for fun on a vacation. Part of it might have been that it was one of the first times I’ve been out and social since COVID. Part of it might just be it’s actually wonderful here in the winter. I think it was February when I came. But we just fell in love with the city and got to know the mayor, got to know some people here. A lot of my friends, particularly from New York and San Francisco, had already moved here, and it just felt very welcoming. The city’s government seems to care about its citizens and want them to be happy, or at least not explicitly trying to make them unhappy. So we came back to look at houses a couple times [and] moved here pretty quickly.
A number of venture firms have recently relocated to Miami — is there a kind of Sand Hill Road forming anywhere?
What I’ve learned so far is that there are three areas of Miami that people live in. The first is downtown Miami, which is very centrally located and where business gets done. Another area south of that is where all the schools are, and it’s more suburban, and that’s where we live. The last area is Miami Beach where all the fun happens.
If you’re a young entrepreneur, just trying to figure out where you’re going to make your mark, they all seem to be located downtown. A lot of the really wealthy entrepreneurs are in Miami Beach, and then people who have kids are generally down south.
Is the process of meeting with founders any different in Miami than in California?
Since I’m doing crypto now, it’s still a lot of Zoom meetings with Asia and Europe and Russia and all over the world. But there are a lot of in-person meetings here. I’ve already been to a few events here. It’s very much like Silicon Valley was in 2005 when I was starting TechCrunch. It’s a small community, people are very [helpful to one another].
People who haven’t followed your career might wonder why you veered so directly into crypto when you did.
I started it just because it was new and I like reinventing myself and I think more people should do that. I think a lot of people become very good at something, and then keep doing that, and stop exploring the world. Even though some VCs I know are multibillionaires, they just keep doing [the same thing]. And it’s like, well, you’ve made all the money, why not just explore something else?
My career has always been a series of reinventions. TechCrunch was one of those reinventions. So for me, this is just the next step. And I’m 50. Now, I plan on doing this right now for the rest of my career, but we’ll see in five or seven years if something else takes my fancy.
When you announced your first crypto fund, there were some twists. It was a hedge fund, not a venture fund, and it was denominated in the crypto currency XRP, created by Ripple Labs. Why hitch your wagon to XRP, and what is your relationship with Ripple exactly?
As I was getting into crypto, I was talking to Brad Garlinghouse, who was CEO at the time, and he told me that some people had approached him about maybe doing a venture fund or a hedge fund that was funded by Ripple. And I said, ‘Well, that’s interesting, because I’m thinking about raising a fund.’ And so we explored it. And ultimately, we realized it didn’t work for tax reasons. Ripple holds a lot of XRP, and they do different things with it to try to make the ecosystem for XRP more robust, but if they were to put a sizable amount of XRP into a new fund, that’s a tax-free exchange, but as soon as a fund invests it, then that underlying XRP would be taxed at capital-gains rates based on a zero basis and it would just be a huge tax bill.
At that point, I started talking to some non-tax foundations about doing the exact same thing. And it does work with the foundations because they don’t have to pay taxes and gains, and so a couple of foundations in Silicon Valley contributed a relatively large amount of XRP to us for our first close. And that provided the foundation of our fund. And we went from there and took other LPs who put in money, or Bitcoin or whatever, but that started with them. And so we owe a lot to Ripple and to XRP. And we’ve been very loyal to them.
Why structure it as a hedge fund?
The reason why we wanted to create a hedge fund was we wanted to be able to recycle capital indefinitely. We make private investments very much like a venture fund. But we also have a pretty large active team based in Asia, and when you’re trading the venture fund, if you buy Bitcoin and then you sell Bitcoin, that’s it, you’re done. You return whatever you got from the sale to investors, and that’s it.
Now, there’s nuance to that. Venture funds usually can recycle 25% of their capital, for example, and over time, some of the newer venture funds and crypto funds have actually gotten to the point where they can recycle indefinitely for a period of time [and] look a lot more like hedge funds. But at the time we created our fund, that wasn’t state of the art.
Ripple has been battling with the SEC since the agency filed a lawsuit in December accusing the company of violating federal securities laws. What do you make of what’s happening?
I don’t understand it. The SEC basically let Ripple do its thing for half a decade before they said anything. And it’s odd to me that at some point, on [former SEC chief] Jay Clayton’s last day in office [as he was returning last year to private practice], they filed a lawsuit. So I don’t know if it’s political, I don’t know if it’s personal, I literally just don’t know. And I have no idea how this is going to come out. It hinges on whether or not XRP is a security. And that depends on securities laws that were created in the ‘40s. Frankly, I think it’s all bullshit. But who knows?
You’ve talked openly about having a terrible year in 2018. Your fund lost a lot of its value as the broader crypto market collapsed. You narrowly avoided entering into a death spiral. Where have you made the most money as a crypto investor?
Yeah, Bitcoin and ETH fell 80%. I think XRP fell 90%, something like that. We fell 42% that first year, so it was bad — 42% first year out the door is not good. But we beat the market. And so one of our main LPs actually re-upped in December of 2018 and gave us another $30 million in XRP that we ended up using mostly to buy Bitcoin at $3,500 and that provided a foundation of Bitcoin in our fund that we hold even until today
When Bitcoin is doing terribly, historically it’s been a wonderful time to buy it, and that will remain true until it isn’t true anymore. So we remain very bullish in down markets and very cautious in up markets. It’s not clear to me what market we’re in right now. We think we’re in the middle of an up market with a pause here for 60 or 90 days.
Why do you think we’re in the middle of an up market?
One of the things we look at are the derivatives markets — so people longing and shorting and and there’s a bunch of interesting derivatives markets with Bitcoin and ETH and others; there are these perpetual futures contracts where people are betting and you see the longs and the shorts stack up. And right now we’re seeing a lot of shorting in different ways of Bitcoin. When that happens, you can have short squeezes, which tend to drive the price way up. So when the market gets super, super short, we get very, very bullish, because you can see squeezes happen and drive the price up as people are liquidated and have to buy to cover their positions. You see that all the time. It happens the other way, too. Sometimes the market gets very, very long, and you see long squeezes, and when that happens, we get nervous and we start to hedge our positions there.
You’re watching the derivatives markets. Are you also participating in them?
We don’t get too exotic. A lot of the really exotic stuff is on unregulated exchanges with fairly serious counter-party risk and it’s fine if you’re doing bets of $100,000. It’s definitely not fine if you’re doing bets of $30 million to $40 million at a time, which we sometimes do.
You’ve done well by stocking up on Bitcoin; where have you seen the biggest losses?
So we’re doing some equity investments, and it’s indistinguishable from venture investing . . . but most of our deals are in tokens that we’re purchasing well before they’re released l . . they these token deals tend to mature much more quickly than equity deals. Sometimes, it’s a year or two but usually it’s a much shorter time frame. We had a deal 50x this year like a month after we invested. They tend to fail faster, and succeed faster.. So we’ve had losses all over the place.
But our venture side, our losses are much smaller than they should be, so that worries me. It worries me that it’s not sustainable, because of course it isn’t, and so we were worried about that. We’re trying not to make long-term investment decisions based on short-term success. But the real losses just come in the wild swings of the market. I mean, . . .. last year, we had well over $1 billion in assets under management and that has taken a dramatic haircut in the last several weeks . . . it’s just part of crypto’s volatility.
You’ve got other funds cooking. You recently announced you were launching a $100 million fund for bets on projects building on the Algorand blockchain.
That fund is just getting its legs under it now. . .
Why index so heavily on Algorand?
Algorand is a layer one coin, and that means it’s a network coin that has infrastructure to allow third parties to create new companies and protocols on the coin. And the founder Silvio [Micali] is literally, like, Einstein-level brilliant, and he has come up with what he thinks is a way to have your cake and eat it, too [in terms of developing a network that’s both decentralized and where transactions can happen quickly], and we believe he’s right.
Just before we hopped on this call, Dogecoin’s founder, Jackson Palmer, published a streak of tweets in which he accuses the crypto industry of all the things that already worry people about it. He says he believes that “cryptocurrency is an inherently right wing hyper capital capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight, and artificial enforced scarcity.” Have you seen these? Do you think there’s some truth to what he’s saying here?
I haven’t looked at these specific tweets yet, but based on what you just said, I don’t disagree entirely. Crypto — Bitcoin in particular — is fundamentally anti statist. It’s trying to rip the idea of money away from the state in the name of economic freedom, and people either agree with that or disagree with that.
I’m a libertarian and just happens to fit my world worldview perfectly. But there are tons of statists in crypto and tax avoidance is hard. As an American, it’s pretty darn hard to avoid crypto taxes at this point, and I certainly don’t even try, I just pay the taxes and smile and go on my way. But there are a lot of people who are in crypto for the money and not for the politics of it, and that’s fine. I’m not sure they see the ultimate outcome of Bitcoin being what I see it as.
There are a lot of multi-billionaires who control large parts of crypto, but I think that’s why we need to see more and more people get into crypto, so that that [wealth] gets distributed among more people as well.
[Note: Arrington’s firm just today published a research report on Algorand. We also talked about his newest investment, we discussed a separate “yield fund” he is trying to put together right now, and much more. Again, you can listen to that interview with Arrington here. Worth mentioning: this editor has never worked for or alongside Arrington; I joined TechCrunch in 2015; he left in 2011 after a somewhat famous spat with AOL, which had acquired TechCrunch a year earlier.)