Kenny Hearn, Fund Manager and Head of Research at SwissOne Capital, tells Ben about his path from traditional asset management to Web3 specialist and why he remains optimistic about the future of the market.
In his role at SwissOne Capital, Kenny champions investments in Web3 and the metaverse. A writer on all things crypto since 2013, he’s a regular contributor to the US Chamber of Commerce.
The collapse of Three Arrows Capital and FTX eroded investor trust in crypto, but Kenny remains “cautiously optimistic” about the market’s future.
Connect with Kenny on LinkedIn or Twitter.
Congratulations are in order for Lifeboat badge winner xray1986 for their answer to Unicode symbol that represents "download".
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Ben Popper Hello, everybody. Welcome back to the Stack Overflow Podcast, a place to talk all things software and technology. I am Ben Popper, the Director of Content here at Stack Overflow, and I have a great guest for us today: Kenny Hearn, who is a Fund Manager and Head of Research at SwissOne Capital AG, a regular contributor to the US Chamber of Commerce, and a writer on all things crypto since 2013, spearheading investments in Web3 and the metaverse. Kenny, welcome to the Stack Overflow Podcast.
Kenny Hearn Thanks, Ben. Thanks for having me. It's a privilege to be here. I've looked at some of your guests and I felt quite honored to be invited to your show, so thank you very much.
BP I gave a quick fly over there but maybe tell us a little bit from your perspective, how did you get into the world of software and technology, if that's what brought you here, and what brought you into the fold for crypto, Web3, metaverse, faithful.
KH So I come definitely more from a traditional finance background. I started out at Morgan Stanley, Barclays, and then moved into hedge fund management. My parents used to call me ‘analysis paralysis’ because I would overanalyze things down to the T and often it became difficult to make decisions. But be that as it may, it's sort of always been the thing of mine to go deep into analyzing and researching things so that's what I did at traditional banks, and then I headed toward the hedge fund management space to be able to apply that knowledge and hopefully make some money out of doing that. And so in about 2013 I came across Bitcoin, which was a funny story, but I did, and at that stage I started looking into it and I really liked the economics of it.
BP Right. Well let me just pause you for a second there, let's not jump over it. Funny, how? How did you find it and why was it funny?
KH Well my wife was doing a yoga retreat in India and she came back and she said this guy that she was renting an apartment from would go to Bangalore and come back from Bangalore on the weekends and he wouldn't stop talking to her about this thing called Bitcoin. And clearly she knew me well and she thought it would be something that would be of interest to me, so she came back and told me all about Bitcoin and I told her, “What are you talking about? This is insane. You don’t know anything about this sort of thing.” So to her credit, she pushed me. And I went a bit deeper into it and really read that white paper and then I was hooked at that stage. Particularly I think I'm definitely from a slightly younger generation in the traditional finance space. I was more of an up and coming asset manager and I call it a new wave of asset managers where we actually want to invest money that is for the betterment of the planet and humankind. So I think that new wave of asset managers was entering the market and something like Bitcoin really spoke to that. And so I tried to start to get the board of directors at the hedge fund that I was working at to look at investing in Bitcoin and I very quickly saw that that was going to take a very long time and I thought that the opportunity was then, and so I went out and started my own asset management business and that's, from that point onwards, what led me down this path.
BP So you mentioned you're someone who helps to manage money for people. You have clients who trust you with their investments. From 2013 to now has been a wild ride, big ups and downs in the world of crypto and Web3. From your perspective, where are we right now? It feels like during the pandemic a whole new group of people got in on crypto, NFTs became a household phrase, and investment and valuations in coins were through the roof. Then obviously there was the collapse of Three Arrows and FTX and sort of a loss of trust in the ecosystem. I don't know what that looks like from your perspective, but I think it would be interesting to hear about it because I know software developers that I speak with within Stack Overflow and externally held very strong feelings about crypto on the way up and on the way down. A lot of them had already made up their minds if this was something they believed in or felt almost averse to it and they wanted to get away from the hype. So where do you sit now and how do you talk about it with your clients or future partners or investments?
KH In the same light as I'm sure a lot of the software developers looked at working in the space and basically investing their time in the space, not necessarily money, but certainly their time, which I think is more precious than any crystallized value. But definitely when we start from me being in 2013 and then the strategies that we developed for institutions and family offices to invest in the space was very much aligned to a very long term view, and that's always been the way our approach since day one was. It has just been really that you can't not have some sort of exposure to this asset class on the planet over the next 10 to 15 years. Even if it went to zero, just a small portion of one's investments or asset allocation into an asset that had this type of growth would make a significant impact on your overall portfolio. So from day one, it's always been about an asset allocation decision for a longer term investment. So that's the backdrop to sort of answering the first part of the question in terms of where are we now in that cycle. I was on a podcast in June last year and I said that I thought that the bottoming was going to be in around March 2023. It seems like things are looking good right now and we needed this recovery. I think that the pendulum swung in the complete opposite way. So just like when we're at 69,000 for the Bitcoin price and everyone was talking about 100,000, it kind of was the total opposite of where we are now where it's going to hundred, developers don't need to develop anymore. They've made all their money, they can go retire on a beach somewhere. And that all ended, and it needed to end because, from a personal perspective, finding developers and finding software engineers was impossible. Everyone wanted to work for ridiculous amounts of money and that's what cycles does. So we needed some reality check but now the pendulum swung in the complete opposite direction, and at that limit, and certainly towards November or December last year we were looking at this market going, “This is very scrumptious valuations that we're looking at if these protocols can do what they say they can do,” and that's sort of the common denominator that hasn't changed, which is that the goal and what is trying to be achieved is extremely large and therefore the valuations will swing because it goes from being zero to huge adoption. So if you look at valuation techniques and equations, the biggest uncertainty around an equation is the G factor, which is your growth factor, and the higher your uncertainty around the G factor, the greater the volatility of your valuation of those assets. So we are in a little bit of a recovery, a necessary recovery because it had gone too far in the negative territory, but we're cautiously optimistic. I do advise caution in trying to get ahead of oneself because there is still a lot that needs to be figured out from our perspectives relative to governance. And what we're building here is still built by humans, and where there are humans there are politics, and where there is huge amount of potential and growth, there's an element of abuse that takes place in that sort of situation.
BP Sure. So you mentioned valuations rise and fall, but the fundamental thesis about the power of these protocols can kind of remain. From your view on a long-term perspective, what is the value there? Is that derived from the software from the cryptography, and what is the long-term value from your view and how would you go about reasonably evaluating these companies or these coins in the same way we might evaluate a company and a stock?
KH I've been looking more so of late at the metaverse category of Web3 and I think the two go hand in hand with each other, and maybe in the next couple minutes we can get into a definition of the metaverse. But I've been looking far more at that and the more this sort of– I don't really like the word crypto because I don't think it does justice in terms of what is too broad a statement in terms of what is actually being built by developers in the space. I think that the developers are developing across such a broad array of challenges that we face as humans on the planet right now, and each one of those challenges deserves the amount of time, respect, and focus from a certain number of people, and those challenges that we're trying to overcome or trying to achieve is really where the value lies. And so as an asset manager, trying to use all traditional ways of valuation is useful when it comes to things that don't really change like people, the way the money flows within a project and the way the value flows and are stored. But you have to try to imagine a new type of scenario or new world in which we're operating within. And then within those multiple different scenarios that you can create, you then look at where the value would lie in a scenario like that. So for example in our metaverse fund that we're looking at at the moment, we really like the hardware aspect of it. And now I'm delving a little bit into the metaverse, but for example, we define the metaverse as a confluence of real world and virtual world. And for many years actually, a lot of people without them actually knowing it, they've been living in the metaverse. Anybody that takes a photo of themselves or goes for a run and measures their heart rate and uploads that into a digital, virtual world is effectively living in a metaverse in our view. And so where does the value chain lie along that process of taking real world data, moving it into a virtual world, where does the value lie? And one of the key points that we like for example, is the hardware aspect of that. So we like the development of the hardware. So Garmin would be a great company to get exposure to the metaverse in, I believe, for the longer term because they're building the chips and the hardware that's required and they're client-facing so they have people who want to buy their products. And then there's even the guys behind the hardware who's then building the chips that go into that. So you're starting to see where I'm getting at, and that's just that aspect of the metaverse.
BP Right. Well, I'm glad somebody is making money in the metaverse. It seems like the side people associate with virtual reality and the headsets has been a tough road to hoe in terms of consumer adoption. I tend to agree with you that anybody who's been playing World of Warcraft for five years and has great friends there and is super invested in their skins and digital gold has been living in a form of metaverse. I guess what we don't have is sort of the metaverse where you can move between the World of Warcraft and your Facebook account and your Garmin health and bring your avatar with you between all those things. You mentioned a few times wanting to invest and think about things from a perspective of the challenges we face you said as a species and as a planet. How do you square the investment in technology with what we need to do to face up against climate change? For a long time I think Bitcoin and Ethereum and others were kind of left out of that discussion. Then they were definitely a boogeyman in there consuming all this electricity for what reason. Now obviously people have come up with new solutions like proof of stake. But you mentioned that a few times so I'm curious. Is this an ESG component, and if so, how do you balance an investment in Bitcoin or metaverse or Web3 with those goals?
KH So I think that energy is a major challenge for moving humans and trying to improve the way that we consume stuff around the planet. I think one of the biggest implications on the planet is the amount of stuff we consume. So if we can improve that and gather data on the amount of stuff that we're consuming, a large amount of energy is required in order to do that, in order to use applications that can monitor the data, et cetera, et cetera. So energy consumption is a massive issue, and I don't believe we're currently valuing energy the way that we should, because what's required to generate energy is hugely impactful. So one way of doing that is to connect the energy that we consume around the planet into some sort of stablecoin that is backed by energy that we can transfer around the planet and use energy and move energy around the planet more efficiently. I think that's something that there are very interesting ways to manage that. But for me, the critical part is where artificial intelligence comes in, and it's suddenly accessible. I mean, I've been looking at AI and all these different sophisticated technologies for years now, but I thought the time until I would be able to use AI is probably 20 years from now. And suddenly I'm seeing the power of this thing and I'm going, “Wow, this is useful.” I always thought, “Why can I get into writing code?” I mean, I know now after having my first child, I just don't have the patience to write code and so I take my hat off to most of your listeners and people who do develop. I would have loved to become a software developer. But the fact is that I've been starting to use AI to give me code to then put into Excel to start running models for me and I don't even have to know how to code. I just say, “This is what I want to do with code,” and then it gives me code. It's quite incredible.
BP I don't want to diminish what's happened in the world of Bitcoin, crypto, Web3, and Metaverse. I myself have been covering this stuff as a journalist since 2010-11 and dabbling in it in various ways and I know many people who work in the industry. I guess I'm sort of struck by your appreciation for AI because I feel the same way, and I guess that's one of the things that to my mind puts a challenge out to something like DeFi or the use of stablecoins by people, which is to say, in a very short time, once it became accessible, so many people were able to see, “Oh, this is the value to me of this technology. Before I couldn't write code, now I can write code and fix up my website. Before I couldn't run these models, now I can,” or whatever it may be. “This is helping me to be a better writer of fiction.” There are many different ways to use AI and some of the most recent demonstrations seem like a turning of a new leaf in search. And not just Googling, “Where can I find this?” But I'm saying, “Hey, I'm buying this closet. It's this size. Will it fit in my car?” And the AI does the calculations for you. That's very useful. Maybe it's not rocket science. It is in the background, not in the foreground, but it's extremely consumer-facing useful. So when you think about that, does that give you pause about sort of the main focus of your investment? Would it shift to AI? Would it continue to be in the areas it's traditionally been in, or do you think those two things will end up blending together?
KH Well they are already blending together. I'm really looking at AI projects within the crypto metaverse space. And for me, the way that I see Web3 or the metaverse, I think it's like a test net for human beings. So the main net is us in the reality that we live in. We go out into the snow and we feel the cold and we come back home and we continue doing whatever we have fun doing. But it's much more difficult to test these things that we imagine, or what things could be like, or how much easier our lives we could make for ourselves, or how much more time we could give each other. Because at the end of the day, the greatest asset that we have is our time. And so the more that we can create tools to give us more time, the better. And so I'm very open to AI from that perspective, and so yes, we're already looking at projects that are doing that and most of the AI projects that are building that are sort of listed in digital asset space, because I want to kind of move away from this word ‘crypto’ because it's not crypto, it's just that they're digital assets that are listed on these exchanges that are dubbed crypto exchanges, but it's just a marketplace to invest in these types of projects. But basically these projects are trying to create a marketplace for people to bring AI that makes it accessible to you or I in a way that's very applicable to my life. So I think that if that can be the focus and the more we can decentralize the building of AI, the safer it is going to be built. I think what scares me about AI I guess is where there's a group of people who sit in a room and are deciding how AI is going to take over the world or what sorts of products are going to be used. So that's what I like about AI being developed inside a more decentralized environment. And that's what most of the projects within a decentralized ecosystem, that's where they're building.
BP I tend to agree with you. Obviously there's large tech companies that have a lot of research in this and we'll have products, but they also publish a lot of the research which is nice. The blend of academic community, open source, and big tech is kind of unique in the AI space. And as you point out, there are some projects like a Stable Diffusion which have kind of almost kept pace in a lot of ways with the progress of what's going on inside of some of the big companies, so that's been really cool to see.
BP All right, everybody. Thanks for listening. Hope you enjoyed the show, gave you some new thoughts on AI and the metaverse. As we always do this time of the show, we shout out a Stack Overflow user who came on and helped out the community, sharing some knowledge. Thanks to xray1986, winner of a lifeboat badge for rescuing a question from the dustbin of history. The question is, “What is the unicode symbol that represents download.” If you're curious, xray has the answer for you and has helped over 50,000 people over the years. As always, I am Ben Popper. I'm the Director of Content here at Stack Overflow. You can always find me on Twitter @BenPopper. Email us with questions or suggestions, firstname.lastname@example.org. And if you like the show, do us a favor, leave us a rating and a review. It really helps.
KH I'm Kenny Hearn. I am the Fund Manager and Head of Research at SwissOne Capital AG. We have a listed product, the Metaverse ETI, on the Stuttgart Exchange which is accessible by people all over the world. And we run a great strategy, we invest in real world assets, virtual assets, digital assets, that's broad. And you can find us at SwissOne.capital or @SwissOneCapital on Twitter.
BP Alright, everybody. Thanks for listening, and we will talk to you soon.
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