Fund Focus: Falcon Global Bullish On Bitcoin

Mar 27 2014 | 6:47am ET

Famed financier Warren Buffet recently called bitcoin "a mirage," and earlier this month the Financial Industry Regulatory Authority warned that the cyber currency posed grave risks to investors. But that hasn’t stopped legions of bitcoin believers from betting on its future.

One of those bitcoin enthusiasts is Brett Stapper.

“I've been obsessed with it for awhile,” the founder of Falcon Global Capital, which he bills as the world's first “insured” bitcoin fund, told FINalternatives' Mary Campbell. “My whole life I've dwelled on the fact that I [wasn’t] old enough to participate in the era, and I see bitcoin as my second chance. It's the early stages of a very, very disruptive and exciting technology and there's no way I am going sit back and watch this go by.”

So deep is his affection for the cryptocurrency that last March he sold his billboard company, put the proceeds into bitcoin and launched the San Diego, California-based fund that he hopes to take to $100 million in 2014.

“What we've created at Falcon Global is a company which will invest in bitcoin for investors and secure it for them. The best way to explain that is to compare it to something that everyone would know. Take a standard investment fund right now that invests in physical gold for its clients. They invest in that gold and then they secure it for them because no one wants to secure a large amount of gold in their own house. We do that, but we're the 2.0 version.”

Stapper and Falcon's chief security officer, Fletcher Cotton, worked for months to develop their own bitcoin vault before discovering the London-based company Elliptic Vault, which launched in January and claims to be the first insured bitcoin storage service. The firm offers “deep cold storage”—which essentially means the cyber currency is taken offline—and has Lloyds of London underwriting any loss or theft for an annual fee of around 2%. Elliptic is storing Falcon Global's bitcoins.

Security Concerns

The question of bitcoin security has been in the media of late, thanks to the recent collapse of Mt. Gox, an online Japanese bitcoin exchange which declared bankruptcy after hackers made off with 744,000 bitcoins.

“Reading the newspapers, it's the end of bitcoin. Bitcoin is done. It's doomed. We'll never see bitcoin again,” laughed Stapper. “I'm seeing all this stuff in the news but it's funny because I'm looking at the bitcoin price and the price has actually gone up a little bit.”

For Stapper, Mt. Gox does not represent any inherent bitcoin flaw—it represents a poorly run company, one that started out as a trading platform for “Magic: The Gathering” cards.

“That was their original purpose,” said Stapper. “So you take a company with a CEO who does that for a hobby and all of a sudden he gets put in a position where he's controlling hundreds of millions of dollars of other people's money, that's a problem. But it's also pretty normal when it comes to disruptive and new technology—you get people in very, very powerful positions not because they deserve to be there or they earned it or they fought their way to get there but...simply because they were there.”

James Jalil, a corporate lawyer with Thompson Hine, agrees:

“I don't think that the failure of one exchange—while troublesome and certainly catastrophic for those people who lost money—really affects the future of bitcoin. There are other exchanges that are operational, that are maintaining the market...and Second Market just announced that they will start trading in bitcoin; it's a very respectable, established market here in New York.”

Cash Equivalent

Jalil, who specializes in investment management and finance, has become something of an expert on bitcoin which, he told FINalternatives, “fits very nicely” within his traditional practice. For him, bitcoin is the solution to an obvious 21st century problem: you can't use cash on the internet.

“But what if you could use anonymous cash on the internet?” he asked. “That would obviate the need for credit card security information and really address data breaches. That's one of the aspects of bitcoin that I think is going to have a tremendous effect on internet sales.”

And if Mt. Gox made headlines recently, so too did the retailer Target, which saw the theft of the names, mailing addresses, phone numbers or email addresses of up to 70 million of its customers.

Another advantage to retailers, said Jalil, is that transaction fees for converting bitcoin to dollars are likely to be lower than the hit they take on credit card transactions. Moreover, bitcoin solves the “click-through” problem that plagues internet retailers:

“What happens is, I'm going to buy a television online and I've got to put my name, my credit card number, the expiration date, the security code number, and address,” said Jalil. “At some point along the line something goes wrong—I press it, it didn't go through; I put the wrong number...I got sick of it; I don't want to give some information—and I stop the transaction. That's a sale you didn't make…

“It's as if they came to a Target store and they said, ‘I want to buy a television and I accept $800,’ and the salesperson ignores them, keeps them waiting, has a cup of coffee and they walk away.

“In Bitcoin you would obviate that—one click and it's done.”

A Treasury Department Job

The story of the customer and the $800 television raises another bitcoin issue: How do we know the bitcoin the retailer accepts for the television is actually worth $800?

“At this point, and I think for the foreseeable future,” said Jalil, “the price of bitcoin will be whatever the market says it is.”

But, he adds, “What's the price of the dollar against the euro? It varies everyday. Now, you take international businesses, they have an entire treasury department that's absolutely accustomed to dealing with this problem. They're making sales in dollars, or they're getting paid in euros...there's whole industries of really smart guys and gals who figure this out.

“It is true that bitcoin's valuations fluctuate wildly and that's going to be a growing pain that the industry is going to have to deal with. And now that Second Market's getting involved and other exchanges, maybe the harmonic volatility will even out a little bit."

Regulation & Taxation

One of the worries of would-be bitcoin investors is that governments will simply declare the cryptocurrency illegal. Although large bitcoin exchanges in both China and India have closed recently due to government probes and warnings, the currency got a shot in the arm from Judge Amos Mazzant  of Eastern District of Texas Federal Court, who ruled last year that a lawsuit against a man accused of running a bitcoin Ponzi scheme could continue because bitcoin constitutes money.

“It can be used to purchase goods or services...,” wrote Mazzant. “The only limitation of bitcoin is that it is limited to those places that accept it as currency.”

That's the difference, said Jalil, of being 'used as money' and being 'legal tender.'

“When you say 'legal tender dollar bill,' what makes it legal tender is you must accept it. And the reason for that is to give confidence to the dollar…

“But, you can have other kinds of currency that aren't official currency. Bitcoin is acceptable for payment, just like you could pay in gold, I suppose, or you could pay in anything—you could pay in Rolex watches. If you went to a car dealer and said 'I'll give you 100 Rolex watches,' there's no reason the car dealer won't say, 'Okay, I'll take 'em.'

As for taxation, earlier this week the IRS declared that bitcoin should be treated as property, not a currency, and is to be taxed accordingly.

Anonymity And The Black Market

According to The United Nations Office on Drugs and Crime, annual proceeds from crime and drug trafficking amount to approximately 3.6% of global GDP, with 2.7%  (or USD 1.6 trillion) being laundered each year. Critics argue bitcoin makes it too easy for criminals to launder money, an argument neither Jalil nor Stapper has much time for:

“Any anonymous means of transferring value is going to be used by criminals,” said Jalil. “This may be $100 bills, gold, including gold coins, diamonds and the list goes on and on….Prohibiting bitcoin will have zero impact on the criminal world because they will just use something else.”

There is also a fear that bitcoins won't achieve wide acceptance. Stapper  says there are currently 200,000 merchants accepting bitcoin, including, famously, whose libertarian CEO Patrick Byrne told Forbes that bitcoin “was like my dream come true.” Overstock teamed with the bitcoin money processor Coinbase to build a payment platform in just 10 days.

Retailers are actually Stapper's source of bitcoin—he buys the digital currency from merchants looking to trade them in for cash—and he doesn't believe this source is in danger of drying up.

And then there's the argument that governments use monetary policy as a fiscal tool to control the economy, and bitcoin, for better or worse, is not subject to government manipulation and control. The safeguard against runaway bitcoin inflation, according to Jalil, is in the bitcoin protocols which provide that only 21 million bitcoins will ever be mined.

“There is a limited supply, however, when it's reached, the [existing] bitcoins can still be purchased and sold,” said Stapper. “ Obviously, when that point hits it's going to be a very big change for the price, but I think that's all that will happen.”

Fund Targets Private Investors, Hedgies

Stapper is currently raising money for the Falcon Global Fund. Minimum investment is $25,000, although Stapper said that will eventually increase.

“We're targeting private investors as well as hedge funds. Our goal is to establish ourselves as the niche fund for the larger hedge funds that diversify into individual funds,” said Stapper.

“This is only part of our business model—we do have other plans to get involved in venture capital as well as other funds involved in the cryptocurrency space, so we're really aiming to be the bridge between Wall Street and the bitcoin technology.”

In Depth

Q&A: Decathlon Capital On Revenue-Based Alternative Lending

Oct 30 2017 | 3:49pm ET

The explosion in private credit activity since the end of the financial crisis is...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Saxby: Not All EBITDA Is Created Equal

Nov 30 2017 | 8:02pm ET

Record levels of dry powder are driving competition among private equity firms to...