Legendary investor Warren Buffett is famously hostile to cryptocurrencies. He has said that bitcoin is “rat poison squared” and that cryptocurrencies will come to a bad end. In an ironical twist of sorts, Morgan Creek Digital Assets, a multi-strategy investment firm, is using the Oracle of Omaha’s famous 2007 million dollar bet as inspiration to promote cryptocurrencies as assets.
Back then, Buffett had wagered that an index fund which tracks the S&P 500 would outperform hedge fund asset allocations over a ten-year period. Morgan Creek Capital’s Buffett Bet 2.0 bet is similar. The firm has bet that its Digital Asset Index fund, which covers approximately 75% of the cryptocurrency market, will outperform the S&P 500 over the next ten years, starting January 1, 2019.
“The challenge…is open to the professional investor who believes cryptocurrencies are worthless or that public equities will be better over the next decade. Not only do the principals of Morgan Creek Digital disagree, but we are willing to put our money where our mouth is,” Morgan Creek’s press release states.
“This is a combination of our outlook not only for the upside of cryptocurrencies but also the outlook on public equities,” Anthony Pompliano, co-founder of Morgan Creek Digital, told CNBC. He compared the slumping cryptocurrency market with performance of public equities, which “aren’t at their all-time highs either currently.”
Morgan Creek’s Digital Asset fund is an index fund launched in August this year in partnership with Bitwise Asset Management, a San Francisco-based asset management firm. It tracks the Morgan Creek Bitwise Digital Assets Index. The index has 10 constituents and is heavily tilted towards bitcoin, which comprises 77% of the overall allocation.
But bitcoin’s performance has been miserable this year. It has crashed and burned its way from the highs it reached towards the end of 2017. As of this writing, the original cryptocurrency is down by 73% from its peak during the first week of this year.
The Digital Asset Fund’s index has mirrored the bloodbath in crypto markets and is down by 78.2%. “The index is down 78% YTD but we were patient on the timing of our fund launch and have been able to avoid much of the drawdown,” Pompliano wrote in an email response. “We believe post-drawdown is a more sober view of the market.”
According to him, cryptocurrency markets will slowly recover over the next two years. “But the big catalyst for kicking off a repeat of 2017 is the next halving (of rewards in bitcoin’s blockchain) in 2020,” he said. (Halving decreases the quantity of bitcoin awarded to miners of the cryptocurrency, thereby making it scarce).
Morgan Creek Digital was founded by Pompliano, a Facebook product manager turned investment professional, and Mark W. Yusko, former chief investment officer at the Endowment Office for the University of North Carolina at Chapel Hill. It claims to be “one of the largest digital asset managers in the space.”