Insight
January 13, 2023
At Stone Ridge Holdings Group, creativity is never a single eureka moment. Each new idea starts small, and we try to build it into a big idea one brick at a time. Most of the time, without success. In recruiting we don’t screen for enthusiasm. We screen for endurance.
Thus, flourishing at our firm requires an enormous capacity for very hard work. The phrase “it’s not how hard you work, it’s how smart you work” doesn’t apply at Stone Ridge. It’s how hard you work.
“I’ve never really viewed myself as particularly talented. Where I excel is ridiculous, sickening work ethic. The only thing I see that is distinctly different about me is: I’m not afraid to die on a treadmill. I will not be outworked, period. You might have more talent than me, you might be smarter than me, you might be sexier than me. You might be all of those things. You got it on me in nine categories. But if we get on the treadmill together, there’s two things: You’re getting off first, or I’m going to die. It’s really that simple.”
- Will Smith (>$10 billion in global box office sales)
On May 9th, 2016, revelations about internal violations at the leading alternative lending platform – LendingClub – and the CEO’s sudden and shocking resignation, shook the nascent alternative lending industry to its foundation. At the time of the announcement, Stone Ridge had $1.3 billion of initial investor capital lined up for the imminent launch of LENDX, our alternative lending fund. Because LendingClub was slated to be LENDX’s largest platform relationship at launch, the entire LENDX portfolio management team immediately decided to visit LendingClub in person and re-underwrite their entire organization. In parallel, we arranged calls with every RIA firm investing in LENDX to share our diligence game plan and answer questions.
We considered hosting one big, investor group call – far easier and more efficient for us – but ultimately rejected that approach. Instead, 74 separate back-to-back client calls over two days tested our endurance (and vocal cords) but provided our investors with the individual attention they deserve. Our team then flew out to LendingClub’s San Francisco offices to dig in, prepared to walk away from the relationship. At the time, conventional wisdom said LendingClub was toxic, un-underwritable, and un-investable. Indeed, virtually all LendingClub loan buyers immediately stopped buying their loans.
In San Francisco, we insisted on structuring the meetings with LendingClub as “one executive at a time” including, separately, the 1) Chairman, 2) CEO, 3) Head of Audit/CCO, 4) General Counsel, 5) CFO, 6) CIO, and 7) Head of Credit. Each of those sessions was intense and our overall process was appropriately invasive. In the end, we came away more impressed, not less, with Lending Club’s culture of compliance, controls, and operational excellence. Conventional wisdom was wrong.
We followed up our trip by calling those same 74 investors to review our diligence findings in detail. On those calls, we also shared that, based in part on what we learned in diligence, Stone Ridge would be doubling its own investment in LENDX. We then proceeded to buy $955 million of LendingClub loans between June and late December 2016.
Let’s fast forward to today. The folks at LendingClub are on their feet, thriving, and 2016 is a distant memory. Stone Ridge is proud to have played a supporting role during LendingClub’s darkest hour – and LendingClub, in turn, has delivered for LENDX and its shareholders.
The turn of events at LendingClub in 2016 tested whether or not we were willing to die on a treadmill. We were. Our team proved its burst capacity for very hard work, gave LENDX life, and, in the ensuing six years, provide 4.8 million loan recipients with $29 billion to bet on themselves – the most American of all traits – propelling our economy forward.
Often wrong, conventional wisdom is never in doubt. What’s initially perceived as a risk management debacle may actually be a firm’s shining hour. As an investor, sometimes it pays to run to the roar.
Silvergate has been an important fixture in the digital asset landscape in large part because of its groundbreaking Silvergate Exchange Network (SEN). SEN, which launched in early 2018, enables the real-time, 24/7 settlement of dollars between network participants, a pain point for institutions dealing with digital asset markets, which operate outside of normal banking hours.
Last Thursday, January 5th, Silvergate Capital reported a 70% drop in crypto-client deposits (likely ~50% overall drop in overall deposits) – yet remained open for business with flawless customer execution. Seamlessly processing withdrawals of anywhere near that magnitude, and over such a short time interval, while maintaining all normal bank functions demonstrates astonishing operational and risk management excellence. It is a feat to be in awe of, not admonished for. Indeed, we find no precedent in the fractional-reserve bank era. Even the “banking runs” of the Global Financial Crisis (GFC) pale in comparison to successfully managing a 70% shock. For example, in 2008, the then venerable Washington Mutual experienced a 9% outflow of client deposits, not 50%, and required an emergency bailout via acquisition from JP Morgan.
Silvergate has been a long-standing partner of NYDIG, and we think especially highly of Alan Lane, the CEO. We are grateful for Silvergate’s historical and ongoing service and professionalism. NYDIG has held deposits at Silvergate and been a frequent user of their SEN product for settlements. NYDIG also added deposits this week. We look forward to continuing our partnership with Silvergate building safe, financially responsible products in support of bitcoin.
Ross L. Stevens
Founder & CEO, Stone Ridge Holdings Group
Founder & Executive Chairman, NYDIG
On Thursday morning, the Bureau of Labor Statistics released the December Consumer Price Index reading. The widely followed inflation statistic was in line with economists’ expectations and pointed to decelerating inflation. While the price reaction from risk markets and bitcoin showed investors were initially unsure how to interpret the news, equities rallied throughout the day and bitcoin screamed higher, breaking through $19,000.
The move appeared to be driven by outright longs rather than offside short positions getting liquidated. Short bitcoin futures liquidations across exchanges only totaled $80M on the day, a number that has reached several hundred million in significant liquidation events in the past. Open interest on futures exchanges is well off the 2021 highs, down to just $8B from $27.4B, and perpetual swap open interest is only $6.5B, down from a high of over $16B at the peak.
The rolling 1-month basis on CME-traded futures, the annualized difference between futures contract prices and spot prices, has recovered from deeply negative territory, an indication that traders are becoming less bearish. The basis, which is reflective of trader positioning, is generally expected to be positive because of funding costs and margin requirements. However, since the implosion of FTX and Alameda, the basis has been negative, a testament to the bearish positioning by traders. The basis just pushed into positive territory yesterday and is reflective of a thawing attitude toward the price direction of bitcoin. It is too early to say the traders are outright bullish by these metrics but, given the positioning in the market, it is no surprise that a small amount of positive news drove prices substantially higher.
Monthly production and sale numbers are in for most public miners for the month of December. The data show a continuation of the trend of selling monthly bitcoin production but avoiding large inventory liquidations in the wake of the FTX and Alameda collapse. The big bump in bitcoin sales by miners that occurred around the implosion of LUNA/UST in May and June was not repeated in November and December, even as the price of bitcoin sank to new cycle lows. This is even amidst bankruptcies, workouts, and restructurings that have occurred in the mining industry over the past few months.
Bitcoin prices rallied 13.1% this week driven by a big move on Thursday. The S&P 500 rose 4.6% while the Nasdaq Composite rose 6.8%. Gold rose 3.2% while oil vaulted 6.4%. Bonds also rallied on the week as the prospects for declining inflation imply a less severe outlook for interest rates. Investment grade corporate bonds rose 3.7%, high yield corporate bonds rose 2.9%, and long-term US Treasuries rose 4.3%.
Regulation and Taxation:
El Salvador’s Historic Digital Asset Securities Law Passes - Bitfinex
Investing:
Earn Update: An Open Letter to the Board of DCG - Cameron Winklevoss
DCG Letter to Shareholders - DCG
Gemini Officially Terminates Crypto Earn Program Amid Spat - Decrypt
FTX Pre-Mortem Overview - Sam Bankman-Fried
Companies:
Coinbase Releases Preliminary Financials, Undergoes Restructuring - SEC
Technology:
Core Developer Releases Proposal to Derisk Bitcoin Custody - James O'Beirne
Bitmain Releases New S19j Pro+ - Bitmain
Jan 27 - CME expiry
Feb 1 - FOMC rate decision
Feb 14 - Next CPI reading
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