For the past several years, almost every weekend we have presented readers with the weekly note of unconventional market (and life) insights from One River Asset Management founder and CIO, Eric Peters, who among other things was not only one of the first institutional investors in bitcoin via One River Digital, but also managed to time his exit perfectly selling most of his holdings by the end of 2021, just as the crypto sector was peaking and generating a $1+ billion profit for his investors.
Well, today we learned that he has perfected the art of selling not just his asset holdings but his entire crypto fund: none other than the only credible crypto exchange left, Coinbase - reeling from a plunge in retail trading volume and flight of skittish retail capital - has purchased One River Digital Asset Management for an undisclosed amount.
Why? Because as Bloomberg's Eric Shatzker notes, One River Digital has built a business to serve only the needs of long-term institutional clients such as pension funds, while avoiding fickle retail customers altogether: "That focus on long-term capital and money management over trading has left it less exposed to the kinds of wild swings in token prices and crypto exchange activity that others, including its new owner, are wrestling with now."
“This is about wanting to bring more institutional capital into the world of crypto,” Greg Tusar, Coinbase’s head of institutional product who formerly headed up Goldman's entire electronic trading platform, told BBG in an interview. “We expect to build — on the other side of this crypto winter — an awesome asset-management business.”
As we reported at the time, in late 2020 One River Digital emerged as one of the then-largest investors in Bitcoin. Alan Howard, the co-founder of Brevan Howard Asset Management, was an early backer, and a financing round in 2021 added Coinbase, Goldman Sachs and Liberty Mutual as investors. That deal valued One River Digital at $186 million.
One River Digital will be renamed to Coinbase Asset Management with Peters serving as its chief executive officer and chief investment officer, while deputy CIO Marcel Kasumovich, a veteran of Goldman, Merrill Lynch and Soros will continue in his role as well.
In a curious twist, Peters will retain his old hedge fund and continue as CEO and CIO of his Stamford, Connecticut-based hedge fund, One River Asset Management, which remains a separate firm. “Having a dual role gives me insight into the worlds of digital and traditional assets,” Peters said. “I’m betting on convergence between the two over the next decade.”
In a note sent to clients this morning (attached below) Peters described his relationship with Coinbase, starting with One River Asset Management’s first Bitcoin and Ether purchases in November 2020; by the end of 2021, he had mostly cashed out, generating more than $1 billion in profits for his clients and neatly sidestepping the crypto carnage that soon followed, including the collapse of the TerraUSD stablecoin and failures of Voyageur Digital Ltd., Celsius Network and FTX. As he evaluated the future for One River Digital, Peters concluded that building out asset management at one of the dominant players in the industry was simply too attractive (not to mention lucrative) to pass up.
“Did I want to compete with these guys or be in business together with them?” Peters said. “It was a pretty easy decision for me.” The negotiations began about a year ago and dragged on through the crypto wipeout that erased almost $1.5 trillion in token values in 2022. Coinbase was among the hardest hit, and with revenue and trading volume both plummeting in 2022, and the company reported a full-year loss of $2.63 billion.
What is also notable about the deal is that Coinbase - the largest US crypto exchange - already has several businesses dedicated to institutions, among them crypto custody, trading, staking and prime services, as well as a spot market for tokens and a derivatives exchange. However, many of these businesses have come under increased regulatory scrutiny. Coinbase Asset Management will be a separate division with appropriate controls and barriers to ensure client confidence and regulatory compliance, Tusar said.
In a recent tweet, Coinbase CEO Brian Armstrong - realizing that the fight with regulators is about to get firty - decided to turn activist, and urged his twitter followers "to advance pro-crypto policy in all 435 Congressional Districts across the U.S. Introducing #Crypto435, our campaign to grow the crypto advocacy community and share tools and resources to make your voice heard. Become an advocate today."
To that end, purchasing One River Digital may strike two birds with one acquisition stone: One of Peters’s early hires at One River Digital was recruiting Jay Clayton, former SEC chairman, as an adviser. It was Clayton who led the SEC crackdown that effectively killed the market for initial coin offerings, or ICOs. Clayton, who’s staying on through the sale together with other members of One River Digital’s advisory board, predicted there will be more consolidation as crypto matures.
“We’re going to see a lot more strategic combinations,” Clayton said in an interview. “Traditional financial players are starting to think about acquisitions of distributed ledger or blockchain companies, especially those that don’t have any legacy regulatory risk.”
Below is Eric Peters' letter describing the Coinbase deal:
Coinbase acquires One River Digital
Hope all goes well. Wanted to share exciting news. Coinbase has acquired One River’s subsidiary, One River Digital Asset Management [here]. In November 2020, One River purchased cryptocurrency, making an investment in digital assets to express an emerging macro theme. We quickly realized the potential for blockchain technologies to replace antiquated infrastructure across the financial industry. It became evident that digital and traditional finance would likely converge in the coming decade. Shortly thereafter, we formed the subsidiary, One River Digital Asset Management, with the goal of building the industry’s leading institutional digital asset manager. Since then, we have created an extraordinary team and a suite of digital asset management products, some of them industry firsts. We also recognized that a few key pieces of infrastructure would be critical for the digital industry to scale and merge with traditional finance. We have been building these. Playing the long game, we concluded that by aligning ourselves with Coinbase, the clear industry leader, we could more fully realize our potential and deliver the greatest possible value to our clients and the industry. Coinbase and One River are both founder-led, innovative, entrepreneurial firms, and are culturally well-aligned. Following the acquisition, I will continue to lead both One River Asset Management (“ORAM”), which will remain independent, and Coinbase Asset Management (“CBAM”). I couldn’t be more thrilled with this outcome.
That's the short of it. For the longer story of how we arrived here, please read on...
One River made its first investment in digital assets in November 2020 [here]. At the time, it was one of the largest institutional allocations to these assets in history and was driven and funded by one of our most prominent investors, a true iconoclast. Underlying the investment was a belief that bitcoin and ether represented highly convex expressions of a global macro investment theme that unfolded post-Covid: Monetary Debasement. We worked exclusively with Coinbase to execute and custody those investments [here]. It was extraordinary to complete such a massive trade without materially moving the market, all while maintaining complete confidentiality. I was left with a deep respect for the team and capabilities that Coinbase built. It was also one of the most exciting periods in my career.
We quickly came to believe that blockchain technologies would replace the antiquated infrastructure across the financial industry. In that world, all assets would become tokenized, and enormous value would accrue to digital assets and the firms focused on this infrastructure in the decades ahead. In January 2021, I articulated my thoughts in The Case for Digital Assets [here]. As a highly opportunistic investor with an entrepreneurial team, our partnership decided to launch One River Digital Asset Management.
We needed deep regulatory expertise to realize our goal of building the leading institutional asset manager in this nascent field. I asked for an introduction to Jay Clayton shortly after he left the SEC in late December 2020. We met, and over the first few months of 2021, found common ground in the potential importance of the technology underlying digital assets to the financial services industry and U.S. national interests [here]. We believed that the technology gap between digital and traditional finance would be bridged, and that One River could contribute to a positive outcome. Jay worked with me to build a profoundly experienced and diverse Academic and Regulatory Advisory Council for One River Digital, including Jason Cummins, Courtney Simmons Elwood, Harold Ford Jr., Kevin Hassett, and Jon Orszag [here, here, and here]. The Council's focus on the interests of investors, prudential considerations, and national security matters, all with a pragmatic perspective, has been and will continue to be invaluable. Jay will continue to chair the Council following the transition to Coinbase Asset Management.
We also knew we would need substantial working capital to achieve our ambitions, especially in such a volatile emerging asset class. In September 2021, Coinbase Ventures led a Series A investment round in One River Digital Asset Management that included participation from Goldman Sachs and Liberty Mutual Insurance [here]. This gave our firm years of working capital to achieve our ambitions. We grew our headcount at a modest pace, focusing on finding uniquely talented and passionate individuals that fit well into our culture. When the Fed embarked on one of the fastest tightening cycles in recent history in 2022, and digital asset markets along with most other long-duration assets came under severe pressure, we were thankfully well-prepared.
The team we assembled has been building a suite of institutional digital asset management products throughout this period that now includes index, income, systematic trend-following, and credit. We had crystallized over $1 billion in gains from our early investments in bitcoin and ether and returned that capital to our investors by the end of 2021. Some of what we built were industry firsts like 365-day fund liquidity [here], a carbon-neutral bitcoin fund [here], and an institutional ether staking fund [here]. Our investment strategies delivered on their objectives through even the most severe dislocations during the 2022 market declines. I’ve spent my career focused on taking risks while carefully watching our flank. We avoided any exposure to Luna, 3 Arrows Capital, Celsius, Voyager, BlockFi, FTX, FTT, and other high-profile failures in the space. Our digital income fund received a return of 100% of its loan capital plus interest when others lost everything. Enormous credit is due to Marcel Kasumovich, our Deputy CIO, and the exceptional investment and operations team that we have assembled.
But our team was not only focused on investments. We also recognized that a few key pieces of infrastructure would be critical for the digital industry to scale over time. The team’s dynamism shone by designing and building this infrastructure, with the severe market downturn the perfect environment to execute. The first project, initially announced last year [here], leverages Coinbase Prime technology and is kicking off a pilot program with a few select clients. I expect that nearly all of us will use this infrastructure in the next decade. If it is not ours that is used, then it will be a competitor’s; we intend to win this race, and our combination with Coinbase makes it a far more likely outcome.
Last year, we started discussing opportunities for further collaboration with Coinbase. They are the leader in this industry and, like us, have built their business with an eye toward playing the long game. Both firms have prioritized customer protection and recognized the importance of working with regulators to bring this asset class into the mainstream. With so much shared history and the formation of strong bonds of trust and mutual respect, I developed a strong conviction that we would more fully realize our ambitions as a pillar within Coinbase. Our equity partners, advisors, and employees strongly approved.
Coinbase and I agreed that my highest value would be in continuing to straddle the traditional finance and digital finance worlds in a balanced manner. Few people have this vantage point, and thus few can glean the insights that come from such a unique role. I expect this will create substantial benefits for all our clients in the decade ahead. I will lead Coinbase Asset Management, working closely with my Deputy CIO, Marcel Kasumovich, and our amazing team. I will also continue to lead One River Asset Management, a firm I founded 10 years ago that is now fully independent of CBAM and manages $3 billion for institutional investors across the globe. Supporting me at One River will be my Deputy CIOs, Ryan McRandal and Stephen Prajna, and our extraordinary team.
The decade ahead will be fascinating and exhilarating, and I am incredibly grateful for this opportunity.
All the very best,
Eric Peters
Chief Executive Officer & Chief Investment Officer