BBW25 - Day 1 - Startup Showcase: Vault 42 AI

the space that exists. We're going to have a conversation that's going to be led by Cordel Tanny who's come to us from Canada. He's going to give us a pitch on his company, Vault 42 AI, which is an AI powered institutional grade crypto trading platform. Please join me in welcoming Cordell to the stage.

Where's the clicker? All right. So, I wouldn't want to say that this is an outright pitch on my company because that's not what I like to do. I actually like to make when I'm doing these kinds of presentations that everybody in here will walk out knowing something that they didn't yesterday. All right, so that's really my objective here going to talk about my company, but really it's more about understanding how Bitcoin behaves.

Does it belong in a portfolio? So, I mean, everybody knows right now that the amount of interest in Bitcoin, Ethereum, and including it in your portfolio, we're seeing a push for it. Not just from the individual level, but now we're seeing hedge funds, we're seeing family offices, mutual funds, ETFs, everything is popping up. So for Bitcoin, and this really is an exciting time because we have AI, we have traditional finance and we have decentralized finance all coming together. But for something to be included in a portfolio, and this is really what I want to go through, you have to understand it.

You have to understand how it's going to behave because that's risk management. That's what a portfolio manager does every day is manage risk. They're managing potentially billions of dollars for other people. So for you to put something in a portfolio, you need to understand it. Then I'll go through a little bit about managing the risks that come with putting cryptocurrencies in your portfolio.

So that's really what I want to go through. I hope that works for everyone. So let's just start with this. What is an asset class? Can anyone here even give me a definition of what the term asset class means?

Which is pretty much integral of what it's more of a rhetorical question. I only have 15 minutes. But an asset class, it's really you have to understand how things behave. And normally an asset class means you have a group of investments that are supposed to behave in a similar fashion. And in the traditional finance world that usually means understanding risk and reward.

And every asset in the same asset class should be somewhat similar in terms of the risk and reward profile. So when we start looking at Bitcoin and compare it against the standard asset classes that most investors are going to have in their portfolio. So on this graph here, you're going to see GOVT is government bonds, supposed to be your safe haven, go-to asset when things get a little dicey. IWM is small caps, supposed to be a little riskier, give you a little bit more alpha, a little bit more juice in your portfolio. LQD is corporate bonds, and then SPY is the S&P 500.

So this is what you call a violin plot. So what you really want to focus on here is the size of the colored body and then the tails. So if you look to where these tails extend to the left, this is what you might hear as tail risk, a black swan event. Now what you're seeing here is that these are daily returns. And this shows you the range and the extent of daily returns for various asset classes.

What you should be seeing here is that Bitcoin's left tail extends way further out than almost every other asset class. And that represents the risk. I don't think anyone here needs me to tell you that Bitcoin can be a risky investment. We all know this. But even if you were to standardize, you know, mathematical terms, zed scores, standardization, if you were to standardize the risk of all investments, the probability of experiencing these fat tail events that really destroy capital is a lot higher with Bitcoin than it is with other asset classes.

So again, the probability of experiencing a sharp loss is a lot higher with cryptocurrencies even when standardized for risk. One other way that we tend to address risk in the finance business, especially banks will use this all the time. It's something called conditional value it risk. It's a really fancy term for except exceptionally pretty much you're saying what is the average loss that I can expect in a worstc case scenario and what you're seeing here is the extent that the expected shortfall or the conditional value at risk for Bitcoin is that much more intense than for other asset classes. So what we're trying to establish here, if you want to put Bitcoin or Ethereum or any cryptocurrency into a portfolio, this is the kind of behavior that you need to understand because the greatest risk for a portfolio manager, it's not being able to predict the future.

It's not being able to identify every event that could wipe you out because you never will be able to do that. Things will always happen. Market tends to humble you. The biggest risk that you take as a portfolio manager is when you think you understand something and then the opposite occurs. That's what can get you fired or worse get you sued.

So actually I didn't want to show this one just yet. Will that go backwards? Beautiful. I'm going to ask a question. This one I'll give 10 seconds for people to answer.

What is the single most important driving force in the stock market or for all asset prices? What is the single most important driving force for the markets?

Sorry,

it's liquidity. It's the amount of money going around the system, which is essentially the Federal Reserve. So, I was very lucky for one of my jobs when I was managing the $2 billion mutual fund program up in Canada. My boss, the CIO, is an economist and a great investment strategist. And those in the business will know economists tend to make very crappy portfolio managers.

All right? It's not an easy skill to translate economic theory into investment strategy. He was amazing at it. And he would start every single one of our asset allocation meetings with a graph like this. So when you have loose financial conditions, money's flowing, companies can borrow.

When companies can borrow, they can invest in projects. They can hire more workers. Workers that make money can spend money. And what percent of US GDP is from consumer spending? 65 to 70%.

So liquidity drives everything. So then the question now becomes, is Bitcoin affected by liquidity the same way that traditional assets are? So in this graph, when you're in the blue, the bottom part that's loose on the top means tight. Rising interest rates, usually something's happening, probably inflation. What this graph is showing you is that Bitcoin is just as influenced by monetary policy as the S&P 500.

So when you see the negative correlation on the left that means you know when you get tighter conditions asset prices go down. So Bitcoin behaves in a very similar fashion albeit scale differently to the S&P 500. So it is affected by liquidity. So now we're getting a little bit closer to understanding how Bitcoin behaves. Same drivers as the market just a lot riskier in terms of that worstc case scenario.

Is it a safe haven? You might have heard a lot of people say, "Well, I think Bitcoin is going to be like the next gold. It's going to be the next thing to save you whenever we have a crisis." Well, is that the case? Who said, "Yeah, no.

Okay, thank you. Not yet." And this is the proof. I just took three scenarios here. Pretty much the end of 2018, we had a rising interest rate environment, CO 19, even a little bit of start of the Ukraine war.

And and normally look geopolitical events is like normally very short-lived their effect unless it starts affecting the credit markets and liquidity. So it is not really functioned as a safe haven. So what have we established here? It has greater probabilities of sharp declines versus other asset classes. We've also established that it's affected by liquidity just like every other asset class and that it hasn't functioned as a safe haven.

This last this is a for all the data scientists out there. This is what we call principal component analysis and I just isolated two of the main components that drive assets in a portfolio. One is beta. You're in the market, you have market risk. Rising tide raises all boats, right?

And then you have just safety versus, you know, offense versus defense. So you're seeing here the Bitcoin exists in a world on its own. I I actually threw in Tesla and ARC because I know probably a lot of fans of that in there. But in any event, what you're seeing here is that it offers incredible diversification benefits because it doesn't exactly behave like the other asset classes. And that's really important because when you're building a portfolio, you don't put all of your eggs in one basket.

I can see how many cliches I can throw at you right now, but ultimately diversification is the only free lunch in portfolio construction. This is what Vault 42 in the company, shameless plug now, is trying to solve because we're offering riskmanaged strategies. Now that we can combine AI, we can combine, you know, traditional finance and everything together, we have the opportunities to have actively managed Bitcoin solutions that could help minimize those sharp draw downs that we've all seen with Bitcoin. So I mean the dilemma of anyone buying cryptocurrencies for a portfolio right now it's that you know it's pretty much buy and hold. You buy it, you hold, you're fully exposed.

So when Bitcoin goes through its cycle and you have a 50 to 90% decline, there's no one there to help you, no one there to hold your hand. You're you're just there waiting for it to recover. So this is what's really new now is that we have the opportunity with the technology and vaults these onchain vaults that we could pretty much run actively managed solutions inside a vault and give people this kind of risk management. So this is what we're doing. We're combining the traditional finance world and all the quant models and all of these risk management strategies and putting it on chain.

Complete transparency, complete liquidity, and this gives you really the best of both worlds. You get that institutional discipline. I mean, we could engineer pretty much any kind of riskreward relationship you want. Let's say you don't need 150% a year. You want 70% a year, but you want that risk really contained.

We can do that. And then at the same time, we put this all on chain. Everything we do is 100% verifiable. So this is just one strategy in action. It just shows you, you know, where the blue line, one of our models.

So you can see really around especially 2024 and May, you can see where Bitcoin was declining. The strategy kicked in, started protecting you from these sharp declines. Now, you know, I mentioned this before during the the pitch competition, making money like long-term wealth creation is not just about being there when things go well. It's about protecting capital when things don't go well. All right?

Otherwise, you're more or less just gambling a little bit away. So, the way the vaults work is essentially anyone could go to a vault, you connect your wallet, you can deposit USDC or in this case wrapped Bitcoin or wrapped Ethereum into the vault in exchange for units of the vault. So, it's essentially a digital mutual fund or a digital hedge fund. And inside we are executing our algorithms to buy and sell Bitcoin and you're getting an actively managed Bitcoin investment solution and that's what we're offering. So we got a really strong team.

So look, I've been in the financial services business for 25 years. You know, I got all these letters after my name that my brother loves to say that nobody knows what they stand for. And for the most part, he's kind of right. So my partner Mark in Switzerland completely plugged into the Swiss market in UK. He's been raising money for hedge funds for Cityroup and for Blue Bay for a long time.

I got my partner Roger in the room here. He's our blockchain expert. So what you're seeing here is you got a team that doesn't just have Tradfi or doesn't just have blockchain experience for we've got it all. And that's something that you're going to find is a little rare is having this range of expertise. And that's really what we're offering.

So, I only had 15 minutes. I think I was 15 minutes and 10 seconds. And considering that they constrained me to three minutes in the pitch competition, this was a lot uh less pressure. So, thank you very much. I I will gladly take Do I have time for questions, Ian?

No. No time for questions. Good. All right. Thanks so much, Cord.

Appreciate that. Um, so now we're going to have a conversation that is