Pratik Kala: Analyst of the Month

What is your story? What was your journey into investing and crypto?

I grew up in Hong Kong (when it was still a British colony) which at the time was the only real way for foreign capital to access mainland China. I distinctly remember the day of the handover ceremony when I was sitting on top of my father’s shoulders watching the event in person as Hong Kong’s sovereignty was transferred to China ending 156 years of British rule. Many of my school friends left and their families emigrated to the UK, US, Australia and Canada during that period as at that time it wasn’t clear what China would do with property rights. I didn’t understand property rights at the time but the experience stayed with me. 

You could not avoid finance growing up in Hong Kong and I always had an interest in the sector - I recall watching Bloomberg at a very young age not understanding the tickers or the numbers on the screen but the intersection of money and real world events always fascinated me. I didn’t study finance at university though because Asian parents of that era only considered a STEM degree as the “real deal” with finance as something that could be self-taught. I studied Computer Science but my deep interest in finance pulled me to a job at J.P. Morgan where I got into the analyst program. 

The first time I actively got involved in crypto was in 2016; I recall being at the Bangkok airport where Bitcoin popped up on the TV screen. By then I had already seen it pop up too many times to ignore and the first thing I did after was to figure out how to mine Bitcoin. I did it using my modest laptop and remember my PC fan churning throughout the night. After a few weeks I had mined a grand total of 0 Bitcoin and my laptop was fried. I read more about mining at that point and the topic fascinated me. I decided to buy some “hash power” via a mining operator in Iceland and saw regular dividends in Bitcoin dropped to my wallet. A few months after I saw the balance grow significantly. At the time I thought that it was fake internet money so I endeavored to cash it out… after jumping many hoops I finally had the money in my fiat account which made it “real”. That was the beginning of my obsession with understanding all things about this new world. Shortly after I ventured into understanding Ethereum, ICOs, IDOs, AMMs, DeFi and got into the weeds of the technical nuances between different blockchains with an obsession.

Early investing/trading in crypto was hard - what is a story you like to recount?

I recall the moment perfectly - right after I had a late dinner on a cold Sydney evening, I refreshed Twitter and would’ve happened to be one of the first people in the world to see a tweet from Elon (posted 0 seconds ago) on Tesla adding Bitcoin to its balance sheet. I verified that the account wasn’t fake and within 5 seconds longed Bitcoin (longed my longs on perps and leverage to be honest) without hesitation. In ~10 mins it was one of the biggest wins in my life.

As fate would have it, Musk did the reverse and announced that Tesla would not accept Bitcoin citing ESG concerns. At the time I stopped using perps (funding was more than my living expenses!) and I had moved to using the quarterly futures product on Binance. I learned the hard way that order book depth, liquidity and market maker support are critical during high vol events and how a drop of 20% on spot can be 25% on perps and 40% on quarterly futures. My biggest win became an equal loss on practically the same news event in reverse.

How did you get to know the DigitalX team? What is your role at DigitalX as Head of Research?

I spent the majority of my spare time learning about and investing in crypto and after doing it for ~4 years I decided to go at it full time. DigitalX was known in the region and one of the few companies globally that had Bitcoin on their balance sheet. I reached out and had a refreshing conversation with the PM and CFO at the time.

I wear multiple hats at DigitalX but primarily my role as Head of Research is to ensure that we run a great liquid strategy and generate alpha in the portfolio in a risk adjusted manner. This requires staying on top of the meta, understanding real on-chain data from fake, and building several real-time models to detect significant on-chain moves and rebalancing our portfolio appropriately. We recently launched our own spot Bitcoin ETF so my role also requires working with the market makers, authorized participants and prime brokers on the day to day operations of running the ETF.

DigitalX was a top performing fund in Q1 '24, congrats! What frameworks, investment decision processes, etc do you think led to this outperformance?

I will not bore you with our very comprehensive DD process in selecting liquid crypto assets and sizing them; but in short we pay an exorbitant amount of effort in understanding the tokenomics of a project including value accrue, lockups, cliffs along with governance structures. Everyone knows this data is opaque but we spend an enormous amount of time focused on this (pestering Discord mods if needed). I’ve seen many projects with the most promising tech, team and backing completely blow up because of flawed tokenomics and incentives. Understanding governance is also critical - looking at historical governance voting patterns we can ascertain who is the “kingmaker” of certain protocols and if there are competing interests - but getting this data is hard so many assumptions have to be made. We’ve been right more often than not in our assumptions.

Your team is based out of Australia. How does that shape or change your view of the liquid token markets versus being based in the US or Europe?

I will be bold and go as far as saying that being in Australia and away from the US we have a more objective and unbiased view of things in crypto. Why? Because we are forced to study the dynamics of the project in detail but at the same time are disassociated with the day-to-day politics that people get embroiled in.

It’s no surprise that it’s harder getting face-to-face time with founders/projects in Australia; so we have a huge reliance on listening to long form podcasts or X spaces. I don’t deny that there is no substitute for meeting in person but I would argue that if you are astute you can get much more value from long-form podcasts with the founder and cover more ground across more projects vs time & effort for meetings in person. Of course, it is not lost on us that podcasts are sterile and “real” vibe checks can only happen in person which we also do where possible.

In the past being in a US timezone did not matter as much; but I think it is getting more important now as the US gears up and ETFs become a dominant source of flows into the ecosystem.

What is your most contrarian view on liquid token investing? Where do you think digital assets will look like in 5-10 years?

I don’t know if this is contrarian but I think benchmark assets (BTC, ETH, SOL) will continue to grow in dominance. The era of the BTC to ETH to ALTS rotation is no more and the market structure has fundamentally changed as a result of the ETFs. Can BTC.D go to 65%? Sure can. Can BTC, ETH, SOL be 88% of the market? Sure. 

Many will talk about the benefits of diversification but I believe you could continue to outperform simply by having the majority of your portfolio in BTC, ETH and SOL (not at market cap weights - have to be smarter about it) with the current market structure. There is always room for 10x’s but in smaller buckets.

I think more people are going to turn to digital assets in some shape or form over the next 10 years as the world becomes more polarized. The ideal outcome will be a completely decentralised social, identity and payments network - but there is a lot of regulatory work to be done before that vision is realised. 

What is your long term thesis of real applications in crypto? What dapps are you bullish on today?

There was a time when only very wealthy people had access to mobile phones (remember the Motorola bag phone in the Wall St. movie?). Today most people are using the same phone as Elon Musk.

Just like the progress in phones; I continue to believe that the most promising outcome of crypto is to even the financial playing field for everyone globally. You could be born in a village or to Musk; but you should have access to the same investment and store of wealth opportunities as the richest man in the world - in a safe and compliant way.

I think DeFi and tokenization dApps will have a role to play in that future.

How much do fundamentals actually matter in crypto markets today? How do you think that evolves overtime?

It has been ~9 years since ETH launched. We have gone through ICO, IDO, IEOs and the VC boom. Fundamentals did not matter in the past as people looked towards a bright future and the sky (or the moon?) was the limit.

Due to the passage of time, today, I think it’s changed. It’ll be a decade of this people are going to ask very hard questions on what is crypto actually achieving? The meme/celeb coins did not help. Many people have been burnt and as an industry we need to show real and tangible benefits via solving a problem or cold hard cash/revenue share in some shape or form. 

Fundamentals were cooked in the past via yield farming, double counting of TVL, sybil farming and many other activities – people are much smarter about these games now and I’m a strong believer that the meta in that sphere is over.

Fundamentals will become critical in the coming years as people and investors tire of roadmaps and research pieces; there was a time when DAG, sharding, DeFi, L2s, parallel compute, blobs, data available, LSTs, captured and invigorated imagination… most people now want to see concrete results. It’s easy for me to say as I am not a founder but alas an observation.

Why did you tell us to change Gokustats to Artemis Terminal :)? 

I still remember my first meeting with Jon where I just straight up advised him to change the name and logo of Gokustats. Reasoning was simple. The product was focused on serious analysts in financial institutions and hedge funds. I totally vibe with crypto’s laid-back and memetic ethos but when you are pitching to wealth funds you regrettably cannot have cartoons. So, as much as we all like Dragonball Z and Goku it simply had to go for this product.

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How have you been able to use Artemis in your fundamental research?

Artemis has been fundamental in our research process and allows us to keep a live pulse on on-chain activity. Using Artemis data, our models will pick up any spike (outside the norm), rise or decline in on-chain activity compared to historical data which we would then overlay with our own qualitative research to drive investment decisions. Continuous innovation from Artemis such as the “Sybil detection” helps reduce a lot of manual work for us too.

Gathering this data manually would require several data scientists and Artemis’ Google Sheets plugin simplifies blockchain data phenomenally well. It is fantastic value for money; I’ve been a fan of the product and the team especially how quickly they ship!

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How to get in contact with Pratik?

You can find or reach out to Pratk on LinkedIn or Twitter.

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Readers should approach this information cautiously and consider their unique circumstances before making investment decisions. The views and opinions expressed are subject to change without notice, and Artemis bears no liability for any loss or damage arising from the use of this information.