Freedom Money Ep13

Today on the podcast, we have Jessica Elhörn from the Amelia. Welcome to the podcast.

Thank you. Thanks for having me.

Normally, I like to get started with your background and specifically your journey to Bitcoin or crypto.

Yes. So my background is in fintech and funds management. So I spent just under 20 years working in that space in Sydney, in Australia. So I'm originally from New Zealand, but like many Kiwis, I crossed over the ditch to the Big Smoke of Sydney. And yeah, just sort of really fortunate to be able to work in a couple of really interesting fintechs, and then went on to found my own superannuation fund, which is equivalent to a pension fund. It was targeted at millennials. We sold that, and that product had been primarily focused around bringing better, efficient portfolios to the market for millennials built up of indexes and ETFs. Because a lot of superannuation funds at the time were still sort of fairly actively managed, um, and the fees were quite high. And it was well known in the industry that you weren't probably getting the best deal you could get, um, from a portfolio cost perspective. So we bought a low-cost product to the market just as ETFs and index funds were really starting to take off, and that, um, gained a lot of traction because of that. And then, yeah, after that I sold that business. It was really a case of what next. I think you're always looking around for something interesting to do, and I'd obviously personally dabbled in crypto but really invested significantly in it. And my partner, who I'd met around the time that I sold that business, he was a trader, um, and a quantitative analyst by background, and he had spent a lot more time in that, in that market trading different crypto products. And so we just got talking and we realized there was really a gap in the market for index solutions, and it kind of evolved from there. And originally we looked at building thematic indexes, which we sort of did, but then we evolved it into something a little bit more different.

So familiar with your company a little bit, and, uh, you know, I, I guess where I'd like to start is just, you know, the differences with crypto portfolio management and diversification and traditional portfolio management and diversification, some things to be aware of.

Yeah, well, I think diversification is something that kind of gets baked into you, doesn't it, when you start to think about portfolio management, when you start to really consider what your objectives are and the, and the term, term over which you're looking to be invested. I think a lot of people understand those principles when it comes to traditional financial assets. You know, you'll have your stocks, you'll have your bonds, you'll potentially have some property in that portfolio, and you may be, if you're a little bit on the adventurous side, looking at something like private credit or alternative assets. But yeah, when it comes to crypto, I think people are sort of often a little bit at sea as to what to do and what is the optimal allocation in a portfolio. And You know, there's been some work done on that to answer that question. I think when some of the ETFs and, uh, index products started to emerge from the likes of Bitwise, Hashdex, uh, VanEck, and BlackRock, there was some foundational papers released that started to actually try to answer that question, like what is the optimal allocation. And so yeah, what it has showed is that you can definitely improve your portfolio return. You can lower the risk and improve the return, increase that Sharpe ratio if you do have an allocation to crypto. Typically it looks at Bitcoin, uh, that's typically the asset that gets added to a portfolio when those studies are done. But there have been studies that have started to broaden that into looking at, say, ETH and Bitcoin, or say a top, top 10 basket. So yeah, historically you can definitely, with a 1 to sort of 5% allocation, that's sort of the range that a lot of people are looking at, you can start to get some real benefits.

I want to come back to that allocation in a minute, but first I just want to understand, I mean, a lot of the portfolio construction or indexing, when I think of portfolios, is similar to what you're talking about and kind of in the world of equities, there's this whole efficient market hypothesis and ideas where, you know, building a portfolio that's reflecting the market is the most efficient portfolio that you can have. Can you take those, you know, equity ideas and bring them to the crypto world?

Well, I think we thought you could, so that was probably our starting point when we thought about building indexes. I mean, an index works because it gives you exposure to the market, and if the market is, broadly speaking, on an upwards trajectory, um, you know, you can do quite well just by investing in the market. It's been proven that it's very difficult for active managers to beat the market, and that's sort of studies over 20, 30 years, really since Vanguard came into the space. So I think it's logical to take that thinking and that framework across to crypto and say, well, I really don't want to waste my time sort of researching tokens and thinking about what to buy. I'd just like to buy an index. I'd like to buy the top 10 or the top 50, the top 100. Surely that will give me broad exposure to a market that on balance is going up. And I think in crypto that maybe was the case 2, 3, 4 years ago before there was this explosion of cryptocurrencies and tokens. And just so your listeners are aware, you know, we went from, say, having one cryptocurrency, Bitcoin, you know, back in the, um, 2010s to sort of over 50 million, possibly far more than that today. It's very hard to track them. And we're certainly, um, not too far away from hundreds of millions, if not a billion tokens. And so I think think about that rate of issuance and the ability for anyone to issue a token, what you actually have to then expect— and this is then showed up in the data, especially what we see— is that you have a very high failure rate. So why do you have this really high failure rate? Well, it's obviously anyone can issue a token, they're all struggling for product-market fit, a lot of them will not succeed. And so this high failure rate then bleeds into that broad market basket, and you see it immediately. Like, you see it in the top 50, you see it in the top 100, you almost even see it in the top 10. Um, and I think that's why just sort of taking this broad market exposure from traditional markets into crypto doesn't really work. Um, and, you know, we're able to sort of visualize that in our—

so it would— the idea then be in crypto to concentrate on Bitcoin?

That's definitely one approach, and that's where people start, right? It's sort of— that's the premier asset in the space. It's proven to have longevity. Many would argue it's found some degree of product-market fit. Obviously there's varying opinions on that, but certainly it's captured the imagination of the population at large across the world. I think a lot of people do start there, and it's not a bad place to start. However, if you're feeling maximalist on that sort of spectrum, then yes, you will wear some severe drawdowns, as, as people did over the sort of past 12 months. And look, that might be fine with your long-term horizon, but there really is nothing to say that Bitcoin will be the asset that succeeds. And I think, you know, it's— perhaps it will. And, you know, I, I, to be in the camp that that's Bitcoin, you know, will certainly do very well into the future, but as far I suppose if you're starting to think about your portfolio and how you manage the risk of that, perhaps there's ways to weight yourself to Bitcoin, but also think about, well, being very selective from the rest of the market where some opportunities are. And there certainly are really great opportunities in this space. It's just how do you selectively get to those?

So, well, that's the next question. So how do you selectively get to those, and, and how do you you know, like, what criteria can you set? I mean, does it require a lot of research into these tokens? You know, is it kind of researching tokens like equities? What, what best approach?

Yeah, yeah. So we set out to try and solve that problem, so we built a custom index builder. So what we did was we partnered up with some of the large, uh, token data aggregators, and we would first cast a wide sort of filter looking for what was really the most tradable liquid assets in the space out of that $50 million, $100 million. So by setting a sort of $1 million market cap and $100,000 daily traded volume, we were able to sort of whittle down that universe to roughly sort of 3,200. It grows every day and some things drop out of it, but that's effectively that first filter of the market.

That's huge. Wow.

Yeah. And then, um, The next step from that is saying, well, out of that universe, we've now identified what's feasibly tradable and, and, you know, I could possibly invest in. What then could I do additionally to further whittle that down into what is effectively the best selection? And so then we built, uh, in this custom index builder, 40— roughly 40 different filters. So you could then filter by platform layer. So for example, you could say, I'm really bullish on the Solana the one. I'd really like to just see what an index of Solana Layer 1 tokens looks like. Actually, I'm really interested in, um, deep-end, uh, projects built on Solana Layer 1. I might have a thesis that deep-end is really going to expand, so I'm starting to narrow it even further. Then you might say, well, what about deep-end projects on Solana with a market cap of over $100 million but lower than $150 million? Because I, for whatever reason, have a thesis that's a sweet spot for explosive growth. You know, you've crossed over the valley of death, you're sort of fairly real, um, maybe you're on your way to a billion dollar market cap at some point. And so I can just keep refining this index with these filters in really infinite combinations till I— and then I can chart that index, and then I can compare that to, say, a benchmark asset like Bitcoin, or I can compare it to Ethereum, or I can compare it to another thesis I might have about tokens on the Ethereum layer 1, and so on and so on. So certainly there is some discovery that is still required to be done. Unfortunately, there's no free lunch yet, but you don't have to get down to what we would say the fundamental level on a per-token basis. What you can do is sort of step up a few, few levels and look at a more aggregate view. And our philosophy is that should be a faster way to get to a better selection of the market and also a diversified basket. Because let's be frank, do you really know which deep-end project on Solana between $100 and $150 million is really going to explode? You probably don't, right? And so what you would like to do is probably have exposure to that, um, that sort of thing or thematic or that, that thesis without really trying to have to get into Discord channels and be an insider on the project to to kind of, yeah, figure out where to place your highly concentrated bet.

Yeah, I'm still struggling with the number of tokens that there are. It's incredible. I mean, we're talking about a portfolio of managing a portfolio of crypto. And I think we touched before on what the optimal allocation to this new asset class would be in an entire portfolio. How does that tie together? Or is that something your clients manage the rest of their portfolio on, on their own? And is there interaction or possibility?

Yeah, yeah. So at the moment, we holistically look at their entire portfolio. So our platform doesn't have the ability as yet to say, hey, what are you— what else are you doing and how does crypto then fit into that? And that could definitely be somewhere we, we take it because certainly I think people would be interested in that without a doubt. And there's probably not a lot of products out there that are doing that. At the moment, we're really just about helping you make a decision about the crypto slice of your portfolio and getting you to a better outcome than, say, what you would have achieved just throwing darts at different tokens or taking highly concentrated bets, sort of, you know, through a hype lens. So, but yeah, that, that is a really interesting question that, that, that needs to be answered.

What is the optimal allocation?

Well, I think Going back to that sort of, that piece at the start, you know, a lot of the studies that have done research on that have really just looked at the premier flagship assets, and they've arrived at 1 to 5%. Now, does that hold when you look beyond those flagship assets into, say, you know, things that are a little bit more down the market cap chain, the unknowns? Like I said, the deep-end projects on Solana, um, I think no one's specifically done that research, but certainly I think over time if you were measuring that yourself, it's something that you could, you could stress test. And how many different ways, you know, are there to skin a cat? I suppose it's like to personal preference and personal risk appetite to some degree, isn't it? And also what your investment objectives are. I mean, if you're retiring in 2 years, you probably have a slightly different risk appetite for an allocation as opposed to, say, someone Gen Z who's looking to, you know, really leverage a crypto run over the next 10 to 20 years.

Yeah, I just, I mean, I find its construction so interesting because, I mean, we have this idea that stocks and bonds, and we have the 60/40 portfolio, and we're ignoring all other assets like real estate and how that interacts with their portfolio, and, you know, how much debt they have and all kinds of assumptions. And it, uh, you know, at the end of the day, the, the market idea is that the market is right. And if you're allocating your portfolio in proportion to the market, it should optimize your risk-adjusted return. So it, it, you know, I think crypto, Bitcoin, over time, you know, are bigger and bigger. Um, and you look at it, compare it to the market cap of Facebook, and, you know, Bitcoin specifically, it just seems to me like it should have at least a place equivalent to Facebook in a portfolio.

Yeah, I mean, certainly that— certainly I think has a— and maybe just going back to that sort of getting exposure to the market, because you have this high failure rate in crypto, that's the piece where you need to be really selective about which part of the market you're choosing to get exposure to, as opposed to, say, in traditional finance where you might be quite happy to have something like the S&P 500. And one of the, one of the sort of framings I often use when I talk about that failure rate is to make it to a listing, to make it into the S&P 500, you know, you're not a startup anymore by any stretch of the imagination. You know, you've gone through the valley of death, you've matured, you've probably done 5, 6 capital raises, you've got revenue, you may not be profitable, but, you know, chances are you're well on the way there. You've then gone through this highly regulated listing process. You know, there's a lot of scrutiny over what you're doing, and you finally cross over and you're listed and you're in the sort of top 500 companies, right? And you're listed. And so that's, that's the portion of the market, traditional finance, that you as a consumer get exposure to. You really don't get exposure to the thousands of companies that tried to get there but never got there. Whereas in crypto, when you come in and you open your Coinbase account or your OKX account They're showing you, you know, stuff that's right at the beginning of that journey, maybe not right at inception, because obviously to get listed on an exchange, it's still a little bit of work you have to do to get there. But relatively speaking, you're still a very immature project, protocol, entity. And I think for the average consumer, they don't really understand that. They think that when something's listed on an exchange, because it's listed that it's safe or it's investible. You know, they don't really perceive or understand that there's such a high failure rate there.

What do you see in terms of, you know, I guess what have you seen in terms of changes in adoption of Bitcoin, whether it's in alert or retail, the types of maybe different conversations you're having or seeing or new people to the market?

Well, I think that's the space that you play in. I think that's really interesting, right? It's about saying, how do we evolve Bitcoin beyond just an asset that we buy and hold? Into an asset that we can build other financial services and products off. Because at the end of the day, a lot of people don't want to sell their Bitcoin, right? They have this vision and belief in the long-term growth of Bitcoin. But if I'm able to use that as collateral in other parts of the financial system, that's really appealing. And especially for those people that have, you know, built up significant holdings of Bitcoin, maybe not with the expectation that it was going to become a significant part of their portfolio because it was a bit of a punt in the early days, but now they're really sitting on quite a significant, um, you know, asset. So I think that's, that's certainly really interesting. And if we're starting to see some of that bleed more into mainstream finance, um, because there's just demand, right? There's people holding a lot of Bitcoin wanting to get some yield from it or wanting to use it as collateral. And so there will be providers that prop up to, to service that need. Um, I think that's going away. I think that is a key trend into the future?

You know, I think we talked about this a bit before, but I think in a couple years, in addition to, you know, indexes with the tokens, I think there'll be indexes with fixed income of, you know, the underlying or to the underlying. So yeah, I'm, you know, because again, with Kadena, what we've built is you can have exposure to Bitcoin, you can trade that exposure for a fixed fiat yield or leverage your Bitcoin exposure. So suddenly there's abilities to do other things with Bitcoin and, you know, use it in a portfolio in other ways and diversify and reduce risk and improve risk-adjusted return. So I'm excited about that.

Yeah. Everyone likes a little bit of income, right? It's nice not to just be hoping for some capital gains.

So, so that's what I see as coming next in the space. What do you see coming next? Space?

Well, I think we're maybe entering into the more boring phase of the market. So we've probably come through, you know, a lot of the hype-driven phase. We've seen a lot of that wash out in the past 12 months. Now a lot of the conversation in this market, especially when you're talking to institutional players, is around tokenization. It's around things like the Genius and the Clarity Act in the US. It's about how do we merge crypto, which has been not mainstream, so alternative stream, with mainstream, and how do we find a place for it for consumers who ultimately probably won't really care what the rails are of any financial service or app they're using, but would like to see some of the efficiencies potentially that come with that. So better yields, for example, on savings accounts through maybe holding stablecoins as opposed to, um, other products. So I think it's a more boring phase, um, it's a bit of a consolidation phase. And I think even though it's felt a little bit doom and gloom in the space, I think there's some really interesting stuff that's it's being built. I mean, you're an example of that. I've spoken to lots of other builders who have been doing some really cool stuff. So yeah, from, from hype to boring, but probably means there's more mass broad appeal.

Yeah, I just get the sense that so much building going on in the space that like what's being built today is probably equivalent to what's already been built. And, you know, I think there's usability of, you know, making it so that my mother or grandmother making it accessible to everybody, not just from a freedom perspective, but also from where it actually makes sense in their daily life, whether they're wanting to transact in different ways. And to me, that's the obvious place for it to go. Do you have— I'm just trying to understand the challenges you're running into. Is it regulatory challenges and growth? Do you— is it Data? Is it client acquisition? Where are— what keeps you up?

I think everything keeps you up at night when you're a founder. You wear many hats. But certainly for us, it's about raising awareness. So it's about getting our story out there, talking about this idea that you can build your own index. And, you know, we've spoken to a lot of people where that resonates, where they come with some crypto knowledge and they go, yeah, I kind of have a thesis, want to explore that. What's really interesting when they use the platform is often the result of that thesis they expect. So I think that's something that's really interesting to sort of play around with on the platform because often what you think is not the reality. Where it gets a little bit challenging—

That's often the case.

That's often the case, right?

Yeah.

So that's great because you can be a little bit of a truth serum. You know, the data is the data. You can't really live with a chart line. I think where the next challenge for us is, how do we move beyond that initial group of crypto-knowledgeable enthusiasts who come with some idea about what they're doing to the part of the market that is actually quite hungry for some exposure to this space but really is time poor, doesn't have the energy or the resources to do the research required to build or compose an index? And that's where we have to think a little bit differently with our product. And so where we're starting to evolve that part of the business too is to say, well, hey, there's all these people that really know what they're doing. They spend their time in the crypto trenches thinking about, you know, opportunity. They can craft and build indexes really well from both a token selection perspective and a market timing perspective. You know, when is a good time to be in the market? When should I maybe be sort of taking a little bit of risk off the table? How do we take that portion of the market aggregate their insights and build what we're ultimately sort of informally calling our house index. So if you're, you know, the time-poor, you know, individual who likes the idea of an index, you're already sold on an index, you get that that's a really efficient way to invest.

Yeah.

And you're— but you're just like, rather something off the shelf that I know has vetted the market for me, has done that legwork. I can stand on the shoulders of those industry or expert giants and just, and just buy that product. It's getting a little bit closer to what people look for in traditional finance when they buy a stock standard Vanguard or iShares ETF. So that's sort of where we're heading and the challenge.

Yeah. Yeah, they go together, the challenge you're having.

Oh yes.

And so, I mean, this is pretty amazing, Jessica. You've had obviously a successful exit and now it's you know, my favorite part of the podcast where I get to ask for advice. And you know, what advice, what advice would you give builders today? And I may drill down on a few things here.

Just think as big as you can possibly think. I think a lot of the time we get caught up in what's practically achievable, and not to say that that isn't a bad thing to do, but I think this is a space where imagination and thinking big really serves you well. So I think, yeah, it would be what's the biggest version of your idea that you can conceive, and then how can you work towards making that a reality?

And, and as somebody who's done it a couple times now, or it's, it's amazing to watch. And was there anything you learned with your first company that you were able to take to this? Like, what experience did that give you? And the confidence to know that you can do this?

Yeah, well, I had come out of a primarily a fintech background, been working for a merchant acquirer, so a payments business. So we were dealing with the likes of Visa and MasterCard, and we were, um, we had built— not obviously myself, I was an early employee, not a founder— but we had built a startup, sort of a different rails for, um, for merchants to accept payments on. It was a lot more cost effective. I think, um, what I learned from that, which I have tried to take into every business and, you know, always trying to be more successful at it is the importance of distribution. And, you know, founders bang on about this all the time, especially second, third time founders, is that you can have a really awesome product for sure. And, you know, you might just strike gold that it just takes off and sells itself and, you know, you're away running. But I think distribution is really important because, you know, the distribution landscape is changing so much that if you can find aligned partners, especially in the early days, who can advocate and take your product, like it fits a gap in their lineup or it creates another revenue stream for them, then that's a really, um, sort of organic way and sort of a cost-effective way for you to grow. So certainly that's something I've seen happen and work really well. I've seen it also not happen, but you know, how can you work on that and evolve it? That's something I think about a lot.

Still amazing. It, you know, I Really appreciate the time, Jessica. I've learned a tremendous amount. I hope one day, one day to be maybe a podcast.

No, for sure. We will definitely have you on our podcast. I think your topic area, well, your business is super fascinating.

Well, I think your business area is fascinating too. I'm kind of a markets junkie. This is right up my, right up my alley. It's, you know, it makes sense and it's, I think, important that people You know, and I think it's kind of tied to the institutional adoption theme. I mean, that seems to be the theme in Bitcoin over the recent years. And, you know, uh, you know, for better or for worse, as it becomes mainstream. And so, sorry.

No, I was just going to say, and look, you, you were at the start of the wave, right? And I think that's, that's where you want to be. You want to be catching that wave just as it's building. So that you can crest it into sort of the mainstream.

Very kind words, Jessica. Where can I send people when they want more information about Familia and to get in touch with you?

Yeah, so we have a website, so familia.co. So perhaps we can give you that to put in the show notes. We're also @familiaapp on X and on Telegram. So people can also reach out to us through those two channels. But yeah, they're probably the best ways to get in touch with us.

Amazing. Well, thank you for your time and good morning to you and good evening to me.

Yeah, thank you so much. I really enjoyed it. Have a great day.

You too.

Take care.