A 28-year-old former Morgan Stanley associate breaks down 3 reasons why he started a $30 million crypto hedge fund to 'almost solely' invest in Ethereum's Merge

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  • Hal Press, the founder of crypto hedge fund North Rock Digital, says his initial big investment on ether is just the first of many high-conviction bets.
  • The exec breaks down why Ethereum is one of "few networks that actually generates real revenue."
  • Ethereum's upgrade, the Merge, is slated for mid-September. 

From retail to institutional players, Ethereum's Merge has caught the eyes of prospective investors across the board in recent months.

Citigroup, for example, said ether – the native crypto of Ethereum's network – will become both deflationary and a yield-bearing asset after its upgrade, according to a recent research report.

Crypto markets looked poised to recover after a rocky first half of the year on the upgrade's hype last month, as ethereum jumped more than 40% in a week, according to Messari. The token, however, has since tumbled on harsh macro conditions and inflation concerns, leaving investors tentatively risk-off on speculative assets.

Some traders are only recently eyeing the Merge as an investment opportunity. Others have been researching the technical upgrade for more than a year.

Hal Press is one of those early entrants, having identified the Merge as a "relevant event from an investment standpoint" around 18 months ago when he was a senior analyst at Maverick Capital. He would go on to launch crypto hedge fund North Rock Digital, and make ethereum the firm's first big bet.

Press says that although he started the fund "almost solely to invest in the Merge," that North Rock Digital will continue looking for "high-conviction" plays after the network upgrade.

"My philosophy as an investor is to basically sit on your hands and pass on all low to medium conviction ideas and wait for high conviction ideas," Press, who also previously worked as an associate at Morgan Stanley, told Insider. "Once the high conviction things do come around, truly go in the weeds and monetize them appropriately."

North Rock Digital has a "broadly cautious view" of crypto, according to Press, but the $30 million fund is most positive on ethereum which is its largest position currently.

Why have high conviction for ethereum?

The Merge, which will transition Ethereum from a Proof of Work (PoW) to a Proof of Stake (PoS) model, will cut the network's energy usage by more than 99%. Slated for mid-September, this is the second step in Ethereum's roadmap of improvements, but will not address criticisms around gas fees and scalability yet.

The upgrade, however, will also further add to ethereum's value for its token holders.

Currently, there's "no connection" between what a holder owns and the revenue that the network generates under the PoW model, according to Press. This, however, changes in PoS where holders can "all of a sudden" capture fees as well.

Press continued: "They get it distributed to them directly when they stake and the rest of it gets burned...To equate it to equities, it's effectively a stock-based dividend and a stock buyback. Ethereum has 100% net income margins because the network basically has zero expenses." 

Press says what's "so significant" about the Merge is the network's shift to a different "structural flow dynamic."

"The reason that I think that the Merge is significant from an investment standpoint is that I view the entire crypto space through a lens of flows," he said, adding that "ultimately what moves prices is flow of funds, not fundamentals."

Press continued: "Nothing directly moves price other than flow of funds, and especially in crypto where fundamentals are more opaque. It's just all about flows. The crypto industry as a whole has a problem. It's what I refer to as a structural flow industry, meaning there's a structural seller every single day."

This is due to the fact, Press says, that "crypto broadly is net-income negative" and needs to fund this negative net income via token sales which "creates net structural outflows." 

Press' thesis is that for ethereum at current prices is that the crypto has "reached an equilibrium where buyers exist to absorb that structural supply. However, after the Merge the structural seller of ethereum tokens, the miners, will no longer exist and therefore the token price must go higher to find a new equilibrium."

Crypto needs active buyers every day to keep prices from going down, Press says. It acts like a long beta asset class in most environments.

"That is the key core difference between crypto and equities," Press said. "It works around very loose monetary policy periods, but otherwise it's challenged."

Ethereum is also, per Press, one of "few networks that actually generates real revenue."

"The Merge will create, for the first time in history, a structural demand crypto asset where revenue is actually greater than expenses permanently," he said. "This will create a situation where it no longer requires inflows to maintain prices but actually requires sellers to keep prices from going down."

The S&P, on the other hand, is net income positive, meaning its expenses are lower than its revenue. "As a result, the S&P has buybacks every single day and has structural inflows every single day," Press said.

Finally, ethereum is also an investable asset class from a traditional finance perspective

"It essentially gets a PE multiple, because the holder starts actually accruing the earnings," Press said, adding that this is a "very digestible thesis for retail and institutions that come from a non-crypto world."

The downside of a 'high-potential investment'

With every attempt at high-return plays, there's always a downside and risk. Press says that he's almost certain the Merge will go "smoothly" though. 

"There's edge cases with anything. There's technical edge cases and a chance that the Merge doesn't work successfully," Press said. "That could massively impact the confidence people have in ethereum, and that would be very adverse to its token price."

There are also overcrowding risks i.e. too many people in a trade on the day of the Merge as well. Nevertheless,  the 28-year-old founder says he's comfortable with all of the risks associated. 

"From a technical risk standpoint, I'd attribute probably a 5% risk of something going wrong the day of the Merge," Press continued. "In that scenario, it's probably about a 40% decline in price. I think there's a 95% chance of things going smoothly, and in that scenario ethereum is probably up 10% that day. If you probability weight that, it's still a very positive expected value."

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