Unveiling the Strategic Brilliance of Maelstrom Capital: A Patiently Managed Fund by Former BitMex CEO Arthur Hayes

Hayes and Vaidya Aim to Outperform Bitcoin and Ether with Maelstrom Capital

Arthur Hayes and Akshat Vaidya, former executives at crypto exchange BitMex, have founded Maelstrom Capital with the goal of surpassing the returns of bitcoin and ether. In an interview with CoinDesk, Hayes and Vaidya revealed that Maelstrom is currently focusing on infrastructure companies as they believe it makes sense in the current market cycle.

Maelstrom Capital’s Patient Approach

Maelstrom Capital, set up as Hayes’ family office using his own crypto assets, does not have any liquidity providers to answer to. This allows the firm to be patient and take its time in deploying capital to identify quality projects without the pressure of earning management fees.

“We want to identify projects that are actually quality,” Hayes said. “It’s not a game of spray-and-pray because we don’t have outside LPs.”

Vaidya added, “Infrastructure deals have strong technological moats that are addressing a large market, and it’s simple to understand business: It’s ‘P’ multiplied by market size.”

Lessons from Bear Market

Hayes highlighted that successful projects like Compound, Aave, and Uniswap were all founded during the 2017 bear market, but they didn’t gain mainstream attention until 2019 and the DeFi summer of 2020. During the bear market, many investors were not interested in these projects due to the negative sentiment around initial coin offerings (ICOs). This led to a surge of projects claiming to be the next big thing, but not all of them were based on solid foundations.

Hayes believes that the turning point for the projects in which he’s currently investing will likely come around 2024 when the market starts to question whether these projects have fulfilled their promises, built their products, acquired clients, and demonstrated the effectiveness of their technology.

Identifying Genuine Value

Hayes emphasized the importance of identifying which companies are genuinely valuable and which are just imitations during this part of the market cycle. He acknowledged that some investments may not always be in pure quality, but rather in projects that may not be as solid but offer short-term returns due to market narratives.

“We’re not saying that we’re always going to invest in pure quality, we’ll invest in a complete piece of [dog excrement] because we get our tokens today,” Hayes said. “And in three months’ time, we could dump them because the narrative is there.”

BUILDing During a Crypto War

Hayes may have been the first victim of the U.S. government’s crackdown on crypto, as he and BitMEX co-founder Ben Delo pleaded guilty to charges related to the violation of the Bank Secrecy Act (BSA) and allowing money laundering on the BitMEX platform. Despite BitMEX not being a U.S. company and not using U.S. dollars, the guilty plea means that the evidence and arguments were never tested in court.

The regulatory environment is a concern for Hayes and Vaidya, but they believe that investing in infrastructure projects, especially those outside the crosshairs of regulators, can be advantageous. Vaidya cited EtherFi, one of Maelstrom’s portfolio companies, as an example of a non-custodial platform that is not under regulatory scrutiny due to its decentralized nature.

“All of Maelstrom’s portfolio companies, bar one, which doesn’t have a token model, have been outside of the U.S. Even when a project does involve U.S. founders, it is domiciled in a friendly jurisdiction like Switzerland,” Vaidya explains. Identifying quality projects For Hayes and Vaidya, identifying quality projects is crucial to their investment strategy. They believe that investing in infrastructure companies during the bear market and doing the necessary groundwork is essential to finding projects that can deliver substantial returns during the bull market. “We want to identify projects that are actually quality,” Hayes emphasized. “It’s not a game of spray-and-pray because we don’t have outside LPs.” He further explained that infrastructure deals offer strong technological moats, addressing a large market, and have a simple business model that can be easily understood. Hayes draws parallels with the rise of successful projects like Compound, Aave, and Uniswap, which were all founded in 2017 but gained mainstream attention only in 2019 and during the DeFi summer of 2020. He attributes their success to having done the groundwork during the bear market, building their products, acquiring clients, and demonstrating the viability of their technology. Copycat projects and investor frenzy As the crypto market shifts from bear to bull, Hayes and Vaidya expect to see copycat projects and investor frenzy, similar to what happened during the COVID-19 bull market of 2020-2021 when clones of successful projects like Uniswap, Compound, and Aave gained significant capital. “In this part of the cycle, it’s important to make money but also to have done the work during the bear market to identify which companies are genuinely valuable and which are just imitations,” Hayes emphasized. He acknowledged that some projects may not be of high quality, but they could still offer significant returns due to market narrative and investor sentiment. Hayes and Vaidya’s investment approach is to carefully evaluate projects based on their fundamentals, technology, market potential, and business model, rather than blindly following the hype. They are willing to invest in projects with strong potential, even if they may not meet traditional criteria for quality, in order to capitalize on market opportunities. Navigating regulatory challenges As former executives of BitMex, Hayes and Vaidya are aware of the regulatory challenges in the crypto industry. Hayes previously faced allegations of violating the Bank Secrecy Act (BSA) and allowing money laundering to occur on the BitMEX platform. In February 2022, he pleaded guilty to the charges along with BitMEX co-founder Ben Delo. Given the regulatory scrutiny on the crypto industry, Hayes and Vaidya are cautious about investing in projects that may attract regulatory attention. They prefer to focus on infrastructure projects that are less likely to be in the crosshairs of regulators, especially those that are non-custodial and domiciled in friendly jurisdictions. One example of such a project is EtherFi, a decentralized and non-custodial liquid staking platform, which closed a $5 million funding round in February. Vaidya explained that because EtherFi is non-custodial, there is no one for regulators to go after, and the project is less likely to receive regulatory notices. Conclusion Hayes and Vaidya’s investment strategy at Maelstrom Capital is focused on identifying quality infrastructure projects during the bear market and taking a patient approach to deploying capital to earn substantial returns during the bull market. They emphasize the importance of doing the groundwork during the bear market to identify projects with strong fundamentals, technology, and market potential. They are willing to invest in projects that may not meet traditional criteria for quality, but offer significant returns due to market narrative and investor sentiment. Additionally, they are mindful of regulatory challenges and prefer to invest in projects that are less likely to