Know Your Market: Participating in Digital Assets

State of the crypto market

by Nejteh Demirian

The relatively high levels of volatility within the crypto markets, including Bitcoin and Ethereum vis-à-vis other asset classes are now well appreciated by investors and have been a source of both interest and concern. During these early stages in the evolution of the asset class, there continues to be considerable price action driven by several factors, including market structure, deficiency in professional investment valuation models and significant changes in the global macro landscape.

Irrespective of market conditions, there is now wider acceptance, adoption, and support for the digital asset “crypto” asset class within the professional and institutional investment community; in some cases, ownership permeating into governments and central banks. The investor ecosystem from early to late-stage private and secondary, is now seeing highly active participation by some of the world’s leading VC investors, institutional hedge funds and market makers. A buy and hold approach with well-known coins is only one of the strategies for professional investors and family offices to gain exposure to the space. Investors can now also participate in token offerings and invest in companies that are building and managing the new digital asset economy infrastructure. Another available option is for asset owners to tokenize their portfolios of, for example, real estate, infrastructure, fine art, even trade receivables.

 

Many family offices and intermediaries are looking for ways to diversify their portfolios, manage risk, and help assure they do not miss the potential upside from this rapidly growing and disruptive asset class. Optimal digital asset investment requires a longer-term strategy rather than simply buying, holding, and selling individual coins such as Bitcoin or Ether to potentially profit from price volatility. A solid digital asset investment strategy should include participation in attractive deals within the ecosystem as well as institutional-grade custodial services and other professional support.

 

Tokens within portfolio construction

Tokens can be classified more generally as utility or security tokens; there are also hybrid varieties, and the landscape continues to rapidly evolve with innovative structures around what tokens can represent including Decentralised Autonomous Organisations (DAO’s). In their most basic form, a token is a digital and programmable representation of asset ownership recorded on a blockchain. In theory, anything with real-world value can be tokenised, while the earliest iterations were utility tokens for web3 protocols. Security tokens can extend further to represent assets such as equities, bonds, real estate, or funds, whereas utility tokens represent assets such as digital protocols. A token’s value is determined by how it captures and distributes value to the token holder.

There have been increasing numbers of businesses issuing security tokens, in ways similar to traditional stock offerings, whereby investors own digital blockchain tokens that represent a proportion of assets or instruments such as stocks, bonds, real estate, and intellectual property. In addition to ownership, these tokens may come with benefits such as rights to a portion of revenue the underlying assets may generate, such as profit, interest, rent or fees.

The maturing ecosystem

The secular digitalisation trend invariably requires an increasingly sophisticated financial technology infrastructure, ranging from exchanges, trading platforms, and security solutions, to marketing platforms. As with early investments in Web2.0 companies that delivered excellent returns during the internet era – today, investing in the right Web3.0 projects could potentially generate considerable long-term upside as well. Development of digital asset infrastructure, in many ways mirrors the growth and maturity of traditional financial services infrastructure, and that makes institutional investors more comfortable, even as they consider investments in Web3.0- an asset class that appears to be a new space with vastly different market dynamics, valuation models and of course financial infrastructure.

Asset Tokenisation

Asset owners can also consider tokenization to unlock the value of privately held illiquid assets. This can be used to diversify risk across multiple parties, and augment cash flow profiles from assets such as accounts receivables. The union of fractionalisation and blockchain technology can now improve market efficiency and are increasingly leveraging on the convergence of layer-1 protocols and Internet of things (IoT) to provide solutions for industries ranging from electricity generation to agriculture.

Tips for family offices

 

  • Diversification of reliable service providers. Family offices have fiduciary duties to fulfill.
  • Custody of assets is key. Open accounts with providers that are secure and compliant.
  • Consider futures and ETFs as interim solutions. Proxies for the ownership of digital assets.
  • Investigate crypto funds. Augment your internal capabilities with external managers.
  • Diversify your portfolio. The scale and pace of digital asset growth is now too large for prudent money managers to ignore.

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