Sizing a digital assets allocation correctly is one of the most strategic and challenging decisions institutional investors need to make when considering an investment in this asset class. Being judicious in their manager selection process and understanding the risks and complexities of this maturing asset class will also provide a boon to institutional adoption of crypto and digital assets.
“The number one question we get is “how much do I allocate?” There are challenges and risks institutional investors need to consider when sizing their crypto allocation,” cautions Chris Matta, President of 3iQ Digital Assets (US), “this is a really volatile space, which can work for or against you, depending on whether your investment is sized correctly.”
The asymmetric nature of the asset class is one element which makes it a compelling investment. Correlation of digital assets to traditional risk assets like equities and fixed income has been low to even negative, historically. If an institution can allocate one per cent of their risk budget to digital assets, their downside is capped at one per cent, while the potential upside could meaningfully contribute overall. The asset class has generated multiples of returns, over the years improving risk adjusted returns for those willing to allocate.
“Even a one percent investment can dramatically help an overall institutional portfolio outperform, especially because that allocation is not highly correlated to the rest of the portfolio, which is a significant benefit,” notes Matta.
He suggests the attraction of the asset class is in fact its more volatile risk profile, behaving like a venture style investment but with better liquidity. “Investors are getting exposure to early-stage developments in this technology, and it is a considerable potential opportunity. This could represent the most significant revolution since the internet and players get to invest in that infrastructure. However, they also have to understand they are being compensated with those strong returns because of that high level of risk.”
Given the progress and development witnessed in the crypto and digital assets space over the last several years, institutions now have more options in how they can access the asset class.
“In addition to sizing, it is important to match the right vehicle with the right investor,” outlines Matta, “Today investors can participate in the digital asset ecosystem beyond owning physical crypto, like earning attractive yield through digital lending, mining or staking assets . There is no one-size-fits-all solution. One institution may have a different investment objective, risk tolerance or investment time horizon. So, it is really key to educate investors on what the appropriate vehicle for them is.”
He highlights how complementary to that choice is manager selection: “Institutions need to look for established managers which have long track records, and have a large, sizable amount of assets. A few years ago, such a group did not exist but now as the market has matured there are a few in the space – with 3iQ being one of them.
“Unlike any other asset class, doing the appropriate due diligence is critical because this is where institutions could expose themselves to certain risks they may not have considered.”
Matta points out that there are several institutional asset managers to choose from with a substantial track record of managing more than USD1 billion in AUM within the crypto space.3iQ is one of the largest asset managers globally and has been solely focused on this space for many years helping investors navigate the complexities of the asset class as the investment landscape rapidly evolves.
Chris Matta, President, 3iQ Digital Assets (US)
Chris is the President of 3iQ Digital Assets (US). Chris also serves as the President and Founder of the Blockchain Association of New Jersey, which advocates for innovative regulatory leadership and enterprise collaboration for the cryptocurrency space. Prior to joining 3iQ, Chris was the Co-Founder of Crescent Crypto, an asset management firm focused on creating innovative investment solutions to bring the cryptocurrency asset class to institutional and mainstream investors. Previously, Chris was a Vice President at Goldman Sachs where he managed assets for the Goldman Sachs Philanthropy Fund and Trust Company.
