Arca Funds Crypto Asset Manager Shares Insights from 100 Institutional Investor Discussions
Despite a drop of crypto market value (at just 75% of their all-time highs). There has been an overwhelmingly positive response to investment possibilities.
Pensions, family offices, endowments, and other institutions have shown remarkable enthusiasm through a series of meetings across the United States over the past four months. They may only want to dip in their toes, but the excitement is there.
There are three main levels of knowledge, and with it varying questions and goals:
- The cryptocurrency newbies
- Evaluators of all emerging fund managers, now looking at cryptocurrencies
- Learned cryptocurrency investors
Any new subject could appear daunting but especially the one about technology, and specifically coding.
But when people are able to make it past that initial fear, the same phases of eventual interest appear; skepticism in such a radical and never before seen idea, an optimism developed through research and seeing what other people have to say about it while still being confused as to what exactly it is, and finally a desire to jump right in on the ground floor and be a part of something you believe will actually be around for decades.
As a blockchain technology, cryptocurrency can seem more complicated than it is and discourage people from attempting to learn about it. As a new market built on an entirely new concept (especially with the ethos from the original Blockchain to get rid of institutionalized banking and individual country monies).
Current investors consider the digital asset market to be “hard to ignore right now”, placing it somewhere between skepticism and optimism/confusion.
Because of the various economic crisis from 2008 to 2018, investors are trying to hedge their bets. There is a growing sentiment that cryptocurrency offers the right exposure outside of traditional banking which could help shield them from losing money through banks in times of economic downfall and although none of them are suggesting one puts all their money in cryptocurrencies, to have no investments in it could be more dangerous than allocating a small amount for it.
A shallow look at just price makes cryptocurrency an exciting, if volatile, investment. Despite prices dropping, the pie is growing. Research may help you decide which piece to take as the opportunities to participate keep growing.
But to look at cryptocurrency in only its price value is to miss a huge piece of the puzzle. The blockchain technology backing it is an infrastructural asset that requires time to asses and watched grow. We are only just barely tapping the potential of what blockchain can do and how it could improve the world.
Whether or not you fully understand crypto assets is of little consequence if you are able to invest to meet goals and stay within risk tolerance in order to further diversify your portfolio. The healthcare equity markets have plenty of investors who do not understand every nuance, for example. You only have to know enough to recognize what you want and make it work for you.
Evaluators spend their time and money on well-researched purchases, using their vast investment knowledge on limiting risk and exposing the most potential.
Their attention tends to focus on three main things:
- Focusing on the low. What matters is how low investment can go above all else. Cryptocurrencies tend to over-inflate what can possibly be made and it is important to think about what can be lost and how to minimize that if you choose to invest. Not making much money is better than losing money.
- Cap structures used for other markets do not work here. For a variety of reasons, it’s just not a useful predictor the way it would be for other markets. The best way to choose is to simply not invest in a coin you do not like. How much you choose to invest and keep in your chosen coin should depend on a risk/return analysis of their profiles. If the risk outweighs the return then divest accordingly.
- Be prepared to thoroughly manage this asset. While most assets can mostly take care of themselves for day-to-day functions, it’s not possible with crypto. The values swing too wildly and quickly from hour-to-hour. It’s best to use a top-down and bottom-up approach: understand the landscape and simultaneously be aware of the value.
This group may have a harder time investing because there are so many unknowns in this asset class. The tangible value doesn’t really exist which is what many risk assessments are based on.
A high prevalence of frauds and excess compared to value is par for the course compared to the normal investment grounds, including pyramid schemes.
It’s expected that legitimate cryptocurrency assets growing will eventually squeeze out most fraudulent and worthless tokens because they are so much less impactful.
Self-made Crypto Experts
These investors are much more magnified in on questions to do with cryptocurrency and blockchain space. They have spent a lot of valuable time researching this world inside and out to attempt to determine the most valuable coin to generate high risk-adjusted returns.
Their two defining focal points are a trust in developers as the new research analysts and identifying what useful research and framework for predictions are in crypto.
The ability to read code has greatly benefited those looking to research these assets under a microscope. The get to beta test products and are more engaged in tech communities which greatly overlap with blockchain for obvious reasons. These are extremely important assets to any researcher.
Because traditional research into assets appears to not yet work in the crypto space, creating a framework in which to properly know and predict this market is of incredibly high value. The proper analysis includes knowing how to ask the right questions. MV=PQ, NVT analysis, and Metcalf’s Law are some promising looks into this.
This year has proven difficult for values of all the major tokens and yet it does not appear to be slowing the momentum of interest in investment into crypto.
Everyone appears to be trying to figure out which coin to add to their portfolio, with traditional hedge funds and VC investments no longer being enough to satisfy needs.
“Crypto is pretty hard to ignore right now.”