In over 35 years in the asset management industry I have seen huge change, multiple business cycles, frauds, successes, failures and plenty of booms and busts.
Crypto and digital assets are simply the next innovation in a continually evolving investment management industry, a new asset class that has emerged from a new computing paradigm.
These crypto assets are integral to their blockchains, the immutable and unhackable technologies that form the foundation of “Web 3”. As more programmers use them for building the applications for future use cases, be that within finance, industry, real-world assets or gaming the price of these assets will continue to fluctuate, but also follow an upward trajectory as adoption increases.
Regardless of what the naysayers claim and despite the bad actors that have been and gone, digital assets provide investors with more investment choice and another way to diversify a portfolio.
As regulators are increasingly embracing the asset class, it is fostering investor appetite on the institutional or “instavidual” side, having already been widely accepted by a good proportion of retail investors.
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This has meant that Independent Financial Advisers (IFAs) have been unable to ignore the gradual rise of crypto, as they service clients who already have exposure to these assets or are interested in allocating capital. Increasingly, UHNW and family offices are deciding that they need to have some exposure.
This of course can be done in a number of ways. Investors can buy their own crypto directly or buy any of the increasing number of passive proxies that are listed on regulated exchanges around the world, for example Exchange Traded Products, like ETFs, that have exposure to digital assets such as bitcoin, ethereum and other “layer one” blockchains such as cardano, solana or polkadot.
These are natural avenues for investors to get some exposure to a nascent asset class but there is an increasing demand for more sophisticated risk managed diversified exposure.
This is where 3iQ’s QMAP managed account platform comes in, providing institutionally robust and actively risk managed accessibility to a wide range of pre-existing digital asset investment strategies or more bespoke structures tailored to the need and risk profile of the client. Family offices, allocators, IFAs and institutions will all increasingly require solutions which are tailored to their needs and provided by solid institutions like 3iQ.
Throughout my career new innovations have been met with resistance. Change is scary, especially in finance. In the past, I remember how investors were hugely skeptical of hedge funds in their early days, an industry that has experienced its fair share of ups and downs with Bernie Maddoff being the most notable. It is now a multi-trillion dollar industry and hard to imagine not having ever allocated to the multitude of talented hedge fund managers.
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There is also a huge educational deficit amongst the adviser and wealth management community which is holding them back. Compliance is too burdensome for many, they perceive the risk of the crypto asset class to be too great and some believe there to be no intrinsic value in these assets. Let’s address these three points individually:
Burdensome compliance
Having spoken with many wealth managers and advisers in recent months, especially those at the larger more established financial institutions, compliance is making it difficult for allocators to venture into alternatives such as crypto, meaning that many firms are turning potential business away and telling clients to take the responsibility of investing in crypto into their own hands.
But the tide is turning meaning the investor choice is slowly becoming less restrictive. The UK’s FCA has made crypto ETPs accessible to professional investors, the EU’s MiCA (Markets in Crypto-Assets Regulation) is live and the US’s SEC is approving crypto ETFs. Additionally, most large financial jurisdictions have KYC and AML requirements clarified.
High risk
The risk argument can easily be countered by pointing out that investors are just as easily able to buy a technology stock or a commodity that is susceptible to huge drawn downs, so in this respect crypto is no different. However, I would argue that any investor interested in digital assets should recognise that the asymmetric risk return profile is exactly what makes the asset class interesting as a complementary holding to improve sharpe ratio applying the appropriate risk weighting.
Intrinsic value
For most digital tokens, the intrinsic value of these digital assets exists in the underlying blockchains, which are secure computing protocols that are empowering a new wave of technological, trade and financial advancements, just as Microsoft and Apple did in the Web 1 and Web 2 phases of the internet. The crypto assets are simply the oil that greases the wheels of these protocols, without which these new applications cannot be built.
As an industry, we are reliant on guidance from regulators and the rules governing this new asset class varies from jurisdiction to jurisdiction, but clarity is emerging, safeguards and protections are being put in place and this is leading to fears, uncertainties and doubts (FUD) slowly disappearing.
But further education is needed to demonstrate the benefits and risks of digital assets and why crypto deserves an allocation to every investor’s portfolio, be they young or old.
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As advisers become equipped with the relevant knowledge to fully understand crypto’s place within the investment landscape, this will enable them to meet a growing investor demand for exposure. Moreover, you can argue that it is almost a fiduciary duty of managers and advisers to offer crypto to their clients, as it can no longer be ignored.
As more user friendly and regulatory compliant platforms emerge, all with the institutional grade security and custody you would expect to safeguard client assets, it will become even easier for advisers to incorporate digital assets into their offerings.
We are still at the very early stages of this new investment paradigm, but what is clear to 3iQ is that traditional finance is starting to wake up to value being created by blockchain, tokenisation and digital assets, so they want access to the asset class via reputable and regulated investment managers like 3iQ and others.
Matteo Dante Perruccio is a senior adviser at 3iQ
