Down the Rabbit Hole: Bringing Crypto Into Context for Capital Allocators
What investment strategy does crypto fall under? Are there diversification benefits, or disadvantages? How can I talk to my board, my committee, or my clients about this disruptive new asset class?
These are just some of the questions that arise when asset owners begin diving into the world of digital assets. Although many of these questions are new and unique to crypto, others tend to be classic examples that arise with any new asset class or technology.
To help investors demystify digital assets, Venn by Two Sigma is launching a new content series entitled, “Venn on Digital Assets.” The series is intended to empower allocators with key information, insights and tools needed to reach their own conclusions about the asset class. The series will cover topics such as allocation sizing, returns analysis, risk evaluation, crypto’s role in diversification and, of course, a deep dive on the common questions allocators may ask when getting started with digital assets.
Beyond launching an educational series for sophisticated investors interested in exploring digital assets, the Venn platform is equipped with digital asset analytics to empower investors with the insights needed to contextualize crypto within a multi-asset portfolio. We want to provide our clients with an intuitive space to complete their key workflows, model portfolios and answer common questions. This may include comparing Bitcoin to the S&P 500, examining which crypto hedge funds are top performers, or learning the difference between Bitcoin and Ethereum.
Before diving into Venn functionality, we think it’s important to understand why we’re increasing our focus on digital assets.
State of Capital Allocation in Crypto
In the last two years ending December 31, 2021, institutional inflows into cryptocurrencies rose from $6.8 billion to $9.2 billion, marking a 36% jump over the period, per data from Coin Shares.1
As institutional interest in crypto rises, new products are coming to market. In 2021, we saw 37 new crypto investment products launched by companies like Fidelity, Goldman Sachs, Charles Schwab, among other reputable financial institutions. This is a 35% increase over the previous 12 months. Globally, there were more than 132 institutional crypto products on the market by the start of 2022.2
While crypto is currently experiencing severe market volatility, we’ve heard from institutional investors that they remain interested in the asset class. We expect that wealth managers, endowments, family offices, pensions, insurers, and other professional investors are receiving questions from internal and external stakeholders to develop a strategy for the asset class.
Need for a Framework to Understand Crypto Risk management
This is one of the core drivers behind our decision to deepen our focus on digital assets.
Venn's value proposition shines through to new asset classes because our risk analytics engine doesn't distinguish whether the underlying asset is a stock, fund, collectible, or cryptocurrency. Only an investment return stream is needed. As such, Venn by Two Sigma can help allocators better understand how crypto can fit within their preexisting risk management frameworks without the need for holdings level data or separate workflows.
Trying to Understand Where to Begin With This New Asset Class?
If you’re considering diving into the world of digital assets, consider starting with questions you already ask in relation to other asset classes. These could include, “Do I invest via a manager and how can I evaluate them? What is the right benchmark? How does my allocation sizing impact a risk/reward tradeoff? Is it a tactical or strategic allocation, or can it be both?”
From there, develop a workflow aimed at exploring answers to these questions. Quantitative analysis can serve as a key input.
1 CoinShares, “Digital Asset Fund Flows Annual Summary,” January 4, 2022
2 CoinShares, “Digital Asset Fund Flows Annual Summary,” January 4, 2022
This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features. Such statements merely reflect our current plans. They are not intended to indicate when or how particular features will be offered or at what price. These planned or future development efforts may change without notice. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.
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