Chris Matta on Bitcoin Valuation and Crypto Allocation
Chris Matta is the President of 3iQ Digital Assets (USA). Chris is also President and Founder of the Blockchain Association of New Jersey, which advocates for innovative regulatory leadership and corporate collaboration for the cryptocurrency space.
Prince: Can you describe 3iQ Digital Assets US?
Matta: 3iQ Digital Asset Management, our parent company, was founded in Toronto in 2012 and is one of the largest digital asset investment fund managers in the industry with over $2.5 billion in assets under management as of 12/31/2021. Our company has historically been at the forefront of digital asset management innovation, including when we launched the first publicly traded bitcoin and ether funds in North America in 2020.
Entering the US market was a natural evolution as a global digital asset manager, but we believe our track record sets us apart. The team has decades of experience managing client relationships and investments in some of the largest financial services organizations. My career, for example, started at Goldman Sachs. I then started my own digital asset management company in 2017 before joining 3iQ at the end of 2020. Our team includes end users and gatekeepers – pain points and where the industry needs to go to increase adoption – and we have designed our investment platform in the United States with this in mind.
Prince: What kind of bitcoin and digital asset investment solutions can our reading audience consider given the regulatory environment and different restrictions?
Matta: A recurring question that we hear is “how to invest in space?” Currently, options for US investors seeking professionally managed investment solutions are limited. Most crypto solutions in the United States offer exposure to single assets like bitcoin. The investment structures and strategic options available are not robust. In the meantime, the crypto ecosystem continues to evolve rapidly and investor curiosity continues to increase.
We bridge the gap between traditional finance and digital asset management and strive to enable private banking advisors to confidently recommend digital assets in a familiar investment structure. That solution is 3iQ Q-MAP, a digital asset separately managed account (SMA) platform that launched in December 2021 in partnership with Gemini.
Our platform offers a wide range of model portfolios in the digital asset space. There is an option to invest in single assets like bitcoin and ether, an option to own a diversified basket of multiple crypto assets, and an option for a custom strategy. We also offer portfolio enhancements such as tax loss recapture, a benefit not available in mixed fund structures like ETFs or private funds.
A typical starting point for investors is our flagship SMA, the Market Index. The index is market capitalization weighted on the largest and most liquid assets available on the Gemini platform and provides exposure to bitcoin, ether and other emerging crypto sectors like the web. 3.0, DeFi and the metaverse.
Most importantly, Q-MAP investors own crypto assets directly in an SMA which is managed on a discretionary basis by 3iQ and held at Gemini, one of the largest qualified custodians in the industry. It is an institutional-grade account structure that eliminates much of the friction associated with self-managing a crypto portfolio.
Prince: What do you think are the main challenges of investing in digital assets and should management experience play a key role in finding exposure to crypto?
Matta: The main challenge facing the private management industry is the lack of education. This is a new asset class, and it is changing rapidly. Asset managers and custodians are catching up as investors signal they want to own digital assets beyond bitcoin. In the meantime, options remain limited as the asset management industry grapples with mounting challenges with crypto regulation. This has pushed clients to manage their own crypto portfolios, and with it, advisors have even more questions to answer beyond “what is bitcoin?” Where should I buy? What is a Wallet? What is a private key? What should I own and how much? The list goes well beyond these few questions.
There are also operational nuances unique to the crypto market. Managing all the moving parts is difficult with significant potential operational risks. Custody, for example, determines how secure and accessible your crypto assets are. Managing private keys, seed phrases, and account passwords is common in managing your crypto wallet, but doesn’t apply to traditional finance. If you lose your private key and cannot recover it, your crypto assets are gone.
For many of these reasons, professional third-party investment management is the most convenient route for wealthy investors. The size, scale and stamina of the manager are important, as this often determines relationships with operational partners. Major investment managers are institutional investors, and this usually comes with an institutional-grade infrastructure passed down to the end client. Track record is also important – managers with investment experience across multiple cycles are well positioned to adapt to ongoing developments in the space.
Prince: From an allocation perspective, what advice can you offer the Private Wealth audience for considering exposure to bitcoin and digital assets as part of an overall investment portfolio?
Matta: The rules of traditional finance still apply when advisors think about building up an allocation for clients. We view digital assets as venture capital-like investments with 24/7 liquidity. Bitcoin, Ethereum, and many crypto projects are powered by blockchain, a transformative technology that is still in the adoption stage. Like other venture capital investments, we would pool digital assets as alternative investments. Historically, we have seen a number of university endowments embrace venture capital in their allocation of alternatives with a typical range between 5% and 15%. We believe that digital assets should be part of this venture capital basket.
Digital assets also offer the opportunity to generate alpha for clients in an environment where it is difficult to maintain the historical risk/return assumptions of diversified stock and bond portfolios. Even though it is a volatile asset, if sized correctly, we believe Bitcoin can add value to a diversified portfolio. It has been the best performing asset class for eight of the past 10 years, and returns tend to move independently of other risky assets. Historically, it has had a low correlation with equities and a negative correlation with fixed income securities. Conceptually, we think of it as a form of insurance or portfolio protection within an asset allocation. It can act as a hedge against the broader risks we see in the financial system today, such as rising inflation or anemic returns.
If we had a message for the community of private wealth advisors, it’s not to stay put. HNW investors ask questions about bitcoin and digital assets every day, and if you’re not having the conversation with your customers, then someone else is. If you don’t educate yourself on this asset class, you risk being the owner of the taxi medallion in a rideshare world.
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