Digital Asset Capital Management today launched Digital Asset Fund which is an actively managed, global investment vehicle for sophisticated and institutional investors that focusses solely on the digital asset (or cryptocurrency) sector. The Fund has been created to provide a unique exposure to both the larger, more liquid digital assets as well as smaller cap opportunities, including through Initial Coin Offerings (“ICOs”). The Fund is a BVI business company registered with the BVI Financial Services Commission.
Gabriel Abed is the Founder and a Director of Digital Asset Capital Management, and, together, we bring diverse backgrounds and career experiences to the Fund. We believe this breadth of experience offers unique insight to our investors. Gabriel has been a thought-leader in the global blockchain sector for many years and has successfully founded and grown operating blockchain businesses. Gabriel aso has a long history of successfully identifying which blockchain technologies will prevail and has incredible connectivity with other key thought-leaders within the blockchain community.
I have over 20 years of financial market and investment banking experience from J.P. Morgan and Goldman Sachs. I have held a number of roles at these firms with a particular focus on the telecommunications, media and technology sectors and was most recently J.P. Morgan’s Head of Equity Capital & Derivative Markets for Australia and New Zealand.
Both Gabriel and I are dedicated to the digital asset sector, have a significant portion of our wealth invested in it and believe funds like ours are the next step in the evolution of investment in the sector as liquidity rises, access to capital for great ideas gets even better, and a broader investor universe seeks exposure to what is the world’s most exciting asset class.
Digital Asset Capital Management uses a proprietary model to assess potential investments. Within the model there are a number of biases, two of which are:
- Protocol layer investments (as opposed to applications); and
- Leveraging the benefits of Proof-of-Stake
Investing in the Protocol Layer
One of the most exciting opportunities within the digital asset sector is the ability to invest at the protocol layer — the infrastructutre upon which systems and whole sub-economies are, and will be, run. This is a rare opportunity with investment in the similar, underlying layers of the internet (TCP/IP, Ethernet and, more recently, WiFi) not accessible to investors through the internet’s initial growth phase. Whilst we retain an open mind with regard to specific applications and there are always exceptions, it is our belief that the risk/reward payout for investing in winning protocols typically outweighs that offered for most specific apps targeting a specific end-market.
Leveraging the Benefits of PoS
We believe PoS will become one of the dominant consensus-building mechanism and have extensive experience operating masternodes and staking assets. PoS strategies and positions will form an important part of Digital Asset Fund’s NAV as we believe they are a highly attractive investment opportunity for three key reasons:
- Removes the impact of inflation: minted coins are distributed to stakers and masternode operators instead of miners. Participating token holders are not diluted by mining rewards as they are, for example, in bitcoin and litecoin;
- Income generation: The ability to earn an attractive “paid-in-kind” yield through the income generated from running a masternode or staking;
- Supply tightening: The secondary market effect PoS has in terms of tightening supply by providing extra incentive to retain assets over a longer-term investment horizon.
In addition to the above investment-focussed criteria we also believe the energy and environmental benefits of PoS systems provide a more sustainable future path for the digital asset sector.
Brief Market Perspectives
Its been an incredible year-to-date in terms of sector performance and individual asset re-ratings. Over the last six weeks we have seen bitcoin finally reassert its dominance along with a significant re-rating in Bitcoin Cash. Whilst there has been significant speculation that buying in Bitcoin was led by anticipation of, first, the Bitcoin Gold and more recently the failed SW2X forks Gabriel and I do not believe this is the key catalyst and either of these forks warranted any change in fundamental strategy towards Bitcoin. Bitcoin had significantly underperformed the sector through the first half of the year and we believe the rise in Ethereum’s capitalisation had driven a disproportionate investment through the smaller-cap complex. We believe Bitcoin’s recent rally has been driven by buying emerging from traditional investors (and likely to increase as futures/options markets light-up). We expected the bulk of this new money to enter the sector through the logical gateway, Bitcoin, and think this will continue for some time. The resultant rally is yet another example of what happens when the demand equation improves for an asset with a fixed supply curve and a generally loyal, inelastic ownership base.
The move in Bitcoin has singlehandedly seen a further re-rating of the sector which has now grown by a staggering 1,200% YTD (source: coinmarketcap.com) and, in our view, led to some significant distortions within the alt-coin market. We believe opportunities are starting to emerge as underlying growth within the alt market continues to look compelling — as an example, Ethereum transaction growth is 824% YOY (source: www.etherscan.io, as-at 30/10/17):
We remain cautious regarding the ICO market but there is some hope (and even early signs) that the recent poor performance of some high-profile offers will reintroduce more rationality in terms of valuations, the amount of capital raised and ICO raising structures in general which could see some opportunities re-emerge.