Risks and returns in digital asset portfolios

In 2018 digital assets, as they are now called, were fairly new. Back then this emerging class of investment opportunities was generically referred to as “crypto” and by which most people meant “speculative investing in bitcoin”.

Against this backdrop, we started raising what was first called AVG Blockchain Fund 1 (and later Applied Crypto Ventures Fund 1) in January of that year. As investors mulled the prospect of investing in our fund, some of their consideration was focused on the unfamiliarity of tokenized assets and the disruptive potential of blockchain as a technology. However, a larger amount of time was spent discussing the risks of investing in nascent digital assets: market volatility, regulation, tax accounting, correlation with other assets, etc.

Fund 1 Diversification Strategy

Our fund strategy was focused on reducing these risks by diversification: roughly equal allocations to equity investments and crypto assets. The equity portfolio was concentrated on use cases for blockchain technology in payments, fintech, and decentralized finance and this reduced the risks of the portfolio significantly.

Fund 1 closed on May 11, 2018. Our actual portfolio by value invested was approximately 53% in equity investments, 30% in exchange-listed cryptocurrencies, and the rest in SAFT instruments which would deliver tokens later. Many of our token holdings have since been listed on major exchanges and as trading activity has picked up we have reclassified some of our token investments as cryptocurrencies. The fund portfolio composition by invested value as of August 2021 is shown below: roughly half equity and half cryptoassets.

ACV Blockchain Fund 1 — Portfolio by invested value

Three years into the life of the fund (as of August 2021), the fund portfolio has grown significantly in value. While the equity investments have held steady the crypto-assets have grown to over 87% of the value of the portfolio.

However, the blend of equity and crypto assets has had other material impact on the nature of our returns in addition to reducing risks.

Cryptoassets have led to early realizations

Traditionally venture capital funds do not make distributions to investors for several years as equity investments in early stage startups typically take 5 to 10 years to develop.

However we found that cryptoassets related exits have led to an accelerated fund returns timeline for Fund 1. We were able to sell some of our liquid cryptoassets within 2 years of fund close and return significant capital within 3 years of fund close.

Blended portfolios have produced favorable returns relative to public market investments

Sophisticated investors have traditionally tracked the performance of alternative investments using the PME (“public market equivalent”) method. The early liquidity offered by cryptoassets significantly enhanced PME returns for Fund 1 when we use the S&P 500 as a benchmark. The graph below plots unrealized IRR returns for our Fund 1 portfolio vs the same capital movements into and out of the S&P500 index.

“Unrealized IRR” shown includes all exits & returns PLUS the value of the portfolio if you were to liquidate on the specified date. IRRs are not computed until two quarters of data are present. SP500 results do not include dividends.

Looking back

While digital assets remain a risky asset class, the influx of institutional investors, additional regulatory oversight, and the maturity of the ecosystem have all reduced these risks to some extent. Any sophisticated investor portfolio should consider an allocation to digital assets, especially a portfolio strategy that manages risks, seeks rapid paths to liquidity, and superior PME returns.

Caveats

  • The fund has several more years to deliver returns. Investment profits will remain at risk subject to market conditions and the future performance of our investments.
  • Unrealized returns are notional and past performance is not an indicator of future returns.
  • Applied Crypto Ventures Fund 1 is closed to new investors and and we are currently not raising any more capital for this fund or any subsequent funds managed by Applied Crypto Ventures.
  • This analysis is not designed to support an investment memorandum for any of our past or future fund offerings.

Important Disclosure Information:
The various funds of the Applied Crypto Ventures (ACV) Blockchain Fund are a series of Green Nonce Ventures, LLC (GNV), DBA Applied Crypto Ventures, LLC. GNV is an independent, for-profit company. Past performance of Applied Crypto Ventures Blockchain Funds may not be indicative of future results. Different types of investments involve varying degrees of risk, and venture capital funds, including the Applied Crypto Ventures Blockchain Funds, are very long-term investments that involve substantial risk of loss, including loss of all capital invested. Moreover, you should not assume that any of the above content serves as the receipt of, or as a substitute for, personalized advice about investments. This newsletter is informational and educational only, and no offering of securities is made with this newsletter. Offers are made only pursuant to formal offering documents, which describe risks (which are significant), terms, and other important information that must be considered before an investment decision is made. Applied Crypto Ventures Fund offerings are made solely to accredited investors who accept the responsibility for conducting their own analysis of the investment and consulting with their professional advisors with respect to their analysis of this investment. ACV’s investments are risky, not suitable for all investors

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