Why we Invested in Prime Factor Capital

www.primefactor.capital

As a private investor, I try to take a portfolio approach to thinking about and managing my (read: our family’s) assets. When I decided to do some family financial planning during a vacation in 2012, I started reading up on the GFC, its causes, economic systems (no conservation laws in economics), banking, growth/inflation, sound money, etc. Sure enough, I came across the bitcoin white paper and proceeded down the proverbial rabbit hole.

For a technology venture investor, Blockchain (let’s call it Distributed Ledger — DLT) and associated digital assets (let’s call them “cryptocurrencies” for brevity) are a near irresistible area to explore and intriguing technologies to potentially:
establish a new model or architecture for computing; 
design new decentralized and censor-resistant products and services based on open protocols;

  • seamlessly include programmable money and incentive structures in them;
  • create new ways of programmatic decision making;
  • new representations and process implementations of asset ownership

How and if any of the above will stand the test of time is hotly debated. However, it is hard to imagine that DLT will not leave a lasting footprint and it is exciting to be able to shape the future by investing in it.
An area where we think DLT-based digital assets will make a lasting impact is the financial services industry. In particular, building the financial services “infrastructure” to allow mainstream market participants to become active in it, is one of our focus areas.

Cryptocurrencies

The proliferation of cryptocurrencies/tokens and the high volatility of their prices expressed in fiat, have been populating headlines for a number of years. And, while the downturn in 2018 was a difficult period for cryptocurrency owners, the combination of 
1) A technology base that can have a fundamental impact in how we compute and transact, and 
2) maturing, established cryptocurrencies in an increasingly developed marketplace. 
allows for a degree of optimism. This is something shared by Morgan Stanley who in 2017, suggested that crypto-assets constitute a “new institutional investment class”.

Why Should Institutional Investors Consider Investing in the Crypto Asset Class

There are good reasons to include an allocation of cryptocurrencies in an institutional investor’s portfolio. From a DLT market fundamentals perspective, the space continues to appear healthy:

  • Around 100K blockchain developers at the moment with “blockchain developer” being LinkedIn’s biggest growing job sector (up 33x in 2018).
  • Job Openings: The number of full-time job openings for blockchain developer exceeded 12K at the end of 2018 — a 400% YoY growth, and up from a reported 200% growth in 2017.
  • Venture investments in blockchain startups grew from $1.2B in 2017 to almost $4B in the first 3 quarters of 2018.
  • Around 3.8T transactions in 2018 across all blockchains, up from roughly 918bn transactions across all chains in 2015. Bitcoin alone saw a trade volume value of $2.2T in 2018, up from $870B 2017, $31B in 2016 and $12B in 2015.
  • The number of cryptocurrency wallets users has been growing (roughly) from 9M in Q3 2016, to 17M (90% YoY) in Q3 2017 to 29M in Q3 2018 (70% YoY) where the number of active wallets is estimated to be around 25% of the total wallets out there.
  • The number of Github blockchain project has risen 10x in the last 3 years.

From a purely investment technical perspective:

  • Cryptocurrencies are not correlated with other asset classes.
  • They provide unique diversification benefits — reducing risk and increasing (risk adjusted) returns in the portfolio.
  • Historically, they offer an asymmetric return profile and attractive return to risk ratios (high Sharpe Ratio).
  • Historical volatility levels may be mitigated given the long-time horizons of institutional investors.

Using portfolio theory research found that in a roughly 50/50 equities/bond portfolio an optimal bitcoin allocation is 1.3%.

Building the Crypto Investment Infrastructure for Institutional Investors

New as well as mainstream players have started to enter the market delivering products and services that would allow institutional investors to invest in the asset class. For example,

  • Fidelity announced in October 2018 that it would store and trade bitcoin for hedge funds.
  • CBOE has been offering bitcoin futures since December 2017.
  • Apex Clearing, which specializes in custody and clearing services for fintech firms, is planning to launch a crypto custody offering called Apex Crypto in February 2019.
  • NYSE chairman Jeff Sprecher, who is also the CEO of ICE (Intercontinental Exchange) called its digital assets platform Bakkt its “moonshot bet”.

Traction Among Institutional Investors

Little public information is available on the actual investment activity of professional and institutional investors in the crypto asset class — though clearly there’s anecdotal “data” abound. What’s been announced is that:

  • The two US pension plans in Fairfax County, Virginia, are anchor investors in a new $40 million blockchain VC fund with other investors including an insurance company, a university endowment and a private foundation.
  • Institutions like Yale (but also reportedly Harvard, Stanford, and MIT) invested in the crypto asset class including (Yale also investing in Andreessen Horowitz’ $300 million crypto fund).

What do Institutional Investors Need?

As an investment in the crypto asset class will be new for most institutional investors and considered involving new and to some extent unknown risks, investors will seek investment vehicles and managers that:

  • Fully comply with appropriate regulations in firmly established and well-regulated jurisdictions.
  • Have an experienced investment team with a combination of a strong track record managing investment funds as well as having crypto expertise.
  • Deploy a disciplined and robust investment process and a rigorous risk management framework.
  • Use best in class service providers, including a regulated 3rd party custodian, top tier legal; counsel, fund administrator and auditors.

And this is exactly what Prime Factor Capital brings to the table. The company was founded by a seasoned team with many years of professional experience and backgrounds in traditional institutional portfolio management at BlackRock as well as crypto trading. The team has built transparent investment products in this emerging space, especially designed for professional and institutional investors, managed by a reliable and FCA regulated investment manager. We are extremely excited to help Prime Factor Capital build the “Blackrock of Crypto”.