Introduction
If you’re the CIO at a pension or endowment fund, getting your investment committee to make a new allocation to digital assets could be challenging for two reasons: One, the likelihood of your investment committee being staffed with experts in crypto is, well, unlikely; and two, there is undeniably a lot of noise around bitcoin and crypto which can make separating fact from fiction somewhat difficult.
Beyond just getting the greenlight from your investment committee to invest in crypto, you must also take into account how to align digital assets within your investment policy statement (IPS). The good news here is that while digital assets are different in some very fundamental ways from traditional investments, crypto - and especially bitcoin and ethereum - are very much now institutional assets that can help you meet the investment goals your fund has laid out in its IPS.
In part four of a five-part Q&A series on building a foundation for crypto investments, John D’Agostino, director of institutional sales at Coinbase, who oversees strategic partnerships for the company, discusses some of the key points that an investment committee should know about the growing digital asset market.
Q&A: John D'Agostino
What should the messaging focus on when talking to an investment committee about allocating to bitcoin or other cryptocurrencies?
John D’Agostino: It’s about normalizing the asset. When we talk about an institutional quality asset, we’re not talking about whether it’s a good or bad asset. It has nothing to do with whether it’s an asset that’s going to go up or down in price. It’s an asset that you can invest in as a fiduciary where if it goes down in price, you don’t go to jail or get fired. It goes down in price for the right reasons, for market reasons. It doesn’t go down in price because your wallet got hacked and there was no insurance policy.
And those protections are now there in the crypto industry
JD: The bottom line is that when you have the kind of institutional infrastructure you get with Coinbase, there are human beings running checks to ensure that no one has misappropriated your identity. This means that working with Coinbase is no different than working with a prime broker hosting your cash and/or equities. The experience of engaging and holding your hot or cold assets if you are an institutional allocator as opposed to retail is thematically the same as the way you hold assets with any third-party custodian, be it a bank or a prime broker like Coinbase Prime.
A standard investment policy statement (IPS) will cover things such as asset allocation, risk tolerance, liquidity requirements, rebalancing and long-term investment objectives. Do these carry over to crypto or do you need to set new parameters?
JD: It has to fit into the IPS and the strategic allocation statement. Every asset that fits into a fiduciary portfolio has to answer those questions. The good news is that as compared to other idiosyncratic assets like derivatives, we have as good of answers as they do.
So, how do you answer the question about liquidity, for instance?
JD: We have real data. You can look at the data and see the two-week long moving average volume for bitcoin. We did a trade of X amount and the slippage was Y. You can lead with the data when talking to your investment committee.
Rebalancing?
JD: It exists with crypto ETFs, for sure.
How important is the exchange to crypto investments? What should the investment committee know about this part of the digital asset universe?
JD: The exchange is huge. Exchanges are the lifeblood of the U.S. economy. They are the focal point of all economic activity. People think of exchanges as places where people transfer value; they’re actually places where people transfer risk. Exchanges are where risk goes from people who don’t want it to people who do. And that’s the role of exchanges: To provide trust and intermediation to an economy. After 9/11 the two businesses that opened first were the New York Stock Exchange and the New York Mercantile Exchange because without them the economy doesn’t function. And being public is important because how can something be that crucial without transparency?
Finally, we’ve discussed what a CIO should explain to an investment committee, but what should be top of mind for the committee itself?
JD: Depth and breadth of market participants. Stability of credit counterparties. Credit counterparty risk is massive. And the regulatory risk in the sense that the risk of this all going to zero is not there. The infrastructure build that now exists provides massive backing for the crypto market.
