As bitcoin and other cryptocurrencies grow in acceptance and market cap, more institutional investors join the market through their own investment funds. These investment funds have a variety of options to set up cryptocurrency portfolios, based in a range of different jurisdictions to cater to a wide spectrum of investors. 3iQ Corp is one of the companies that has set up a cryptocurrency investment portfolio. Based out of Toronto, Canada, 3iQ is expected to launch its fund, geared towards accredited investors, within days. We caught up with Frederick Pye, the CEO of 3iQ to get his insights on cryptocurrency markets and how institutional investors are approaching the cryptocurrency revolution.
Digital Asset Choice
Bitcoin Chaser: You set up a crypto asset fund with 3 underlying assets in it: Bitcoin, Ether and Litecoin. Why did you choose those 3 assets?
Frederick Pye: One of the most important characteristics in setting up a fund such as ours is the security and competence of the custodian. We have been working with Coinbase on various projects for over a year now and have selected them following a very deep dive into their security and protocols. At this time the custody through their Vault system, bitcoin, Ether and Litecoin. Also, those 3 are in the top 5 of market cap and we believe have a great future. We believe this provides a core holding for family offices and institutions dipping their toe in the water.
BC: How will you determine the ratios of each asset within the fund, and how will you determine the ratio of asset holdings to investor participation?
FP: The fund will be fully invested, 80% allocated to bitcoin, Ether and Litecoin, 40%,30% and 10% respectively. These were selected based on future potential at this time. It is a buy hold strategy that can rebalance quarterly if we choose. By being buy/hold we receive favorable tax treatment in Canada. By using this structure, we can keep fees very low and this is what family offices and institutions are interested in. The balance will be allocated to more active crypto managers that have different types of exposure in the crypto and ICO space.
BC: Switching to risk exposure, how will 3iQ handle the upcoming SegWit2X fork?
FP: The fund will actually be closing after the hardfork. We will discuss with ARK-Invest who are consultants to the fund.
BC: In a hypothetical situation in which the upcoming fork – or any future fork for that matter – yields a “crypto-dividend” just like the BCH fork did, how will you handle the dividend?
FP: As long as it is supported by our custodian, we are happy to hold. The future is a long time and we will obviously be following the success of these chains and also others.
Investment in the Fork
BC: Will 3iQ become an automatic investor in any new altcoin that comes out of a fork or will you sell and re-invest in one of your 3 chosen underlying assets?
FP: Each situation will be reviewed independently.
BC: Given all these risks, how do you think the market for this kind of fund will develop over the next few years?
FP: Cryptocurrencies are out of Pandora’s box and I firmly believe are here to stay. If the evolution of these assets turns into one of the greatest technological innovations of our time, innovative investors and their advisors have no choice but to, be informed, be prudent and cautious but… participate.
BC: What do you think about the possibility of a Bitcoin ETF being approved by a major regulator in a leading financial market?
FP: We have some serious concerns of an ETF functioning correctly and orderly until the futures and options markets mature and able to handle the kinds of volumes that would be generated. We would most likely throw our hats into the ring but we believe there are other structures such as this one that satisfies the initial interest.
Institutional Investment and Cryptocurrency Trader Experience
BC: There is a wealth of knowledge on the topic of cryptocurrency trading, but most of it comes from non-accredited, unregulated investors – some of whom remain anonymous. How can you integrate their experience into your operations?
FP: Granted, I am an old dog learning a new trick, I think Jameson Lopp said it best, “First step to understanding Bitcoin: Admitting you don’t understand Bitcoin
Final step: Realizing that “understanding is a moving target”
BC: Switching to other investment possibilities in the world of cryptocurrency, how do you feel about the possibility of creating derivatives for this market? What do you think about investing in other sectors within the economic cycle of the 3 underlying digital assets that 3iQ selected – mining or even in utilities (electricity)?
FP: I believe derivatives will become a very important part of this market. There are significant operational issues that have to be settled, let alone the regulatory challenges, but I always have embraced progress. We are taking one step at a time right now, but we believe the opportunities in this space right now are endless. We must focus on what we do best which is structuring product and educating our potential investors.
The ICO Market and its Effect on Underlying Asset Prices
BC: What do you think about the ICO market, given that it has such an influence on Ether prices?
FP: I know many players in this space and suffice it to say, the wheat will one day be separated from the chaff. The brain power invested in the ICO space is very impressive. Which use cases come to fruition, only time will tell.
Decentralized Autonomous Investing
BC: Do you see the possibility of an investment DAO developing in the near future? What do you think about this idea?
In my time I have seen many changes in the capital markets and exchanges. We have already come a long way from open outcry and there is no reason to believe that more changes are to come. A DAO eliminating cost and the middlemen makes sense to me but we are far from there I believe. Most likely we will see this happen first in an emerging economy and everyone will be closely watching.