Many crypto firms and blockchain startups, especially ones who have run an ICO, have a unique position compared to non-blockchain firms: they are sitting on a large sum of liquid assets. In fact, the average successful ICO raise in Q1 2018 and Q4 2017 raised more than $20m USD.

That’s great news, but there’s one problem: most teams hold their treasuries in 100% Ethereum or 100% fiat currencies—neither of which are optimal for a crypto firm.

Here’s why:

Holding 100% Ethereum doesn’t make sense

With a treasury fully allocated to ETH, the company war chest is subject to extreme risk, volatility, and potential loss of capital. It’s not smart to be fully allocated to a single asset in any space, and this goes tenfold for crypto. While it’s laudable to offer transparency to project supporters and support the blockchain space by keeping funds in ETH, it’s not good treasury management. If you raised $10m in fiat from a VC, you wouldn’t buy $10m worth of Ethereum with it, so don’t stay allocated in ETH simply because you raised with it.

Holding 100% fiat doesn’t make sense

Similarly, a 100% fiat allocation seems not only too conservative, but also philosophically at odds with building a firm in the new digital economy. With an intelligent investing strategy, the a crypto firm may never need to fundraise again. To be focused 100% on the business and not worried about fundraising is an incredible luxury for a young firm, and one that many startups would kill for. While we believe it’s very sensible to have cash in your war chest (at least 2-4 quarters of runway), we don’t believe it serves the teams or the ecosystem to pull 100% of their capital from the blockchain space.

Basic crypto indexes are not an option

A cap-weighted or equally-weighted index of top cryptoassets is not much less volatile than Ethereum itself. While indexes address the diversification problem of a 100% ETH allocation, they fail on the volatility front. Having a tiny slice of a company treasury in a crypto index may be reasonable, but it’s not a fit for a large allocation because it’s not actively managed to avoid major drawdowns. It’s a nonstarter to lose upwards of 50% of your company assets in a bad quarter, which can easily happen with an index strategy in this space. Based on SEC Form D filings, it seems likely that more than 75% of Bitwise Index investors lost at least 40% of their assets, as of November 15, 2018.

Better options exist

Actively managed funds with a defensive approach are best-aligned with the needs and values of a young crypto firm. Again, we don’t recommend investing 100% in any single fund or asset, but deploying a portion of the treasury under this strategy can yield the best mix of risk mitigation and total returns for a company war chest. We are, of course, biased and believe our approach is the strongest here, but there are other options. Many teams aside from ours have identified ways to avoid bear markets and protect their investments. If a firm keeps some of its funds in crypto (as we believe they should), it’s critical they utilize a strategy that reduces downside risk.

Returns of the member of the manager of the general partner of Esoteric Capital, unaudited. Figures and charts are purely informational and does not constitute an offer to sell a security or asset of any kind. For detailed materials, please contact us directly. None of the information on this page or website constitutes investment, legal, or tax advice. No representations or warranties of any kind are made or intended, and none should be inferred. More disclaimers

The Bottom Line

  • Don’t risk your company’s future by staying undiversified in a single cryptoasset like Ethereum.
  • Don’t waste time trying to actively invest with your company’s war chest—focus on building your company.
  • Don’t miss out on the upside of the crypto asset class or by going 100% to fiat—you’re in the blockchain space for reason.

If you have raised a decent-sized war chest, you have a duty to your team and project supporters to invest it intelligently. Get it right, and you may not have to worry about money again. If you want to learn more about options for treasury management, get in touch.

Content on this site is provided purely for informational purposes only, and does not constitute investment, legal, or tax advice. No representations or warranties of any kind are made or intended, and none should be inferred, about the performance of any asset, product, service, or provider referenced here. Esoteric makes an effort to provide accurate information, but we cannot and do not guarantee the accuracy all information provided on the site or other content produced by Esoteric Capital Management LLC and its affiliates.  More disclaimers