How Crypto is Changing
Portfolio Construction 




Often painted with broad strokes, digital assets are more specialized than many investors realize – and becoming even more so. That’s a good thing because it’s the early days of a long-term opportunity. 






Given recent volatility in digital assets, it’s natural to question future opportunities in the space – but regardless of volatility, they’re there. To better understand the potential of what is yet to come in the wide-open landscape of digital assets and blockchain technology in a Web3 context, turn the dial on your time machine just a few clicks to the left and set it on “1990.” Only a handful of people understood what the internet could become. The timely sharing of information relied on fax machines. Smartphones and mobility tied to the internet? Not even a glimmer in Steve Jobs’s eye.  




Today, we’re in the early days of what’s probably a 30-year, multi-decade investment opportunity that is Web3 blockchain technology,” says Peter Buhler, Chairman,and Managing Director EXM Capital. Back in the 1990s, it would have been very difficult to grasp any of the entire industries that would grow from the internet. Whole app ecosystems were yet to be conceived. Today, we’re at the base level of rearchitecting that full technology stack in many ways, and we’re just scratching the surface.”

Many institutional investors – seasoned observers and players of long games – share Buhler’s perspective. Venture capital firms invested more than $33 billion in crypto/blockchain in 2021 – more than all other years combined. In addition, valuations in the space were 141% higher than the rest of the VC space in Q4 2021.1  In short, institutional investors widely believe in the growth of blockchain technology and the space at large, and are backing it up with allocations. Such investments will likely lead to improvement in the quality of the investment process. They may feel that way because they’re already seeing it in, for example, custody. 

“Safety of assets has always been important for institutional investors,” says Buhler . “Over the past five years, custody solutions have significantly improved, not just with bitcoin and Ethereum, but across a lot of mid- and small-cap assets. Hedge funds and venture funds can securely own and provide custody for these digital assets in an institutional fashion. A lot of traditional custodians in the asset servicing world are partnering with crypto-native custodians because they know there’s a need and their clients are asking for it.”






Evolving need for specialization 


A common misperception in crypto is that there’s only really one thing to allocate to and that everything is the same as everything else. In fact, there is considerable segmentation and specialization, much of which results from old-school relationship building.

“Digital assets form a global asset class, and we invest globally, but localized deal flow matters, especially for early-stage,” says Buhler. “We like boots-on-the-ground relationships at an early entrepreneur stage, where you’re really incubating and working closely with the founders, helping them recruit and hire the team. If you’re going to be hands-on, we’re going to be very value-add as a venture investor.” 

Institutional interest in digital assets is likely to increase as the space matures to provide more robust companies to invest in – real revenues on certain equities in the space and in venture investing make it feel more familiar and easier to compare to a traditional valuation framework. This is being seen to some degree as digital assets begin to disrupt other sectors, such as gaming, health, wireless, and data storage. Some non-traditional aspects of the investment process will require adaptation, too. 


“The importance of operational due diligence in crypto and digital assets is very different than with traditional,” says Buhler. “Crypto is a new instrument, so the operational diligence is complex around new providers, trading counterparties, counterparty risk, the instruments being traded and so on. A lot of in-house teams can’t execute the level of operational diligence required in the space, so we are frequently asked to handle that for clients. Investment due diligence and operational due diligence are bifurcated on our team, and have been since the beginning due to the importance of a comprehensive focus on both parts of the diligence process.”

Another area that requires a shift in perception is the context in which risk is viewed. “Institutional investors won’t change the way they bucket risk assets, so you tend to see the teams engaging in digital assets in a similar fashion,” says Buhler. “A venture group that looks at investing in emerging technology, for example, can look at blockchain technology in a similar lens and allocate a portion of their normal venture allocation to the space. That’s been the easiest way for institutions to enter the market because it’s the clearest path – and often, a multi-decade technology iteration maps well to that venture allocation. A hedge fund team focused on absolute return will look at digital assets and question if there’s relative value and might view it as a potential substitute for equity volatility or equity absolute return.”



The net result of this has been increasingly more specialized products for different investor types. For example, a nimble multi-family office with a higher risk tolerance may want to move aggressively into certain parts of the directional market. Larger, more risk averse institutions not only want to bucket risk the right way – they also want to understand volatility and liquidity parameters, among other things. 

“We have a market neutral fund that speaks really well to those that are more risk-averse,” says Buhler . “Our ECF fund is well suited to folks who are okay with a longer duration investment and who don’t want more market risk. We see questions getting more nuanced, and demand for 24/7/365 expertise in this space is super high. Many of our partners look to us as a de facto OCIO in addition to being a multi-management fund manager.








Changing perceptions 



With new investors frequently entering the sphere of digital assets amidst the movement toward decentralized finance, it’s common for investors to wonder exactly when that decentralization will occur. In short, it won’t happen overnight. 


“Societies have been centralized for thousands of years,” says Buhler. “There’s a role for trust and centralization. Not everything needs to be decentralized. We’ll evolve to a Web3 world, but there’s a 2.5 in between that maybe has some decentralized protocols as a base layer with some centralized business models on top that can add a trust layer where necessary. Then process improvement can happen at the protocol layer.”

That sort of insight is pervasive throughout an investment approach that is a broadly diverse expression of the thesis that is crypto and blockchain technology. 


“We’re trying to capture the emerging category winners of the future, maximize the opportunities, and minimize idiosyncratic risk – whether that’s with a single project or a single manager,” says Buhler. “How do we do that? By making high-quality allocations to top crypto venture managers – both emerging and marquee-type managers.”