Institutional Investment: Due Diligence For Cryptocurrency
Institutional investors carry strength to influence the market. The non-monopolistic nature of this currency has truly swept the market. With individuals devoted to adding digital assets into their portfolios and the maturity of the crypto market, it is inevitable for institutional investors to dive in too. Expansion of the digital asset market and the availability of extensive tools to aid such trade have made it convenient to begin participation in the cryptocurrency world. User-friendly apps and tools are readily available to track investments and their performance.
With great power comes great responsibility, rightly said. Institutional investors can influence the market greatly and also the individuals whose contribution to their funds has enabled them. Thus, comes the delicate task of examining the opportunities and carefully designing a trading strategy to invest in the cryptocurrency-based digital asset market.
Where to begin
The foremost requirement for institutional investment agencies is to have a pragmatic shift in the process of determining investment opportunities and performing operational due diligence for digital assets. Though the crypto market has been maturing and has begun to trade in tighter bounds there still is a long way to reach the stability and predictability that traditional stock markets have achieved. It is important to understand and worth stressing that an investment in cryptocurrency is, by all means, an investment in the technology underlying it.
Expand Mind Power
As the traditional market functions differently, there is a requirement to involve experts with functional knowledge of the decentralized finance world. These might be visionaries, analysts, or owners of blockchain-based asset creation firms. Include in your team, people who understand blockchain technology, people who are aware of the trends and trading intricacies involved with investing in digital assets, people who understand portfolio diversification along with stakeholders and decision-makers who can take the call on how much and when to put into the market.
These people should be able to decipher the tax implications that would come with the gains through the crypto market and the volatility of this still naive technology. Analysts need to be enabled to monitor market signals and notice red flags to make strategic investment decisions.
Devise a Digital Asset Investment Strategy
Capitalizing on the volatility of the market is a great strategy here. A few things need to be clear before any decisions can be made on investing in the market. These include:
Percentage of Capital Investment
Based on the goals of investment in the crypto market. It has to be concluded what percentage of investment will digital assets comprise. Ideally, it is anywhere between 2-5% in the portfolio for opening your investment portfolio to cryptocurrency. There is no such rule though, there have been multiple cases of putting more than 50 % of their investment into crypto by huge companies. There are institutional investments with digital assets comprising above 90% of their portfolio. The percentage and the distribution of investments are dependent on the experience and comfort of the strategizing team with cryptocurrency.
Where to Invest
Digital assets include cryptocurrency, NFTs, DeFi, blockchain trading platforms et all. As mentioned above, cryptocurrency investment is an investment in the underlying technology and technology has never been devoid of expansion opportunities. When it comes to categorization there are broadly 3 ways to invest in crypto: A direct investment in currency, buying tokens during token sales and HODLing them, and investing in the digital commodities that trade using cryptocurrencies. It is at the discretion of decision-makers to invest in one or more forms based on the goals of investment.
When to Invest
Buy low sell high. Holds pretty much here too but is to be applied in a slightly different manner. The cryptocurrency market experiences bear and bull phases independent of what is going on in the traditional market. Any institution needs to have a dual strategy to be able to make the best out of bear and bull runs of their holdings. Also, it is not influenced by local policies and financial decisions. Being a global market, running 24x7x365 it is always on iteration and is impacted by global phenomena. It is to be carefully monitored consistently to infer the apt time to invest for maximizing gains.
Perform Due Diligence
Much like due diligence in the traditional market, cryptocurrency involves some common parameters to be analyzed before investing. As obvious, only people aware of technicalities will be able to perform effective operational and investigative due diligence. Here we have elaborated on the essentials to be taken care of before investing in the cryptocurrency market. Layered diligence needs to be performed to have an all-around evaluation to make investment decisions.
As there are three ways to invest in crypto, due diligence has been elucidated individually.
Due Diligence for Direct Investment in Cryptocurrency
The foremost requirement is to pick an exchange and set up an account for trading.
- This involves understanding the blockchain technology and evaluating it for its capabilities to have a true decentralization of the assets. Asset decentralization is dependent on demographic, architectural, commercial, and contractual policies of where the currency is held.
- Assess the maturity of security features of the blockchain. How effective and experienced the security management team is at the exchange directly impacts how vulnerable your assets will be to any kind of security threats.
Next is to decide the currency you want to buy or invest in, as it is the ultimate showrunner for your portfolio.
- The smart contract and the white paper are key factors in understanding the efficacy of the currency. If the currency is released as a token, the associated project, its prospects, and the team working on the project should be taken into consideration and critically analyzed.
- Again, how well planned and executed the security mechanism behind the currency and the underlying blockchain architecture is, remains a primary concern.
Look for storage solutions for your assets
- Currency can be stored in individually owned wallets, third-party managed wallets, and a hybrid system in which a two-part key is used and held partially by both the individual and the third party involved.
- Self-storage amounts to cold storage and is only as secure as the private key with the owner.
For storage solutions supported by the exchange, its security and private key storage mechanisms shall be evaluated technically for immunity levels towards hacking attacks.
Understand the Liquidation Process and Capacity
- As institutions enable liquidity generation and security, institutional investment is expected to be liquifiable. Institutions need to carefully examine the liquidation facilities provided by the exchange. The delay, the lower and upper limits, the liquidation repercussions, all need to be considered before making any decisions.
- Ensure that locking periods if any are taken into account, funds might not be liquidated or even transferred in some cases for the locking period.
- Being a highly volatile and still a disparate infracture of technology it is based upon, liquidity is not going to come easy for cryptocurrency. Hence, the institutions need to accommodate non-liquifiablity per-se into their portfolio
An instinctive lookout for any signs of similarities with the renowned crypto scams will be of great help in spotting the obvious red flags.
- Analyse the cryptoscams of the past. You actually do not need to analyse just look up through reliable crypto information resources on the internet.
- Observe the common traits and failure causes to spot “bound to fail” or “questionable” characteristics.
Most often than not, seasoned crypto analysts are able to spot inconsistencies and vulnerabilities through experience and knowledge of past success and failures.
Last modified on July 26th, 2023 at 2:59 pm