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Investment Strategy & Risk Management
We have a continuous flow of investment proposals. For projects that grasp our attention, we dive deeper by looking at and assessing specific attributes such as the team behind those projects and their relevant experiences, previous accomplishments, the team’s technical expertise, the leader's vision, and more. We also consider other aspects such as who the backers and investors behind a particular project are.
When evaluating a project’s competition, we look at the project’s defensibility factor which indicates its core competencies for things such as how easy it is for other protocols to fork (i.e. copy) the project and develop better features and utility, users’ switching cost, how vulnerable the project is to vampire attacks (attempts by competitors to steal the project’s users), the project’s market share, time in the market, the protocol’s liquidity, product or service efficiency, its network effects, and other factors that represent barriers to entry.
Crypto assets are valued differently from non-blockchain-based businesses. There are certain evaluation metrics that are specific to this asset class. This includes the total value locked, the use of a project’s token as money, and tokenomics, which refers to the supply and demand dynamics of a token on the blockchain. Other metrics include what the tokens represent, the utility (if any) behind those tokens (token usage), the voting power (if any) of the tokens, the supply schedule (including whether this is fixed), whether the tokens are inflationary or deflationary, the issuance and burn cadence of the tokens, and the token distribution. More traditional metrics do exist as well and we look at those too, including market cap, project maturity, protocol revenues, price to earnings and price to sales ratios, the multiple at which the token is trading at, the number and concentration of unique addresses that hold the token, trade volume which the protocol processes, number of daily active users, growth rates, adoption rates, and the size of the treasury.
We operate the fund fully on-chain which offers various benefits such as the range of tokens available to invest in and how we can interact with DeFi protocols. For instance, Coinbase has approximately 73 million users but less than 100 tokens. Binance has over 30 million users with over 500 tokens. FTX has under 10 million users with less than 500 tokens. The majority of crypto owners worldwide hold their limited range of assets on these centralized exchanges while less than 10 million people are active on-chain using self-custody software and hardware wallets. There are over 20,000 tokens in issue but as demonstrated above, only a small fraction is available for the retail investors to trade on centralized exchanges. In contrast, we invest in some crypto assets using decentralized exchanges before these assets become available to the masses when they are listed on centralized exchanges. As you can imagine, this offers massive potential as we can get our hands on crypto assets using methods that are still considered complicated to the majority of the crypto asset holders using CEXs.
Most importantly is for a token to fit in our overall investment strategy that operates on a long-term investment horizon. We strive to maintain a well-balanced, risk-managed portfolio that is allocated across the various crypto industries and risk levels.
DeFi Activities we engage in
- Liquidity Mining: We will participate in providing some of our crypto assets into various liquidity pools to earn a share of the revenues generated from the protocols hosting such liquidity pools, the most commonly being Decentralized Exchanges. Click here if you would like to learn more about what liquidity pools are and the role liquidity providers play.
- Yield Farming: We look for the most attractive and sustainable returns across different blockchains and decentralized finance protocols to earn a yield on some of our holdings.
- Options Vault Strategies: We employ covered calls and puts options strategies to earn a yield for selling potential upside or downside of an asset we hold.
- Airdrop Farming: We actively look for potential token airdrops that will be profitable. An airdrop is when a blockchain based project issues a token and distributes that token to early adopters of its product such as using a trading platform. Some crypto airdrops have proven to be very profitable giving users 7 figure rewards.
The areas of crypto that we invest in include
- Layer 1 Blockchains Layer 1
- Layer 2 Blockchains (Scaling Solutions)
- Blockchain Infrastructure: Bridges, Storage, Compute & Oracles
- Defi (decentralized finance) Protocols
- GameFi (Gaming meets finance) Apps
- DAOs (decentralized autonomous organizations)
- Social Tokens
- NFT (non-fungible tokens) Infrastructure
- NFT enabled services (but not PFP or JPEG NFTs)
- Any other applications that will emerge and that make sense to us and leverage the blockchain technology.
There are two types of risks associated with cryptocurrency trading, i.e., systematic risks and unsystematic risks. The systematic risk is present in all cryptocurrencies because it is inherent in the crypto markets. Unsystematic risk, which is particular to a single crypto asset, could involve a change in the company's fundamentals.
- Regulatory Risk: Crypto is still in its infancy so there still are a lot of uncertainties surrounding its regulatory environment.
- Market Risk: This includes factors that impact the overall market sentiment arising from shifts in market sentiment due to change in interest rates or the overall economy trajectory
- High Volatility: Crypto is considered a very volatile asset and it is not uncommon to see sudden shifts in market sentiment that can result in significant and rapid price movements.
- Risk of Hack: Hackers are becoming very creative in finding new ways to hack into crypto wallets such as phishing and ransomware attacks
- Smart Contract Risk: This type of risk exists in smart contracts that contain bugs that haven’t been exposed yet
- Human Error: Sending funds to the wrong address will not be possible to retrieve the funds
- Impermanent Loss: The risk that liquidity providers take in exchange for fees they earn in liquidity pools. This happens when the price of the deposited assets changes compared to when the assets were deposited resulting in a loss in value compared to value appreciation in case the liquidity provider were to hold the same pair of assets. Click here if you would like to dive deeper into this subject.
- Risk of Liquidation: Losing a collateral as a result of a decrease in collateralization rate below the required level.
- Rug Pull: The risk where crypto developers and founding teams abandon a project and run away with investors’ funds
We take the following measures to minimize the risks involved with crypto trading:
- Multisig Safe: The funds are stored in a vault. The vault is a shared wallet that is controlled by all three partners. This minimizes the risk of hacks and transaction mistakes since any transaction must be approved by more than one person. For example, if a hacker was able to hack into one of the partner’s wallets, they wouldn't be able to steal any of the funds as any transaction would require the other partner's approval as well. Another example is that transactions get to be double checked before executed which also minimizes the wrong transaction being executed. We use Gnosis Safe Multisig wallet which is used by the leading protocols in the crypto industry and currently has over $107 billion worth of assets stored in such safes.
- Diversification: We believe that diversification is the number 1 rule of investing so we strive to diversify, not only in terms of the number of tokens we invest in, but also across different chains, industries, etc.
- Cash is King: We always maintain a certain level of cash in our portfolio to take advantage of market downturns and avoid the need to sell assets for cheap during turbulent times.
- One Sided Markets: To avoid the risk of impermanent loss in the case of liquidity mining, we only participate in single sided liquidity pools or in stablecoin pairs which eliminates the risk of impermanent loss.
- Hedging Strategy: We engage in options vault strategies by selling covered call or put options that delivers sustainable yield
This is a highly indicative representation of how our portfolio allocation will be split amongst the different risk levels. We will continuously calibrate to stay within those range, however, 3GI maintains the right to change this split at any time.
- Risk Level 1 (Low): 25-35% of portfolio – this will include tokens that are well established, such as Ethereum and Bitcoin, and have a lower risk level with an assumed lower potential returns than other tokens.
- Risk Level 2 (Medium): 30-40% of portfolio – this will include tokens such as Uniswap and Fantom that are established and considered mid-level in terms of risk and reward.
- Risk Level 3 (High): 20-30% of portfolio – risky bets which are considered moonshots offering massive four or even five-digit gain potential.