With the coronavirus health and wealth crisis disrupting traditional investments in a fractured world, the virtues of the decentralised digital cryptocurrency are becoming attractive, but how can family investors get onboard with confidence?
CampdenFBput some of the key questions families have on crypto—issues of risks, rewards, trends and security—to Patrick Lowry (pictured left), chief executive and managing partner at Iconic Holding.
“Our research, conducted together with our academic partners at Germany’s leading finance education institution, the Frankfurt School of Finance and Management, indicates that even just a 1% allocation to crypto, rebalanced monthly, from a standard family office portfolio, would have yielded a Return on Investment double that of the standard allocation over the past five years,” Lowry said.
What personally and professionally inspired you to venture into cryptocurrency and launch Iconic Holding with Maximilian Lautenschlager (pictured right), co-managing partner?
The inspiration for Iconic came from my time working on the VC team at Deutsche Borse. We were investing into early-stage blockchain companies that had strategic value for the Borse as one of Europe’s leading stock exchange operators. Drawing on this inspiration, I reached out to my MBA colleague and friend, Max, and together we launched Iconic Lab as an early-stage crypto VC and accelerator.
Iconic Lab was and is wildly successful, however, some of our larger investor groups wished to have exposure to blue-chip crypto assets, such as Bitcoin and Ethereum, but did not know how to invest. Given my background as a PwC auditor of such clients as Vanguard and Blackrock, I suggested we launch an index fund group for crypto assets. Together with Christian Angermayer and Mike Novogratz’s Cryptology Asset Group, we launched Iconic Funds to create investment vehicles for investors to gain passive exposure to the growth of crypto assets.
Iconic Holding became the rebranded name of the parent company of Iconic Lab and Iconic Funds.
What is Iconic Holding’s USP in the crowded crypto market, why is it the underdog?
Iconic has always been a first-mover, whether it be by entering the blockchain VC space early or by becoming Europe’s first fully-licensed and regulated crypto index fund provider. We further cemented this position by filing a prospectus for a Bitcoin Exchange Traded Note, which if approved, would be the world’s first Bitcoin ETP to be admitted to a Regulated Market.
However, our true USP is our traditionalist approach to crypto asset management. Iconic does not want to push its own arbitrage or long/short strategies like most crypto asset managers. Rather, we focus on educating investors on the merits of crypto as an asset class that every investor should have a small allocation to. To facilitate this, we have built institutional-grade investment vehicles that offer passive and diversified exposure to crypto, providing investors the quality assurances they deserve from a world-class asset manager. Further, we aim to be the cost leader, with even our planned Bitcoin ETN earning no management fee for at least the first year of its existence.
What is the biggest myth about cryptocurrency that needs debunking?
The most prevalent myth behind crypto assets is that they have no underlying value and are purely for speculative traders. Nothing could be further from the truth.
Take Bitcoin, the most well-known cryptocurrency, for example. Bitcoin is the world’s hardest money. While the technology behind it is not yet scalable to facilitate micro-payments, Bitcoin is currently the fastest and cheapest manner to transfer large values between two counterparties, and it is done without a bank or intermediary. Coupling this with its inherent deflationary nature (only 21 million will ever exist), it is easy to see where Bitcoin derives its value from. In fact, Bitcoin can easily be modeled and priced using its stock-to-flow ratio, similar to other commodities, as highlighted in the following article: Modeling Bitcoin's Value with Scarcity.
The other biggest misconception is that people can create new cryptocurrencies, like Bitcoin, out of thin air. While technologically possible, a cryptocurrency is only worth the trust people place in it, similar to fiat currencies. To compare, a paper dollar does not inherently have value, but the ecosystem around it and government backing make it trusted, and thus, valuable. Similarly, the cryptographic technology and mathematics backing Bitcoin make it trusted by its community, and thus, valuable.
How is cryptocurrency performing during the coronavirus pandemic—will it make or break the digital asset?
Make no mistake, 2020 is the year Bitcoin validates itself due to the economic fallout of Covid-19 pandemic.
Historically, Bitcoin and crypto as an asset class, is uncorrelated to traditional markets. While there are short bursts of correlation, such as in March during the immediate market effects of the pandemic, crypto has historically proven itself as non-correlated asset class for over a decade.
Further, as I touched on earlier, Bitcoin is the world’s hardest form of money. This is in contrast to central bank issued fiat currencies, such as the dollar, euro or sterling, which are “soft money” due to their ability to be infinitely printed by a central authority. As trillions of fiat money is printed to combat the economic crisis to artificially inflate the economy, it will inevitably fall victim to inflation.
Bitcoin is uniquely positioned to combat the economic and fiat fallout due to its hard, deflationary nature. Wise investors use such assets as hedging instruments when constructing their portfolios.
For anyone interested to learn more in detail, I recently wrote an article which details the opportunity Bitcoin has in 2020: Bitcoin's Perfect Storm.
What are risks and rewards for families investing in cryptocurrency?
Before investing into crypto, I always recommend everyone to thoroughly research the topic and inform their own thesis. You should understand what you are investing into before jumping in into anything, but this is especially true of crypto.
Crypto is a very nascent technology with immense upside and risk. Because of this, you should treat it very similarly to a venture investment where you are fully prepared to lose your entire investment. This is why we recommend only a small portion of any investor’s portfolio be allocated to crypto, and that you enter for the long haul, rather than to “get rich quick” as some would have you believe crypto has the ability to do.
The upside, however, is longterm exposure to a non-correlated, deflationary asset class that acts as a premium hedging instrument in any portfolio. If properly managed, a crypto allocation may ensure the construction of a balanced, well-structured and diversified global portfolio.
How secure and reliable is crypto?
The blockchain itself, through the use of cryptographic technology, is an unhackable, immutable and transparent distributed ledger. While cryptocurrencies are built utilising the indisputable safety of blockchain technology, there are still risks around the real-world management of cryptocurrencies, such as wallet and transactional management, which are exposed to hacks.
One of the biggest issues in crypto is that, when transferring crypto between wallets or storing the assets on an exchange, they are susceptible to be stolen due to hacks, never to be recovered again. This is only a risk if the wallets are improperly managed by individuals or the exchanges themselves. It is imperative that anyone who wishes to invest into and hold crypto on their own is fully capable of managing warm and cold-storage devices, multi-signature wallets and their own private keys. While this is completely secure and reliable when done well, most people do not have the technological knowhow to do so and should rely on a professional crypto asset manager to manage and safekeep their crypto investments.
Where are you focusing your crypto investments at the moment and why?
The data is incontrovertible; every investor should have a small percentage of their overall portfolio allocated to crypto assets.
Our research, conducted together with our academic partners at Germany’s leading finance education institution, the Frankfurt School of Finance and Management, indicates that even just a 1% allocation to crypto, rebalanced monthly, from a standard family office portfolio, would have yielded a Return on Investment double that of the standard allocation over the past five years. Further, the risk-adjusted return on investment for the same allocation in a standard family office portfolio, reflected by a Sharpe Ratio, was nearly double as well, even with crypto’s notorious volatility. Crypto needs to be a part of every investor’s portfolio.
This is why we are focusing our investment thesis in crypto on passive, diversified exposure for all investor types. Our crypto index vehicles allow investors such exposure at industry leading low costs. We want to be the catalyst that drives the institutionalisation of crypto as an asset class, and we believe our indexed investment approach is the best opportunity to accomplish this.
Where do you want to see Iconic Holding in five years’ time?
Iconic’s mission is to bridge the traditional and crypto financial markets. We aim to be the world’s leading crypto asset manager, but we are not just stopping there.
Core to Iconic’s beliefs is that every financial instrument, such as stocks, bonds and derivatives, even funds themselves, will inevitably be tokenised. As the future Apples and Amazons of the distributed economy issue cryptographic shares on the blockchain, Iconic’s ambition is to leverage the same professionally managed cryptocurrency investment vehicles we have for Bitcoin and others today for future tokenised crypto assets.
The marriage of state-of-the-art technology, innovative investment products and uncompromising professionalism places Iconic at the vanguard of crypto asset management, and in five years’ time, we not only aim to be the leading crypto asset manager, but one of the premier asset managers in the world.
What is your message to the Campden Wealth community?
I would just like to conclude by saying how excited the Iconic team and I are to be joining the Campden community! We very much look forward to meeting you at future events and helping educate anyone interested on crypto assets and their value drivers.
In the meantime, please feel free to reach out to us if you would like to learn more about Iconic, Bitcoin or crypto in general. We would be more than happy to conduct a complementary, virtual workshop with you to answer any questions you may have and to share some educational content we have compiled with our research partners. Feel free to book a workshop below or connect with us directly through a Campden representative.
I wish you and your loved ones the best of health in these trying times, and thank you, once again, for welcoming us to the Campden community.
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