Digital Assets Investing with an Institutional Risk Management Mindset

[Digital assets, like most emerging asset classes, have been on an inexorable march through fits and starts, scandals and successes, to be acknowledged and accepted as a legitimate financial asset class and major positive disruptor for many industries across the planet. Through the trials, tribulations, and noise, a very strong pattern of maturity has been forming with experienced players and leadership from other industries pushing the blockchain and digital assets industry into the mainstream. They are addressing the pitfalls and where the strategic focus and legitimate needed investments in this industry need to be centered to propel it forward.

To learn about the evolution of investing in blockchain and digital assets as a legitimate asset class, we spoke with Ruairi Hanafin, PhD, Chief Investment Officer, Jim Hwang, CFA, Chief Operating Officer, and Jay Vyas, CFA, Chief Strategy Officer of Firinne Capital – an investment firm with a vision to create a trusted investment space to bridge the gap between the emerging world of digital assets and traditional finance. Their name Firinne is Gaelic for “truth” which they chose to emphasize that digital assets are underpinned by the immutable truth of blockchain technology.

Their Firinne Liquid Digital Assets Fund provides its Limited Partners the opportunity for capital appreciation and income generation by investing primarily in a diversified portfolio of digital assets. Their investing strategy and research offers a unique combination informed by the experiences of early and ongoing digital asset adopters with the disciplined, measured hand of institutional investment management expertise. Recently winning the 2024 Hedgeweek Award in performance in the Directional Fund (1+ Years category), their goal is to ensure every investor has the opportunity to be part of this groundbreaking revolution and generational growth opportunity in blockchain and digital assets.]

Hortz: What exactly is the generational growth opportunity in digital assets?

Jay: Jim and I have been in the institutional investment industry for three and a half decades. We have seen that every 10 or 15 years something comes along, either a new technology, which could be a new industry, or a new risk premium that eventually becomes part of the investment landscape, occupying a space that did not exist previously. The people who recognize it and invest in it early have an uncommon opportunity to reap exceptional returns, but nothing is ever a straight line. Everything has risk.

The internet had a huge ramp up in the 1990’s and then a crash. But, if you look at where it is now, it has become ingrained in everything we do to the point that would have been inconceivable to people back in the 1990’s. That is an example of a type of a once-in-a-generation opportunity for participation. We will use the language of modern finance and call it an emerging risk premium. But you could call it a new technology that becomes an industry. And that is what we are seeing here with digital assets and the underlying technology called “blockchain”.

With the early internet era you could buy internet-based companies, but you could not invest in the underlying plumbing. What is really fascinating about this period of time we are in with the blockchain and digital assets is that you can invest in the underlying blockchain technology as well as the digital  projects that sit on top of it. This is actually novel in terms of investment opportunities.

Blockchain technology is not going to go away. It is a technology that has myriad uses in banks and insurance companies, in payments, in digital identity, and that is barely scratching the surface.

Hortz:  Why are you so confident about the growth of this new technology and investment risk premium? How do you see blockchain and digital assets will be accepted and deployed?

Jay:  There is a growing mainstream acceptance of digital assets as an investment choice in a global portfolio of risk assets. As a recent example, we have seen large investment organizations releasing digital asset investment products like Bitcoin ETFs. Ten years ago, investing in digital assets was a high-risk proposition or venture capital opportunity. Exact figures are hard to pin down, but we have seen some surveys that indicate that the percentage of people who own crypto now is not far from the percentage of people who own dogs. Suffice it to say, crypto is becoming more and more mainstream.

So blockchain and digital assets went from an anarchist or libertarian tool to a multi-purpose technology with great utility in many areas. Look at the idea of smart contracts on the Ethereum and similar chains. They allow us to do things that we could not do before, such as creating autonomous organizations. These growing applications give you the sense that this will be lasting. Regulations are also moving in a positive direction, and governments are talking about adopting digital assets as reserves. This all points to increasing stability or the fact that this will remain in the landscape of investment options. It is well beyond just a flash in the pan.

Ruairi : Just a little bit extra on those points. Looking at a chart of the market capitalization of crypto over the past decade or more, you can see it growing through orders of magnitude every couple of years. If you look at what the total addressable market growth is, crypto may start becoming commonplace with regular usage and adoption of stable coins and other applications. If you just continue that trajectory on that Market Cap Chart, you can reasonably imagine where it could go over the next decade or two. There is plenty of room for growth, I would say.

Crypto assets market cap, as of 13-Mar-2025. Source: CoinGecko

Jay: There are plenty of new application ideas where people who are issuing bonds or offering custody are saying, Hey, we can replace our existing process with something on a blockchain, and it’ll be more reliable. It’ll be immutable. It’ll be more secure. That is all true. There is a growing interest of replacing what we do now operationally with something that uses a blockchain.

What is more exciting is that we also have a new generation of young people who will grow up not knowing a world without blockchain. They will come up with ideas for projects that somebody my age would never have conceived of, and it is those innovations that can be supported and be brought to fruition to reality by the blockchain and by digital assets. This is a key driver that led us to move from TradFi to digital assets. There is a certain amount of optimism in what we say. We will be honest. But the blockchain and digital assets have definitely grown from a fringe tech idea to a mainstream technology   whose impact is just beginning to be realized as well as a legitimate investment option.

Hortz: How exactly does your asset management firm combine the blockchain and digital asset innovation experience with an institutional investment management perspective?

Jay: Jim and I have been in the institutional investment management space since the 1980s, and we have managed significant AUM at Barclays Global Investors, say north of $80 billion in actively managed strategies, and at the CPP Investment Board with $24 billion in global market neutral portfolios. When you are running money in these types of sophisticated organizations, you are always thinking about risk management from all angles – operational risk, investment risk, counterparty risk. Relative to the exciting growth and development of the crypto space, risk management seems really quite boring, but it is critically important in institutional asset management.

With our team, each member has institutional investment management and crypto experience. That gives us a unique perspective. Jim and I have seen a million things that can go wrong in investment management, and Ruairi, who has a long history in the space, has seen all the bumps and crises on the rise and implementation of blockchain and crypto. Compare this to managers who only have experience since the global financial crisis where markets have basically gone up, or to people who jumped into crypto just a few years ago.

We have also all worked together before at a global investment firm and have risk management in our joint DNA. We perform a lot of due diligence on what we are going to invest in and who our partners will be, which has already helped us avoid major blowups in crypto like FTX and 3 Arrows Capital. In short, we are very skeptical in our investment selection process and sensible in our execution.

Ruairi: The funny thing is our performance – for all its defensive and institutional risk management approach – has still been in the top bracket of performance in our investment space of crypto and blockchain. I think the key to this space is that you know you are in a space that is developing and rising exponentially. It is very important not to take excessive risks to try and boost performance by a few percentage points. There are a lot of options to reach for short-term performance which generally have worked out poorly.

Jim: Let me add that our focus is on what we call informed risk taking. One of the things we talk about, when we think about investing is What is the investment horizon needed to realize investment returns? This is particularly important to us. As Jay mentioned, when we came into the crypto space, we saw other investors that were focused on the really short-term horizon. I am referring to orders of magnitude of within one to a couple of days. These managers were looking to arbitrage the pricing inefficiencies among the different exchanges. But, by doing so, they were not focusing on the long horizon returns that one can capitalize on – looking for Who are the builders of this new infrastructure? Who is laying down the pipes? Who is building the useful applications? So that is a competitive difference in our thinking, and how we are considering investment decisions.

Given this starting point, we then attempt to add to alpha by also capitalizing on short term inefficiencies. This is something we bring over from traditional finance where you actually layer different strategies together to form a complete portfolio. That becomes a form of diversification and risk control across different time horizons. It is not clear that a lot of people in crypto investing think about horizon diversification.

Hortz : Another component of your management style is to manage the portfolio to generate some income. Can you explain your strategies for yield enhancement?

Ruairi: There are a number of ways in crypto to generate yield on assets and boost returns. One of them is participating in what is called staking. It is essentially the consensus mechanism for these blockchains which we participate in. Another is called liquidity provisioning which is basically supplying assets into automated market makers. We participate judiciously and carefully in some of these activities. Let us just say, via these types of mechanisms, we are making more efficient use of our portfolio’s capital. We are managing the liquidity aspect of the portfolio. It is a form of multi-dimensional management, looking at all different aspects of the portfolio.

Hortz: What is the backstory on the benchmark you chose?

Jim: Related to traditional investment management, we brought an index into the picture so our fund can be compared to a market benchmark, and we can aim over time to beat that performance. The Bitwise 10 Large Cap Crypto Index represents a capitalization-weighted index that tracks the largest crypto assets including established giants like Bitcoin and Ethereum, as well as some up-and-coming assets. The benchmark has 10 names, but we can invest in names outside the benchmark. We typically stay to the largest 50 or 100 names in the crypto space. Remember for context that there are millions of tokens available for investment. Our universe is going to be the largest and most-in-play names that will comprise 80 or 90% of the portfolio. We use the index as a guide, not a constraint.

Ruairi: I think the point is that we wanted to choose a benchmark that we felt was as fair as possible, and given that Bitcoin and Ethereum together represent well over 50% of the entire crypto market cap, we picked one that gave us relatively broad market exposure. We believe that the crypto market is one of the most inefficient markets that we have seen in our careers, and we want to take advantage of that for our investors. I personally would never passively invest in a market cap weighted index in this space. I think you can, in the long run, do quite a bit better than passive investing in crypto.

Hortz: How would you explain to advisors and asset allocators your differentiated value proposition?

Ruairi: We are a conservatively run fund in a space that is anything but conservative. It is a rapidly evolving technology and asset class that is appealing by offering a generational investment opportunity as we discussed, but there are concerns and fears in the back of many investors’ minds as to the growing pains and abuses of some players they read about along the way. Investors need to know that the high-profile collapse of FTX was not a digital assets issue. It was good old-fashioned fraud that we avoided with our thorough due diligence and risk management processes.

That is an important aspect of our value proposition that our combined investment expertise from crypto and institutional expertise will not allow us to swing for the fences, because sometimes in this space, if you swing for the fences, you might have the ball just come up and smack you in the face.

We are the tortoise in the “tortoise and the hare” race. It is a dynamic and evolving space, but we remain humble, and we remain diligent. We clearly have far-sighted vision of where the technology and asset class opportunities can take us, but we carefully look out for excesses and traps along the way. Our differentiated approach backed by two dimensions of management – crypto and institutional investment expertise – is what we feel will help our investors be able to participate in this generational investment opportunity.

This article was originally published here and is republished on Wealthtender with permission.

About the Author

Bill Hortz

Founder Institute for Innovation Development

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.