Digital Assets

Digital assets are often framed as “new tech” or “digital gold.” Institutionally, they are underwritten as a high-volatility asset class with unique operational, regulatory, and market-structure risks. The allocator lens is less about narrative and more about whether the manager can control custody, counterparty risk, and liquidity under stress.

From an allocator perspective, digital assets affect:

• portfolio volatility and drawdown risk,
• custody and operational risk,
• regulatory exposure, and
• market structure fragility (liquidity gaps, exchange risk).

How allocators define digital asset risk drivers

Allocators segment exposure by:

• Exposure type: spot, systematic, discretionary, relative value, yield/DeFi, venture-like tokens
• Custody model: qualified custodian, self-custody controls, multi-sig governance
• Counterparty exposure: exchanges, prime brokers, lending counterparties
• Liquidity profile: depth by token, redemption terms vs market liquidity
• Volatility/drawdown controls: risk limits, de-grossing, stress scenarios
• Regulatory risk: jurisdiction, compliance posture, enforcement sensitivity
• Market structure risks: forks, protocol risk, smart contract risk, exchange outages
• Disambiguation: exclude “digital transformation” marketing; require token/crypto evidence (“bitcoin,” “ethereum,” “DeFi,” “on-chain,” “token fund”)

Allocator framing:
“Is this a controlled digital asset exposure with institutional custody, liquidity, and governance—or a narrative-driven risk position vulnerable to operational failure and liquidity gaps?”

Where digital assets sit in allocator portfolios

• small, risk-budgeted sleeve in endowments, family offices, some pensions/insurers (where permitted)
• often split between liquid token exposure and venture-style blockchain equity exposure
• sometimes used as asymmetric optionality rather than core return driver

How digital assets impact outcomes

• can add asymmetric upside but increases drawdown and volatility
• can fail operationally if custody/counterparty controls are weak
• can face liquidity cliffs in stress when correlations spike
• can be dominated by regulatory and market structure events rather than fundamentals

How allocators evaluate digital asset managers

Conviction increases when managers:

• demonstrate institutional custody and governance controls (clear segregation, audits, policies)
• disclose counterparty exposures and manage concentration aggressively
• show disciplined risk management through drawdowns (not only bull-market results)
• provide transparent reporting: exposures, liquidity tiers, leverage, and scenario stress tests
• maintain compliance posture aligned to allocator risk standards

What slows allocator decision-making

• weak custody/counterparty documentation
• reliance on “yield” strategies with opaque smart contract and rehypothecation risk
• lack of stress-regime evidence and drawdown management
• regulatory ambiguity and limited compliance controls

Common misconceptions

• “Crypto is liquid so risk is lower” → liquidity can vanish quickly in stress.
• “Custody is solved” → custody failures and governance errors remain meaningful risks.
• “Yield is yield” → on-chain yield often embeds hidden leverage and protocol risk.

Key allocator questions

• What custody model do you use and what are the controls and audits?
• What counterparties do you rely on and how is exposure limited?
• What is the liquidity profile by asset vs redemption terms?
• How did the strategy behave during major drawdowns and de-leveraging events?
• What is your regulatory and compliance posture by jurisdiction?