FAQ: Digital Assets and Decentralized Finance

Linn Wealth Capital Management has been at the forefront of advising clients on digital assets, and decentralized finance. With Decentralized Finance (DeFi), financial services are shifting away from the incumbent traditional companies like large banks, brokerage, and insurance companies who normally facilitate transactions. There are many ways this can be applied; for example, the blockchain can authenticate transactions, enabling individuals to engage in peer to peer transactions.  Smart contracts are now able to complete a transaction and execute a contract with the terms of the agreement between buyer and seller being directly written into lines of code that exist across a distributed, decentralized blockchain network. Banking is transforming rapidly and having your individual bank on your smart phone is going to be prevalent.  Being able to send fiat currency and digital coins, lend fiat currency and digital coins, and trade digital coins is going to be at your finger tips all without having to utilize the traditional financial companies of the past.

More and more investors are interested in learning about digital assets, so we decided to provide our FAQ

Q: There are many considerations when it comes to these investments such as which coins to purchase, use an active trading strategy or a passive buy and hold, or a combination of both?

LWCM: The potential increase and decrease in value in any coin will be determined by factors such as utility of the underlying technology of each coin, supply & demand, and liquidity of the market.  There are coins that have are being adopted at a faster rate, and seemingly have underlying technologies that look to be more certain. These coins prices have already increased substantially, but will probably continue to have volatility and could posses more upside.   Other alternative coins have had less adoption and posses much more upside and downside as the future utility of those coins are yet to be determined.  Both Active and Passive strategies can be used to participate in the digital asset space, both having their own advantages and disadvantages. We are currently utilizing a passive buy and hold strategy for coins, while evaluating managers and strategies for the active managed approach.  

 Q: Should you purchase them in a brokerage account using a fund, or own the coins directly?   

LWCM: We believe that owning the actual coins might be valuable in time, so recommend direct ownership when possible, however do recommend investing through funds and other instruments when that is not possible.

Q: Do you lend them out to earn interest, and what are the best companies to use based on competitive rates but also safety of the transaction.

LWCM: As with lending securities for investors looking to short the public equity markets, there is also a similar application to coins. We think it is a very interesting and beneficial use case, however, depending on which custodian you use, the length of time your coin is lent out, and the interest % earned changes rapidly. There is also a small but possible risk of not receiving a coin back when being lent out, or at least a substantial delay depending on the platform used and the end borrower.

Q: Do you keep them in a hot wallet, cold storage on a personal ledger, or at a trusted Custodian? 

LWCM: There are reasons to use all types and methods of storage options, let’s first look at a comparison of all three.

Hot Wallet/Online storage provides instant access to your coins, typically used to trade coins, make payments etc. This allows for quick access and allows for quick and easy transactions, however, hot wallets and online storage is more vulnerable to hacking. 

Cold Storage is when the coins are held off line from an exchange. They are less available to be used for a transaction, but also less vulnerable to be hacked. Cold storage can be either on your personal ledger (which is very similar to an external hard drive) that you own, or a Custodian can be chosen to use cold storage for your coins which  has institutional grade storage options. (which is very similar to large servers)  This is the most secure option and many custodians also choose to insure this method from potential loss due to a security breach.

Our preferred custodian partner in this space, Gemini trust company offers both a hot & cold storage. Our clients Fiat are held in the hot storage exchange accounts until we purchase a coin. At that time the coins are then transferred to the cold storage custody account. While some clients like to have their own wallets, there is a risk they could loose or damage their wallets and not be able to retrieve their coins. For that reason, it’s nice to have Gemini’s assurance the coins are safe and insured.

LWCM also utilizes a third part money manager Eaglebrook Advisors, whom adds an additional layer of protection by having certain security protocols like proceeds from a liquidation being sent back to a source bank account at a brokerage company that our firm manages.

Q: Which Custodians are deemed the safest and most reliable and reputable, and which have the best features for trading vs storing?

LWCM: We have vetted multiple partners in this emerging space and found that at this time, Gemini Trust Company, an industry leader, is the best in class solution for our clients. Gemini is a New York State Trust Company and Qualified Custodian under the New York Banking Law. They are aligned with the Federal Financial Institution Examination Councils (FFIEC) and are the world’s first SOC 1 & 2 certified crypto exchange (audited by Deloitte.) In addition, both their exchange & custody accounts are insured by Marsh. The insurance on the exchange accounts are adjusted to match that of of the investments, while the secure cold storage has 200 Million in coverage.

We hope this FAQ has been informative and LWCM will continue to evaluate options for our client’s give advice in this space as trusted fiduciariesWe offer advice as well as solutions that fits the needs of all types of investors, whether it be an experienced investor who has purchased these assets on their own, or first time investors.

Linn Wealth Capital Management is a registered investment adviser.

As with all crypto assets, a complete loss of capital is always a potential outcome.

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