Crescent Crypto Asset Management is a cryptocurrency investment firm launched in 2017. The firm’s flagship fund, The Crescent 20 Private Index Fund, seeks to provide investors with a vehicle for passive investing in the cryptocurrency space, and holds twenty of the largest and most liquid cryptocurrencies in the space. Co-founder and CEO Ali Hassan began his career at Goldman Sachs, followed by stints at Granger Management and Fairview Capital. Crescent has two other co-founders, Christopher Matta who also hails from Goldman Sachs, and Michael Kazley, who previously worked as an investor and trader at Cedar Lake Capital.
“Towards the middle of last year, we started to see the asset class really grow,” Ali said. “We started to see hundreds of coins being launched and one could truly build out an index of those coins. We built out a methodology that included strict criteria of how a coin can be included in our index and how a coin will be kicked out of our index. The first criteria is market cap. We took a lot of the ideas behind building our index from the S&P500. We use a market cap, but we don’t use a daily market cap.”
Cryptocurrencies are notoriously volatile, and to avoid constant churn as cryptos rise in and out of the top twenty coins, Crescent employees a 90-day trailing average market cap.
“Coins can make it to the top twenty on one day and be kicked out of the top twenty the next day. You’d be constantly buying things if they make it into the index, buying high and selling low,” Ali explained. “We use a 90-day trailing average to smooth out that volatility that is commonly associated with cryptos, and it allows us to have a much less volatile portfolio with much higher Sharpe Ratio.” Crescent looks for coins that have spent the past 90 days with a market capitalization over $500 million, and by the time coins make it into their index, they have a market capitalization of over $1 billion.
The second criteria for entrance into the index is liquidity, as Ali explained. “We’ll look for 30 percent of the coin circulating supply to be exchanged at least every 90 days. We don’t want to see coins where the majority of the supply, the majority of the volume that’s happening is across one exchange, we want to see multiple exchanges, multiple pools of liquidity where we can transact because these exchanges […] are unreliable,” he said. “We want to see a coin that has a relatively high volume as well as that volume being spread across multiple exchanges.”
Ali explained that the Crescent fund is designed to be a pure play on the growth of the crypto industry; with that in mind, the third investment criteria is that coins or tokens backed by physical assets are excluded from the fund, to avoid distorting the index with broader macro trends. “We exclude coins that are backed by any hard assets,” he said. “Things such as the U.S. dollar or gold, […] those are macroeconomic risks, outside of the cryptocurrency ecosystem and the cryptocurrency asset class, those are not risks that we want to take on in the fund. And those coins have historically been the ones that are easiest to manipulate. Any coin that is not subject to the market forces of supply and demand tend to be easily manipulated.”
The fourth criteria for inclusion in the index relates to the unique security concerns in the crypto industry. As the spate of high-profile exchange hacks attests to, holding significant digital assets online presents serious risks. Crescent only holds coins that can be cold stored. Ali explains that they take cold storage a step further then most investors.
“We take a very specific view of what cold storage is,” he said. “We will not hold the coin if we cannot generate the private keys for the blockchain offline, in our own secure offline environments.
“We actually exclude all those coins in the top twenty that don’t meet that cold storage criteria […] no matter how we like them or dislike them, no matter much we want to own a coin or believe in it, if we cannot generate the private keys offline, […] if we cannot protect ourselves and our clients and our investors from being hacked, then we won’t hold that coin,” Ali elaborated. “When you apply all of our criteria to the universe of over 1,500 or so cryptocurrencies that are traded right now and exclude ERC20 tokens, you actually come up with around thirty coins. We […] cap it off at the top twenty, and these twenty represent about 85 percent of the market cap of the asset class.”
When asked about the crypto experience level of investors in the fund, Ali explained that the client base has been somewhat bifurcated; a large group of investors come to Crescent without much background in the crypto space, while other groups tend to have more experience.
“What’s interesting actually is we’ve seen both extremes but not so much in the middle,” he said. “We’ve seen […] those where the conversation will start off with ‘what’s the difference between Bitcoin and Ethereum’” while, on the other hand, “you have people who are actively involved in the space, those who have actually made some money and have participated in it, bought and sold and played around with the infrastructure. They don’t want to commit as much time as they historically have or want to take some risk off the table but don’t necessarily want to sell their assets.”
For these investors who are looking to diversify their digital assets, Ali explained that the fund provides a novel solution.
“They don’t necessarily want to sell it, but they’re looking to diversify. Our Fund is great for that,” Ali said. “We will actually take their crypto holdings. You can give us $250,000 worth of Ripple […] instead of you having to sell them, we’ll take it into the fund as a contribution and we will rebalance the fund and protect the assets and hold it in cold storage on their behalf.”
While a flurry of recent SEC subpoenas to ICO issuers may be a sign of a sea change in attitude, so far the U.S. Federal Government has largely taken a hands-off approach towards the evolving industry. Ali views this as largely positive, saying that the government’s strategy to date has helped encourage innovation in the industry. On the other hand, Ali views some local and state government regulations as having backfired.
“We’ve seen examples of local jurisdictions who have done it hastily and are regretting it now,” he said. “Most notably the bitlicensing fiasco in New York City that has essentially driven a lot of innovation, a lot of talent out of the New York area.”
Ali sees great opportunity for the cryptocurrency industry as the U.S. regulatory environment firms up, believing that many investors are interested in investing in the space, but need clearer regulatory guidance in order to enter. “There’s a lot of money waiting on the sidelines hoping for some more regulations,” he said. “I think as we see those clear guidelines from the SEC and CFTC, and you see the positive data they are putting out the on the assets […], we will see class grow more, see more participation and more interest in the blockchain ecosystem overall.”
With prices in digital assets seeming to have floored up after their decline from their late 2017 highs, and with interest and activity in the industry stronger than ever, the future for the industry looks bright.