March 6, 2022

Risk Management

The nature of investing in crypto and Web3 is considered high-risk (compared to other assets like real estate) given its nascency and the uncertainties around regulations.

Risk-Level Allocation

There are two types of risks associated with cryptocurrency trading, i.e., systematic risks and unsystematic risks. The systematic risk is present in all cryptocurrencies because it is inherent in the crypto markets. Unsystematic risk, which is particular to a single crypto asset, could involve a change in the company's fundamentals.

  • Regulatory Risk: Crypto is still in its infancy so there still are a lot of uncertainties surrounding its regulatory environment.
  • Market Risk: This includes factors that impact the overall market sentiment arising from shifts in market sentiment due to change in interest rates or the overall economy trajectory
  • High Volatility: Crypto is considered a very volatile asset and it is not uncommon to see sudden shifts in market sentiment that can result in significant and rapid price movements.
  • Risk of Hack: Hackers are becoming very creative in finding new ways to hack into crypto wallets such as phishing and ransomware attacks
  • Smart Contract Risk: This type of risk exists in smart contracts that contain bugs that haven’t been exposed yet
  • Human Error: Sending funds to the wrong address will not be possible to retrieve the funds
  • Impermanent Loss: The risk that liquidity providers take in exchange for fees they earn in liquidity pools. This happens when the price of the deposited assets changes compared to when the assets were deposited resulting in a loss in value compared to value appreciation in case the liquidity provider were to hold the same pair of assets. Click here if you would like to dive deeper into this subject.  
  • Risk of Liquidation: Losing a collateral as a result of a decrease in collateralization rate below the required level. 
  • Rug Pull: The risk where crypto developers and founding teams abandon a project and run away with investors’ funds

Risk Management

We take the following measures to minimize the risks involved with crypto trading:

  • Multisig Safe: The funds are stored in a vault. The vault is a shared wallet that is controlled by all three partners. This minimizes the risk of hacks and transaction mistakes since any transaction must be approved by more than one person. For example, if a hacker was able to hack into one of the partner’s wallets, they wouldn't be able to steal any of the funds as any transaction would require the other partner's approval as well. Another example is that transactions get to be double checked before executed which also minimizes the wrong transaction being executed. We use Gnosis Safe Multisig wallet which is used by the leading protocols in the crypto industry and currently has over $107 billion worth of assets stored in such safes. 
  • Diversification: We believe that diversification is the number 1 rule of investing so we strive to diversify, not only in terms of the number of tokens we invest in, but also across different chains, industries, etc.  
  • Cash is King: We always maintain a certain level of cash in our portfolio to take advantage of market downturns and avoid the need to sell assets for cheap during turbulent times.
  • One Sided Markets: To avoid the risk of impermanent loss in the case of liquidity mining, we only participate in single sided liquidity pools or in stablecoin pairs which eliminates the risk of impermanent loss.
  • Hedging Strategy: We engage in options vault strategies by selling covered call or put options that delivers sustainable yield

Risk Allocation

This is a highly indicative representation of how our portfolio allocation will be split amongst the different risk levels. We will continuously calibrate to stay within those range, however, 3GI maintains the right to change this split at any time. 

  • Risk Level 1 (Low): 25-35% of portfolio – this will include tokens that are well established, such as Ethereum and Bitcoin, and have a lower risk level with an assumed lower potential returns than other tokens.
  • Risk Level 2 (Medium): 30-40% of portfolio – this will include tokens such as Uniswap and Fantom that are established and considered mid-level in terms of risk and reward.
  • Risk Level 3 (High): 20-30% of portfolio – risky bets which are considered moonshots offering massive four or even five-digit gain potential.

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