Fund managers of powerful family offices and affluent individuals are showing keen interest investing in cryptocurrency and blockchain companies.
2017 is the celebrated year for cryptocurrency advocates, as Bitcoin’s historic bull run has cemented the cryptocurrency market in the global financial ecosystem. Both retail and institutional investors have noticed the emerging market of new asset classes, and thus it is unsurprising to hear that accredited investors such as Family offices and Ultra-rich individuals, or Ultra High Net-worth Individuals (HNWIs), are planning to shift their investment options into Bitcoin and other cryptocurrency assets.
Since 2005, as the ranks of the super-rich grew to record proportions, family offices swelled proportionately, with a particular focus on technology companies such as Facebook, Netflix and Google. Family offices are entities which manage financial assets and other affairs for the wealthiest families in the world, and are constantly looking for new opportunities to grow their net worths. When Bitcoin exhibited an exponent growth, specifically a twenty-fold growth within a span of 12 months, it has also catapulted many altcoins such as Ethers and XRP into a ‘financial superstardom’. Managers of numerous well-known family offices saw it as a glimmering hope of wealth accumulation in uncertain times, when many publicly-listed companies saw discouraging growth. Their focus of nascent cryptocurrency, blockchain funds and companies are inevitable, but keep a watchful eye on the volatile and still-manipulated cryptocurrency market.
During the 2018’s Context Summits Conference, where alternative asset management entities such as pensions, sovereign wealth funds and family offices were surveyed about their reception on the novel cryptocurrency market. Only twenty-seven percent of those surveyed considered Bitcoin and cryptocurrencies to be of a legitimate asset class, while twenty-six percent thought that the crypto market is a fraud. More importantly, close to fifty percent of the respondents were uncertain about the placement of cryptocurrencies in the financial market.
Therefore, it is imperative for leading experts and crypto market leaders to educate and explain the basics of blockchain and cryptocurrency to family offices, and how the emerging technology could potentially disrupt industries on all fronts.
Bullish Influence on Families and Funds
Encouragingly for the Bitcoin and cryptocurrency advocates, the long-term structural story of the 2017/18 bull market is unchanged. There is an uptick in interest from family offices with regard to Bitcoin, cryptocurrency and blockchain. For managers of family offices, it often boils down to reputation when it comes to investing in cryptocurrencies.
The last bull market saw Bitcoin and other promising alts peaked with an all-time high level, with prices mainly driven by private investors for a brief period. Shortly after, shedding prices of Bitcoin and the entire market were largely attributed to the process known as “capitulation”. Fortunately, the space has seen significant technical developments and rapid expansion of cryptocurrency infrastructure such as exchanges and DeFi (decentralised finance) solutions. China has also taken the lead in launching its first national blockchain platform recently, as part of the economic powerhouse’s grand plan of transforming the world economy digitally with the aid of blockchain and the national cryptocurrency. Coupled with the currently low prices of all cryptocurrencies, there is a consensus among the crypto experts and key opinion leaders that the next bull market will be driven by institutional capital inflows, including the fund injection from family offices.
Diversification between the traditional and crypto markets
Although wealth management of family offices is often conservative, cryptocurrencies are arguably one of the new asset classes which may deliver exceptional performance to their portfolio. Emerging financial vehicles such as cryptocurrency asset funds are created to serve the growing, yet discrete demand. There is an ongoing trend of wealthy individuals gearing towards the inclusion of smaller proportions of cryptocurrencies. Financially speaking, there is a very low, or even negative correlation between traditional asset classes and cryptocurrencies. No known asset class shares similar characteristics with Bitcoin or other cryptocurrencies.
As family offices familiarise with Bitcoin and other cryptocurrencies, they were cautious of their move into the new asset class since they are not accustomed to handling investments which could yield an 80% variability returns. On the contrary, on the traditional stock market such as the S&P 500, typical yield return points towards 12%. In addition to that, the evolving industry offers chances for gains through currency arbitrage based specifically on the gaps in industry infrastructure. Managers of numerous family offices understood that there is an inherent opportunity to go long on crypto, but were taken aback by inefficiencies such as the lack of a central exchange, often referring to the various issues pertaining to centralised cryptocurrency exchanges. Meanwhile, family offices and HNWIs have already positioned themselves with well-diversified portfolios of traditional asset classes. The allocation percentage for cryptocurrency-related investment is highly dependent on their risk appetite. These entities can currently accomodate a lower percentage of funds for Bitcoin and cryptocurrency investment as a test run for larger volumes in future.
Smart Crypto-based Risk Profile
Family offices and wealthy individuals could capitalise on the strong asymmetric risk distribution which they could benefit with the addition of Bitcoin and other cryptocurrencies. By allocating tiny amounts of cryptocurrencies into their portfolio, the admixture could be adjusted by the weighting according to one’s risk appetite. Since cryptocurrencies do not adhere to the conventional Gaussian distribution of risks found in traditional portfolios, they could start with a number of favorable cryptocurrency assets and adjust overtime. The larger the allocation over time, more research can be made on shortlisted cryptocurrency portfolios by doing thorough analysis of whitepapers, studies and acts accordingly to mid-term or long-term plans. While retail investments are disparagingly referred to as “dumb money”, investments from institutions like family offices or sovereign wealth funds are “smart money” which could possibly be attained even with baskets of cryptocurrency assets.
Most often than not, family offices often question the achievable returns with a suitable risk profile in the existing market condition. Traditional assets like equities, real estates and venture capital only represent a few of their asset classes. At the time of this writing, it is fairly difficult to design a well-balanced portfolio due to the current low-interest phase. Allocating portions of their portfolio into Bitcoin and cryptocurrencies could prove to be useful to the portfolio, and that the likelihood of outperforming the adjusted inflation is reasonably elevated if only a small portion of the portfolio is invested in Bitcoin or other cryptocurrencies.
Securing Cryptocurrency Assets
Finally, the emphasis of family offices investment into Bitcoin and other cryptocurrencies are meant for mid to long term plans. For instance, the strategy of positioning a cryptocurrency portfolio consisting of Bitcoin is to purchase and hold. Bitcoin is designed to be a deflationary cryptocurrency and has an embedded mechanism that ensures that the value of the limited supply appreciates with time. The average amount of a family office’s investment could be worth upwards of millions of dollars, thus the Bitcoin address and storage wallet must be protected from prying eyes and hackers. Unlike the traditional stock portfolio, it is possible for Bitcoin and a select few cryptocurrencies to have an additional layer of anonymity by a unique process called Bitcoin mixing. The privacy tool, known as Bitcoin mixer or tumbler, is essentially a mixing service which obscure transactions of funds obtained from exchanges or cryptocurrency fund companies. This technique could supplant custodian services, shifting the control and saving the maintenance of the crypto funds of the family office. By using a Bitcoin mixer, the tracks of a large volume of Bitcoin transactions could be sufficiently hidden from public view.
Acceptance of cryptocurrency as an asset class
The positive developments in the Bitcoin and cryptocurrency space and comparatively moderate prices give the wealthy a signal that an intensification of cryptocurrency investment is timely. The advantages of cryptocurrency investment outweigh the impediment of a potential recession effects on the traditional stock market. Increasing investment vehicles relating such as crypto certificates and funds could make provision for legally secure and problem-free investments. Innovative solutions like utilising a Bitcoin mixer for long-term Bitcoin investment could enhance the security and anonymity for the fund management of family offices.