Family offices have always been risk averse, but some have been tentatively dipping their toes into the crypto space. We look at what attracts them
It is not often that the new asset class captures the imagination of investors the way cryptocurrencies do. And while many institutional investors such as family offices are still hesitant about whether cryptocurrency is an investable asset class, some are now dipping their toes in the water.
This may seem surprising: The primary goal of a family office is to preserve wealth for future generations. As anyone who has bought into a bull market knows, crypto can be a huge wealth destroyer. In general, family offices follow safer opportunities. And their performance criteria, which are typically 7%-10% returns, are far from the risk profile of cryptocurrencies.
However, in a world of persistently low interest rates, with hard to find good returns, family offices have to consider alternative asset classes, including cryptocurrencies. A July 2021 survey by Goldman Sachs found that 15% of 150 family offices that responded were investing in digital assets, with 45% being interested.
However, although the returns for cryptocurrency can be higher, so are the risks and volatility. So family offices will do well to maintain the alternative investment allocation – that is, with low single digits.
Should you invest in disrupting bitcoin or the blockchain?
It is important to distinguish between buying cryptocurrencies in the spot markets – and investments that seek exposure to the disruptive potential of their underlying blockchain technology.
The crypto aggregator offers much more opportunities than just allocating bitcoin, the primary crypto asset.
A less risky approach may emerge on topics such as coding for existing asset classes, decentralized finance, and new technology. Assets such as non-fungible tokens (NFTs) actually unlock value by enabling verifiable ownership of unique digital (and non-digital) goods.
However, even though the NFTs market attracted an estimated $22 billion in cash in 2021, price discovery and due diligence in sub-sectors such as NFTs technologies remain an issue.
The attractions of cryptocurrency should also be viewed in the context of the significant shift from traditionally traded investments to private equity and fund investing.
Many of these funds invest in unproven tech or technology startups, and are attracting speculative money inflows. Not surprisingly, family offices seek returns of five times or more from allocating them to cryptocurrency.
In some ways, family offices are in a better position than other crypto investors because they can take a long-term view. For example, a typical family office investment committee will appreciate that although bitcoin is highly volatile, its risk-adjusted returns improve a lot when calculated over longer time frames.
Also, a relatively small amount can go a long way if five times returns can be achieved, putting less capital at risk.
Cryptocurrency security, environmental, social, and institutional governance concerns remain an issue.
Family offices will also maintain significant concerns about corporate governance and the security of assets on the blockchain, given the loss of hundreds of millions of hackers every year.
Many blockchain investment managers are known only by a small circle in the crypto world. The crypto ecosystem has come a long way in a couple of years, but there is still a lot of work to be done in terms of business practice and governance.
Another concern is the amount of computing power needed to secure the Bitcoin network and mine new coins. Bitcoin’s “Proof of Work” protocol has been criticized as both wasteful and inefficient, due to its lower transaction transfer rate per second (seven) compared to payment networks such as Visa (about 2,000 per second).
This is not a good view at a time when ESG considerations are at the forefront of investors’ minds. However, many crypto networks do not use the same wasted POW-number analysis process as bitcoin.
Cryptocurrency regulation is on the way
Another danger is the lack of regulation. However, regulators in major economies are moving to implement many of the proposals from the G20 Financial Action Task Force, on anti-money laundering, KYC and counter-terrorist financing.
It may include “travel rules” that require “virtual asset service providers” to record the identification details of senders and recipients of digital assets. Areas of interest for banks, such as stablecoins and custodians, will also be subject to increased oversight.
All this can make the sector more attractive for family offices.
Cryptocurrency presents unique challenges. As the due diligence and reporting requirements are more complex than ever, having the support of a third party will prove invaluable.
At Intertrust Group, our continued investment in technology-driven compliance, data storage in secure environments for financial investment and public investment in data knowledge will continue to expand, providing essential backup for family offices looking into crypto.
Why Intertrust Group?
We help manage more than $470 billion in client assets and have more than 4,000 employees worldwide, combining global and local expertise.
Our expertise in all classes of private capital assets, with a focus on customized corporate, fund, capital market and private wealth services, enables clients to invest and thrive anywhere in the world.
Best-in-class technology meets the requirements of all alternative asset class reporting and portfolio management.
Intertrust Group is committed to climate action, flexible work practices, and digital transformation.