More family offices are increasing crypto exposure to diversify their investment portfolios, but they are taking steps slowly and indirectly amid regulation uncertainties and market volatility.
According to a
Nearly every other asset class is facing volatility caused by rising interest rates, geopolitical uncertainties brought on by the war in Ukraine and inflation rates unseen in four decades. Family offices, with $4 trillion in assets under management, may find themselves looking for other opportunities, despite the uncertainties in crypto markets, including questions on regulations, and risks of hacking and cybercrime.
“Family offices are sophisticated individuals and families, and in some cases, opportunistic as well,” said Rajesh Nakadi, head of investments, Global Family Office at BNY Mellon Wealth Management. “They have the patience and willingness to invest in the long term. That’s what makes them more suitable for investing in emerging asset classes like crypto.”
Next generation wealth
The BNY Mellon report found that 45% of family offices, each of which typically manages over $100 million assets for wealthy families to grow and transfer wealth across generations, say that potential family successors are driving their interest in cryptocurrency investments.
“Family offices led by younger generations allocated more in cryptocurrencies, demonstrating a willingness to accept and absorb some additional risk. While those led by older generations are cautious and discerning in their crypto investments,” Aman Ahluwalia, managing director of investment advisor consulting firm Foreside, said in an email.
Younger demographics are usually early adopters to technology and newer asset classes. They also have longer term investment horizons to build portfolios and are looking for things that they are not necessarily going to get through the stock and bonds markets.
“The young generations understand that there's a lot of risk associated with it, but they don't want to miss out on this opportunity to be a part of the next big, shining thing, which is why I think it's extremely important for family offices and advisors to start having those conversations (with) their clients,” said T.J. Faber, a wealth advisor at Blackbridge Financial.
Slowly and indirectly
A 2019 study by the Yale economist Aleh Tsyvinski found that bitcoin should occupy about 6% of every portfolio to achieve optimal construction. Even those who are strong bitcoin skeptics should maintain at least 4% bitcoin allocation, he found.
But despite rising momentum, crypto allocation in family offices is relatively low. The average family office has only 1% of its portfolio invested in cryptocurrency, according to research by Campden Wealth last November.
“I think most people understand that crypto is not going anywhere,” said Logan Henderson, CEO and founder of Gridline, an alternative asset management firm. “What you're seeing is people are starting small and building up larger positions over time and so moving from 1% exposure, 3% exposure, to 5% exposure all the way up to 10% and doing it in a very systematic fashion.”
Many family office investors believe that cryptocurrency should not be utilized as a safe haven for investors' money nor as a replacement for gold, according to Henderson.
Whereas traditional financial advisors tend to behave in similar ways because they are all trying to beat a particular return hurdle, family offices don't have a uniform method of accomplishing their objectives, and they often have different investment strategies.
“That's why you saw a slower adoption into the cryptosphere,” said Lorenzo Esparza, CEO of private wealth and investment firm Manhattan West.
Despite growing interest, family offices are moving cautiously. Their current approach to crypto assets are indirect investments in the companies that have exposure to blockchain, without necessarily holding crypto assets themselves.
Industry experts believe this has to do with regulation uncertainties. It's unclear how cryptocurrency will be classified as an asset and the type of custodian responsibilities that will be required.
“Directly investing into specific currencies or infrastructure projects is not something that they are comfortable doing at this point,” said Blackbridge Financial’s Faber. “Advisors have to make sure that they are abiding by compliance laws with FINRA and SEC, which are not yet clear about cryptoassets. That puts a lot of handcuffs on them and explains why we're seeing so much of the indirect investing into cryptocurrencies with family offices.”
One way family offices are dabbling in crypto indirectly is through the exchange-traded funds like the Grayscale Bitcoin Trust, a financial vehicle that enables investors to trade bitcoin shares in trusts, and ProShares Bitcoin Strategy ETF (BITO), a U.S. bitcoin-linked ETF fund. Family offices also invest in crypto assets through trade exchanges like Coinbase.
Another indirect way for family offices to increase crypto footprints is to tap into blockchain ventures. Thiel Capital, the California-based single-family office managing the capital of PayPal co-founder Peter Thiel, poured $300 million into cryptocurrency exchange Bullish Global last May. Soros Fund Management has taken similar steps. The New York-based single-family office managing the capital of American entrepreneur George Soros made a $200 million venture investment in bitcoin company NYDIG and a $53 million Series D investment in Lukka, a software company for managing crypto assets, last March.
“While family offices will not rush into any investment decision, they will approach cautiously. Paul Westall, co-founder of Agreus Group, a consultancy for family offices, wrote in a
After President Joe Biden signed an executive order on March 9 directing agencies to study cryptocurrencies and come up with government-wide approaches to regulating digital assets, industry experts believe that clear guidelines are on the way as to how they should operate within the broader crypto markets, which will open the door for advisors to recommend cryptocurrencies. But before that, they also suggest that clients need to understand the underlying technology rather than trusting their financial advisors blindly or just chasing the market frenzy.
“I tell my clients, ‘do not buy this stuff unless you believe in it,’” said Joe Coughlin, founder and CEO of a risk management and insurance advisor firm Corporate Risk Solutions. “It is different from an advisor telling you to buy in the Vanguard Index Fund or the Charles Schwab 500, which has years of historical performance data about risks and returns. There is personal responsibility regarding this type of investment. The investors should have some knowledge about it.”
“You really need to understand the application use case and look at it less as an investment security,” Gridline’s Henderson said. “What is the potential that the smart contract systems could bring to market?”
