Cryptocurrencies: Keeping it in the Family

Family offices are traditionally seen as engaging in staid investment strategies in their roles as protectors of the wealth of the richest. In fact, family offices have pioneered investment in alternative assets with many now testing the waters by buying cryptocurrencies, either as an investment or an inflation hedge.

Current trends for family office investments in cryptocurrencies

The conventional view of family offices, that manage the wealth of some of the world’s richest, is that they are dedicated to investment strategies that will preserve the wealth of their owners. They are not seen as assuming any adventurous risks that will make their owners even wealthier. For some family offices, this could not be further from the truth. Many family offices have been set up by entrepreneurs who have accumulated their fortunes by taking hugely successful bets on growth industries like information technology, telecommunications and healthcare. They do not leave their risk-taking at the door when they create their family offices: Many have been innovators in the derivatives markets, venture capital, private equity, real estate, private debt and, recently, in special purpose acquisition companies, or SPACs. Now, some family offices are turning their attention to cryptocurrencies.

Are cryptocurrencies attractive to family offices?

But family offices are dipping their toes, not plunging headlong into the pool of digital assets – mainly cryptocurrencies that are created electronically as rewards for solving complex computer calculations and exist only in the virtual world. A report, looking at the investment intentions of family offices, published by the investment bank, Goldman Sachs, says that while 15% of respondents are currently invested in cryptocurrencies, almost half are considering initiating exposure. For many, considering the purchase of cryptocurrencies is a defensive measure against what they see as the debasement of fiat currencies. Some 40% of family offices are contemplating investment in digital assets (42%) and precious metals (37%) to address the rising specter of inflation eroding the value of their wealth. This overshadowing of wealth preservation has arisen following economic stimulus measures. These began with central banks using quantitative easing to dramatically expand the money supply following the financial crash in 2008 and, again, using economic stimuli in response to the threat of economic slowdown arising from the Covid-19. These measures saw the creation of unprecedented volumes of money. The consequent threat to the value of currencies prompted a flight to assets that would protect against the anticipated rise in inflation and to higher yield assets that would counter the impact of persistently low interest rates on investment yields. However, the Goldman Sachs survey also found the opposite reaction among family offices: It reports that among respondents with no current cryptocurrency exposure, their most cited reason for caution in steps to acquire cryptocurrencies stemmed from skepticism about cryptocurrencies as a store of value. Goldman Sachs also say that family offices are monitoring the potential of other digital strategies including other digital assets and the investments in the blockchain technology that underlies the digital assets ecosystem.

Cryptocurrencies compare to classic investments

To some cryptocurrencies now qualify as an asset class. Last year Bitcoin’s performance made it the best-performing asset of the decade – outstripping the tech-heavy Nasdaq 100 index. Even though its value has since plunged, at $882 billion, Bitcoin has the largest capitalization among cryptocurrencies. Bitcoin is as synonymous with cryptocurrencies as Google is with search engines. Indeed, many people could not name another cryptocurrency – or search engine. But the cryptocurrency exchange, CoinMarketCap lists no less than 9,003 cryptocurrencies valued at over $2 trillion (compared to the world’s main stock exchanges that are capitalized at around $62 trillion). And, according to Forbes, while anyone who bought an early Bitcoin would have seen its value rise by 9,200%, those who bought the lesser-known cryptocurrencies would have seen breathtaking explosions in value like 14,3000% for Luna, 22,000% for Solana, 33,500% for Ethereum, 520,000% for Binance Coin. But as stellar as these gains are, volatility in cryptocurrency markets has been as stomach-churning as a fairground ride. Cryptocurrencies have reacted violently to news flow about billionaires investing/not investing in them and central banks adopting, planning to create their own, clamping down or warning that the value of cryptocurrencies could plunge to zero.

Future for cryptocurrencies in family offices’ investment

Rolls Royce recently reported record sales of their luxury cars because, the company said, “Quite a lot of people witnessed people in their community dying from Covid, that makes them think life can be short…” It seems the pandemic has also spurred risk-taking. According to Forbes magazine, “There has been a shift in risk appetite with 59% of family office leaders now saying they are more prone to taking risk following the COVID-19 pandemic. In addition to the pursuit of balanced, anti-inflationary investment strategies or those that preserve yields, family offices will be aware of the toying with cryptocurrencies by the high-profile mega-rich like Elon Musk and Michael Saylor. But family offices can take the long view and, according to Meena Flynn, who helps lead private wealth management for Goldman Sachs, the majority of families want to talk about blockchain and digital ledger technology. Beyond Bitcoin, they think that “this technology is going to be as impactful as the internet has been from an efficiency and productivity perspective.”