Family Offices Move into Digital Assets
While elder statesmen like Warren Buffett and his business partner Charlie Munger have been vocal critics of cryptocurrencies such as Bitcoin, it has not discouraged institutional investors such as family offices from investing in the space. In fact, digital assets currently represent a very modest portion of family offices portfolios, we suspect that the investment levels will increase with the influence from the next generation of family office successors. In addition, we are witnessing large asset manager such as Blackrock entering the arena looking to develop products for institutional clients.
47% of U.S Family Offices have investments in digital assets
A 2021 survey from Fidelity reported that 47% of U.S Family Offices have investments in digital assets. The survey results also noted that there was an improving perception among Family Offices surveyed with 79% having a neutral-to-positive view of digital assets, a 22% increase over the last two years in those with a positive view.
Long time horizons to absorb price volatility
The growing influence of innovative decentralized finance and the rapid appreciation of digital currencies like Bitcoin and Ethereum have certainly piqued the interest of family offices. In addition, much like large institutional investors, family offices have long investment time horizons and the appropriate risk tolerance to absorb the price volatility that comes with holding innovative investments that offer the prospect of attractive rates of return.
Cryptocurrencies as a hedge
Some family offices have recently pivoted to digital asset investments as a hedge to the current economic environment where unprecedent monetary and fiscal policies and rising inflation threaten to erode purchasing power. In the past, gold and other precious metals were considered as good stores of value in inflationary periods. The 2021 UBS Global Family Office Report noted that cash and gold represented 10% and 2% of the strategic asset allocations providing families with sources of liquidity and capital preservation. We can envision younger investors making the argument that cryptocurrencies provide similar benefits within a family’s portfolio today.
The biggest criticisms
One of the biggest criticisms of digital currencies is that they exhibit extreme price volatility. While the U.S dollar and gold have been effective portfolio diversifiers during periods of uncertainty, cryptocurrencies have yet to exhibit the same attributes. As an example, the price of Bitcoin has fallen by 25% or more on seven different occasions in the last five years. Given the asset class is still in its infancy it may take some time before it obtains a similar status in investment portfolios.
Keeping up with new investment trends
A survey from BNY Mellon highlights that the key motivating factors that have driven family offices to invest in digital assets are to keep up with new investment trends and because cryptocurrencies offer good investment opportunities. In contrast, family offices that remained on the sidelines pointed to the high price volatility and the uncertain regulatory environment as reasons they have been reluctant to invest in digital assets. The same report indicated that family offices that have invested in digital assets have primarily done so through exchanges such as Coinbase and exchange traded funds, with smaller allocations in venture capital funds.
Today digital assets make a small portion of the alternative allocation within family investment portfolios; however, the allocation is likely to grow as we witness greater adoption within the industry. As such, we gather that it would be a worthwhile endeavour for family offices to dedicate resources to learning about the pros and cons of investing in the asset class. This provides an excellent opportunity to engage younger family members within families that can provide valuable insights in this rapidly evolving space, while allowing them to appreciate the overall objectives of the family’s wealth.