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Elon Musk has been very outspoken about his views on cryptocurrencies over the past few weeks . This week, Dogecoin has the potential to become a world currency. Two weeks ago, Musk updated his bio on Twitter to add the hashtag #Bitcoin.
Musk, who has 44.7 million followers, mentioned on the social audio app Clubhouse that he believes "Bitcoin is a premium asset" and that he should have bought the cryptocurrency eight years ago. More importantly, Tesla publicly revealed yesterday that it has purchased $1.5 billion worth of Bitcoin.
The rapid growth of crypto assets in 2020 is undeniable, especially Bitcoin. As the pandemic rages, people around the world have entered a new lifestyle at almost every level, the geopolitical environment has become increasingly unstable, and global debt has reached a record high, leading to increased demand for currency and a flattening of interest rate forecasts.
The events have economists questioning the future of debased global fiat currencies and investors looking for ways to reduce their reliance on the traditional financial system.
Faced with these challenges, some of the world’s most savvy institutions and investors have turned their focus to decentralized investing, incorporating digital assets into their portfolios to further diversify and mitigate risk as part of their strategy. One of the main investments of choice is Bitcoin.
This trend has not escaped the attention of family offices. Nelson Minier, head of OTC sales and trading at Kraken, pointed out that "over the past year, especially in the past six months, family offices have become increasingly interested in the market because the increase in currency issuance has seriously distorted traditional market valuations."
As cryptocurrencies continue to move from the fringe to the mainstream, should family offices pay attention to Bitcoin as part of their long-term risk management and investment strategy? Answering this question requires looking back at recent developments.
Growing interest in alternative investments
For many family offices, the focus on diversified investments, including consideration of digital assets and cryptocurrencies, is not new. In the long-term low interest rate environment of the past few years, with the emergence of "smart investing", even the most conservative family offices have slowly shifted from a purely traditional investment mentality.
In recent years, many family offices have shifted from the traditional 60-40 equity to a fixed-income asset allocation framework in their portfolios, seeking a path to more extensive diversification into other asset classes. According to the 2020 UBS Global Family Office Report, a notable trend is that in mid-2020, many family offices favored other investment categories such as cash, precious metals, gold and stocks in developed markets to rebalance portfolio returns.
However, as global events continue to unfold and geopolitical tensions increase, people are increasingly skeptical of fiat currencies. The increased risk associated with holding cash makes holding fiat currencies less attractive.
Given these significant concerns, asset-backed digital financial derivatives and cryptocurrencies have regained interest among investors around the world, with Bitcoin emerging as a frontrunner in alternative investment avenues.
Why Bitcoin?
Bitcoin has been met with skepticism and heavy criticism since its creation in 2009. As of early 2020, it is still considered a fringe investment, with even billionaire investor Warren Buffett deeming it to have “no value.”
However, as debt and money supply continue to grow steadily, Bitcoin is quickly gaining recognition as a viable alternative to the existing system and as a hedge against expansionary monetary policy.
Bitcoin is built on a cryptography-based blockchain network and is a distributed cryptocurrency that supports global direct peer-to-peer electronic payments. It is not tracked or controlled by any individual or organization. And there are only 21 million bitcoins available for verification, which means there is no inflation.
Essentially, Bitcoin eliminates intermediaries and restores financial sovereignty and privacy to users, a prospect that is increasingly attractive during times of economic uncertainty.
These factors, combined with the cryptocurrency’s benefits over time and its outperformance across all major asset classes in 2020, have captured the attention of Wall Street, putting crypto back on the radar of investment groups that may have once dismissed it.
Fidelity, a well-known digital asset advisor, even produced an investment thesis for it. Large business information companies such as MicroStrategy, asset management groups such as Stone Ridge Holdings, and high-net-worth individuals around the world have also joined its investors.
Bitcoin and Family Offices
It’s no secret that family offices view strategic asset allocation and diversification as the cornerstones of long-term wealth preservation and accumulation. Many subscribe to the approaches of Modern Portfolio Theory (MPT). These approaches encourage diversification and seek to minimize risk without reducing returns. However, even these strategies are not immune to systemic risk.
The conventional wisdom surrounding Bitcoin has always been about correlation risk. Yet in the face of market volatility over the past year, it has proven itself as an uncorrelated asset with a correlation coefficient of approximately zero over its lifetime. Ironically, it may be a viable risk mitigation solution.
According to Andrew Howard, Chief Business Development Officer at Bitcoin Reserve, “Bitcoin and family offices are a logical fit. The goal of family offices is to preserve wealth over the long term across generations. Bitcoin is a non-inflationary form of money that retains its value over time.”
This is a very attractive prospect for families because in the current low-yield environment, diversification is a priority for family offices as part of their investment and risk mitigation strategy.
Bitcoin also offers an alternative to cash, and according to analysts at JPMorgan Chase and Deutsche Bank, the two are similar components that will make up the balance of many family offices' portfolios in the mid-2020s.
Although family offices that are about to enter the market are concerned about the volatility of Bitcoin, the investment strategy of family offices is long-term, and many investments are made from a long-term perspective. This makes the volatility of cryptocurrencies not as much of a concern as for family offices that allocate assets in the short term.
However, Minier advises: “Before investing in Bitcoin or digital assets, family offices should be aware that the history, security, community involvement, and expertise of a digital currency partner are all critical. Therefore, family offices should carefully choose who they work with. The right partner is not only a place to execute transactions, but also a knowledgeable and experienced team.”
He added: “Custody is an important function for family offices and they have to get used to holding their own private keys.”
It is only a matter of time before new technologies will be able to help overcome various risks and challenges. One example is multi-party computation (MPC) technology, which can help eliminate the requirement to hold keys. Built on MPC technology, companies such as Qredo, Unbound and Copper have brought enterprise-grade wallets to market. Similarly, other corporate businesses have come online to address other challenges in areas such as regulation, trading, brokerage, liquidity and asset management.
As global economic uncertainty and instability increase, financial crises and inflation become more prominent, UHNWIS, investors and related organizations are increasingly adopting cryptocurrencies. Family financial institutions are in urgent need of taking a place in the new financial revolution. We believe that at least some of the family financial institutions should consider investing in cryptocurrencies such as Bitcoin. (Blockchain Knight) |
