Following a surge of retail investors buying cryptocurrencies and ICO’s in 2017, family offices are entering the market. According to several US surveys, between 10–15% are planning to invest in 2018. In the UAE alone, we know at least a dozen that are investing directly.
Single Family Offices led by the first generation that actually created the wealth tend to be more open to new industries and supportive of new entrepreneurs. Established second or third generation offices tend to prioritize wealth preservation and philanthropy and often have to balance competing risk/reward expectations and demands. Multi-Family Offices tend to be the most institutionalized and risk averse and their trustees are often still rejecting crypto in the absence of clear authorization in the trust deed. Even so, well known families like the Rothschilds, Rockefellers and Soros are investing for good reasons:
- Opportunistic, short term alpha and diversification. Current crypto-markets are retail driven, highly volatile, extremely complex and inefficient. This means that experienced traders can play the technicals, arbitrage and take advantage of plenty of unsophisticated alpha donors. As an asset class crypto is negatively or non-correlated with FX, equities, bonds, real estate and commodities. All the more important when the global outlook for most asset classes is very negative according to $150bn hedge fund Bridgewater, which is forecasting oil in 2019 at $62 with a weaker dollar, yield curves remaining flat and a decline in equities.
- Strategic, long term alpha and diversification. US Asset Manager Grayscale recently wrote of a paradigm shift in the global economic order driven by two major secular forces: digitization and decentralization. Digital currencies and assets accelerate these forces. A digital world needs digital currency. Cryptocurrencies will take their place alongside the USD, not replace it. As early as next year we can expect the first Central Banks to issue cryptocurrency. Grasping the potential and implications of decentralization requires some mental elasticity. One can imagine many successful companies being disintermediated. The most obvious ones are banks, insurance companies and money transmitters. Toll booths on the global money highways. Even successful tech companies are ripe for disruption. AirBnB and Uber are essentially centralized rentseekers on P2P networks. Their costly business models have been sustained by investors who put up with huge losses in the hope of a “winner takes all” victory à la Facebook. Decentralization puts this at risk. Furthermore, value created through decentralization is unlikely to accrue to the equity markets. In conclusion, rebalancing a portfolio overweight in disruption-ready stocks and bonds by adding crypto can create significant alpha.
How do family offices invest in practice? Mostly indirectly through crypto-funds. Besides investment expertise, the advantage of using a fund is the outsourcing of the operational risk of safe-keeping the crypto. No client-side honey-pot to attract Ukrainian hackers, no private key management hassle. These funds can be VC-like, hedge fund-like or a combination of the two. When choosing funds an office typically uses its network of co-investors, trusted bankers or placement agents. Due diligence remains very important but some leap of faith is inevitable as track records are counted in months, not years.
Also popular are direct investments in a private pre-sale of an ICO. An ICO is essentially a crowdsourced capital raise that is more liquid than traditional VC and is geographically unconstrained. A recent example of a pre-sale was the $1.7bn raise by Telegram, the messaging app that is building its own decentralized storage and payment system through a native token. Several GCC private offices invested $10m each — it helps that the Telegram team is based in Dubai — into what is essentially an ecosystem token.
Before any investment can take place, one has to find a way to convert fiat money into crypto and back. The easiest way is to open a corporate account at exchanges with fiat-crypto markets. Sometimes though, exchanges lack liquidity. A $10m BTC/USD buy can create considerable slippage (price movement). This is where OTC brokers step in. In fact, BTC/USD and ETH/USD trading is much larger OTC than on exchange. OTC brokers are dominated by a handful of large players in the US and Asia. The UAE has one such broker that operates legally with full KYC/AML.
Family offices face a steep learning curve when it comes to crypto but there is no better way to learn than having some skin in the game. When investing in-house, it is important to hire the right people. With regard to trading, it could be an experienced FX trader who knows how to play the technicals and arbitrage. Long-term investing requires a different type. Someone who is on “cryptotwitter”, really passionate about the space, reads whitepapers at night, and knows the major opportunities by theme, infrastructure, identity, privacy, storage, prediction markets, … Because crypto is such a wide subject, he/she will have a broad interest in technology, economics, business and law.
Crypto of course is not only to be invested in, but also to be used. The use case is great for globetrotting HNWIs concerned about security and privacy. Crypto on a cellphone is like having a Swiss bank in your pocket but without the cost.
For a family office, money is something very personal, it is invested for future generations. Visionary investors realize that the future is already here, it is just unevenly distributed.