Education
Why should family offices consider their portfolios for digital assets
Constantin Kogan is a BitBull Capital venture partner and since 2012 it has been an investor in cryptocurrency. He has more than 10 years of marketing, technology and finance experience.
Digital assets based on Blockchain can be an alternative for investors to lose trust in a failed, traditional financial system. Because of this, institutions have kept a close watch on developments in the digital asset market – and the potential success story of the final breakthrough of blockchain can benefit wealthy investors, and in particular family offices.
Many may say that the over-discussed institutionalization of the digital asset market is far from efficient. Current trends, however, have encouraged families that are part of the institutional investor contingent to take on more and more strategies for portfolio diversification that support the allocation of funds to digital asset investments.
Although the banks are much healthier in these unprecedented economic times than during the past crisis, there are still persistent risks within the financial sector (e.g. , non-bank mortgage servants). Investors should now no longer view Cryptocurrency as an uncertain foray but instead as an revolutionary financial resource.
Due to this, the focus on digital assets as a good investment class from the family offices has increased.
What are offices in the family? Total family office assets under control by analysts are valued at more than 6 trillion dollars. Family offices' investment activities include a preference for hedge funds, real estate and private equity. The average family office allocates 22 per cent of its capital for private equities, according to the 2018 UBS Global Family Office survey. Immobilien is becoming popular (17%) with a slight drop of hedge funds to 5.7%.
A idea originating in Europe, the House of Morgan (with a well-known investment figure called J.P.) and the family Rockefeller in the United States first popularized the Family Offices. Over the years, a constant influx of newly mined millionaires and billionaires has made the growth in the family office business unprecedented. More than 10,000 family companies are based worldwide today.
A family office is an exclusive money management tool that helps wealthy people or families to combine liquid assets. The sole objective of family offices is to manage, grow and preserve their families' wealth and heritage.
The concept has recently expanded: it can now be used to manage the wealth of two or more families or multi-family departments.
Digital properties and family offices
The UBS Global Family Office report shows that 57% of family businesses believe that blockchain will transform future investment policies and conduct. This is not surprising. A recent Fidelity Investment Survey revealed that 22 percent of more than 400 US institutional investors have explored investment products related to digital assets, including family offices and foundations.
This fascinating discovery further drives a discussion of the increasing affinity to digital securities, blockchain-supported resources that are connected to a commodity. This undoubtedly alters the view that crypto is a mainstream investment vehicle with no future. That is most surprising, however, is that 72% of the investors in the Fidelity study said that digital investment products had no issues with purchasing.
The main reason for this is probably the low correlation to conventional assets of digital investment products based on blockchain.
Although the thesis on correlations is strong, liquidity is another credible reason why the influx of investment from family offices in digital assets is unavoidable.
An antidote to blockchain
An investment strategy that guarantees incomparable liquidity, up to 7% is held in cash by the average family office. Nevertheless these entities may eventually adopt digital assets because they are at long-term dependence on cash as a source of liquidity.
First of all, the burocratic nature of traditional financial systems, where the intermediaries stand out, is avoided by blockchain-based digital assets. The stability of fiat currencies is also doubtful, especially in the increasingly tensional geopolitical landscape today.
In reality, transaction and keeping cash costs in the short term are negligible. However, the long-term cost is not acceptable for an entity such as a family which values longevity and generational wealth.
An Accenture and McLagan study estimates that blockchain technology could reduce central financial reporting costs 70 percent, companies and central operations 50 percent, enforcement 50 percent, and middle- and back-to-business more than 30 percent.
New family office investment technologies
Without unliquidity in the conventional investment strategy, digital assets can give family offices access to the benefits of risk capitalism. This approach will be feasible as custodial cryptoindustries continue to evolve and grow into a blockchain business field.
The goal of digital assets is to play a more important position in the family office portfolio. This narrative is punchy because the activities of this institutional class are still crucial for diversification, lack of correlation with other assets and liquidity. The Blockchain Ecosystem remains new, but its innovations are still captured by family offices' attention (and investment).
