Digital asset management is now back on the financial agenda with a new wave of private investors, hedge funds, and family offices investing in cryptocurrency.
As cryptos begin to rise for the second time in their short history, they leave behind a ‘nuclear winter’ that saw billions wiped off the market, multiple ICOs exiting the scene, and investors losing fortunes.
In stark contrast to that dismal period, recent price performances appear to be stirring up an air of increased stability while a large number of newbie virtual currencies are creeping into the market - most recently in the Defi sector.
Adding to this positive aura is BTC's price index which is now holding above the $10,500 mark while other cryptos such as ETH, LTC, and BCH are stabilising with only minor downswings and more frequent upswings.
One thing is for certain, this new phase of cryptocurrency dominance shows the financial world three key positives:
- Resilience: Cryptocurrencies are extremely resilient to economic and political pressures as well as relativly independant of influence from traditional indicies such as stocks and FX markets
- Regulations: New regulations put in place by world governments strongly suggest cryptos are here to stay. Notably, European and US banks are now beginning to offer customers crypto custodial services
- Growth: New digital currencies are still emerging which are linked to new blockchain tech solutions that solve real-world problems traditional IT systems struggle to deal with
Investment Sectors That Once Avoided Cryptos Are Now Honing In
With stability and financial regulations, plus a continuous flow of new entrants inventing never seen before ground breaking blockchain tech solutions comes new investors.
The kind of investors that are only willing to take a shot at finacial markets with a proven track record - something that was amiss for cryptos pre-nuclear winter but since the market is in what many to believe to be a new cycle, cryptos now have a history for more serious analysis.
One such investment sector now taking an interest in digital asset management since the crypto market matured is perhaps the toughest to please, and the investment firms that operate within its realms have built a reputation for being rather fickle when it comes to investing their clients' money.
This is the 'family offices' wealth management niche. These firms take on the responsibility of managing the mountains of wealth and fortune for the world's growing list of millionaires and billionaires. Their policies tend to prevent them from investing in unstable markets, but it seems in today's current financial climate the crypto market is less regarded as a high risk propersition.
Below we are going to investigate some of the reason as to why this new era of crypto finance is leading to an increasing number of family offices investing in cryptocurrency markets.
What Are Family Offices?
Family offices are financial investment firms that manage ‘family wealth’. Affluent families or individuals – usually with more money than they know what to do with - hire wealth management firms to look after their fortunes.
In short, this class of super-rich referred to as ultra-high-net-worth (UHNW) investors outsource the management of their wealth to 'family offices' who invest and manage their clients' stacks of surplus cash!
This is as opposed to these wealthy individuals or families letting their money sit in multiple bank accounts doing nothing. A 'family office' a.k.a. wealth management institution investment firm will create portfolios to pretty much ‘make-money-make-more-money’. This is achieved by diversifying investments into traditional assets, and more recently digital assets.
Although short term investments are an option for family offices, the key focus is to invest in long-term opportunities.
This includes traditional assets such as real estate, private equity investments in private business ventures, and public equity investments, while quite a few family offices are also linked to infrastructure development funding (IFD funds) and venture capitalists.
Here is a short list of some of the terms you will see to describe family offices:
· Global Family Offices (GFOs): serve families across the globe
· Multi Family Offices (MFOs): serve multi families using economies of scale
· Single Family Offices (SFOs): serve just a single family
Why Are Family Offices Investing in Cryptocurrency?
If you consider that the idea of a family office frim is to seek out safe and secure long-term investment opportunities, cryptocurrencies failed to tick the right boxes due to the volatile nature of the market.
Yet, more recently confidence in crypto-financial markets is on the rise. Major cryptos such as BTC and ETH survived their first big test by not only showing resilience, but also bouncing back from their first dip. Now the first noteworthy cycle in crypto history is behind us we could be starring down the barrel of a longer series of market cycles.
For family offices, historial reference means everything. Now their financial investment experts can compare trends within the cryptocurrency financial markets with that of similar tech financials such as the Dotcom markets where there are remarkable similarities.
What this means is that somewhere in the crypto sphere the next Amazon, Google, Yahoo, Evolution Gaming, NetEnt, Airbnb, or Netflix could soon rally. And it is family offices that are the new kids on the block hot the trails of ICOs showing long term potential that neatly fit the profile for family office investment.
Dotcom Market Cycle
The Dotcom era is the perfect market to compare with cryptocurrencies because they are both tech-based, and they both went through a rocky start in life!
You only need to compare Bitcoins price index with the Dotcom price index and the similarities are undeniably there for all to see.
Let's consider that Amazon, Facebook, and eBay are all dotcom era companies. Much like many ICOs and cryptos are showing now, these dotcom firms also showed resilience over the long term. They all rose to success after initially being written off at a time when everyone began to pull out of Dotcoms, around 2000-2001, and this is something that could repeat itself within the crypto sphere.
The same story we all see in the crypto sphere today applies to firms like Facebook and Amazon – “If you invested X amount in 20XX, then your money would be worth X amount today” and "If only we saw it coming"!
The Dotcom market's fate was due to overvaluation of companies that financial experts knew very little about. Suddenly people began to realise that many of the ideas fueling these companies' price indexes on exchanges like the NASDAQ were living on cloud 9 coming up with outrageous ideas that would never work.
Ring any bells?...
Well, it should because back in 2017-2018 cryptocurrencies were also something we knew very little about. The crypto market was very much a repeat of the Dotcom era with cryptos being severly overvalued. Plus, there were also a few outrageous ideas that fizzed out while there were numerous fraudulent ICOs which were Ponzi schemes, corrupt wallets, and unscrupulous exchanges.
Wiping out the crypto markets weak links...
All these weak ICOs, scams, and most unregulated exchanges are history. Meanwhile, weaker cryptos were wiped out during the crypto markets 'nuclear winter'. As a result, we are left with what appears to be a more stable and regulated market with legitimate ICOs.
On top of this, scams are now much less likely as investors know what to look out for. The old saying goes, 'once bitten-twice shy'.
Family Office are increasingly confident that the 'Old Risks' of crypto investment are no longer relevant thanks to a 'Dotcom' style shake down!
- Scam ICOs are now all but pushed out of the crypto market today
- Weaker ICOs with financial instability chose to exite the crypto market during the 'nuclear winter' leaving only strong contenders (the next Amazon!)
- Trustworthy crypto exchanges, wallets, and ICOs are now almost all regulated and outragous ideas exposed quickly
- The market is now considered matured with new cycles that compare with other financial market trends
Digital asset management Vs Traditional asset management for family offices?
In today’s current financial market climate, digital asset management is becoming as much a part of wealth management funds as traditional asset classes. That trend is set to continue as cryptos are now a more stable and the technology behind them is sure to bring forth the next big tech giant of this Millenium.
Some of the safest investments out there are firms that show potential for the future. For example, DASH could become the next payment system, while Ripple's blockchain ecosystem could become a global cross-border payment for banks and governments around the world which should lead to the increase in the value of XRP.
The Ethereum blockchain ecosystem is breeding new ICO. These crypto firms use EC20 tokens making it easier for them to break down barriers to entry into the crypto industry as they already have a ready-made blockchain ecosystem they can tweak to create their blockchain tech solution. Somewhere in here could be a hidden gem that will be the next Google or Amazon!
Meanwhile, family offices will continue to invest traditional asset classes such as FX, private, as well as public equity options. Traditional financial investment is east to explain because it is the long term investment into non-crypto asset classes.
- Digital asset management is a new trend for most family offices
- Traditional assets historically offer secure long term investment opportunities
- Cryptos are now showing more promise in terms of 'safe and long term investment'
The Story Of Cryptos Winners & Losers To Date
Now we know why family offices are diversifying their welth funds into crypto, we are going to take a quick trip down memory lane to just why these wealth management firms were steered away from investing in the past.
This helps to build a picture of the crypto market and how it came to be the financial market that is now attracting family offices investing in cryptocurrency!
Just half a decade ago, as we were approaching 2016, BTC was already on the rise. Back then it was hovering between $250 and $300 per virtual coin in circulation, and at the time a $1,000 investment would be worth close to $45,000 today.
Then you can only imagine how $1,000 is just a drop in the park for large wealth management funds, hedge funds, and family offices investing in crypto.
Some of these investment firms bought $10,000 and $100,000 worth of BTC as soon as it began its rise past the $200 mark. When you do the math, that’s $450,000 and $4.5 million going by today’s BTC value of just under $11,000. Yet, although this is a nice story with a seemingly happy ending for some investment tycoons, the reality is that thousands of people also lost their crypto investments.
When BTC made an unprecedented bull run in 2017, it was closing in on $20,000 per coin. It looked like the crypto was never going to stop. People were selling their houses to get in on the ‘New Gold Rush’ with the prediction that BTC was destined for values far beyond $20,000. However, as many of us who have been in the investment business for any length of time knew – what goes up, must come down.
As the world’s most mature, and most expensive, crypto closed in on that milestone the bubble burst and much like the Dotcom era, BTC tumbled as did many other cryptos. If you compare the Dotcom price charts versus the BTC price charts, they look almost identical.
In both the Dotcom 1995-2001 and 2016-2018 crypto era People sold their houses, invested their life saving into BTC and other cryptos at the wrong time. They made their entrance to into the market just before it peaked after resisting investment for so long. At the time it seemed as if cryptos were now a good investment.
In the end, cryptos such as BTC fell to figures below the $4,000 mark wiping off thousands of dollars from the crypto market.
In both instances, the Dotcom and crypto markets show marked recoveries and it is this comparison that is influencing the rise of venture capital firms investing in blockchain technology, hedge funds diversifying their portfolios into digital assets, and more recently an increase in family offices investing in cryptocurrency.