Digital assets are becoming a major part of the financial industry and their attributes are better understood and appreciated. But how can family offices get onboard with confidence?
The recent positive developments in the digital assets’ ecosystem give a signal that a start or intensification of investments in cryptocurrencies is timely for family offices. Diversification, a potential of high performance contribution and store of value are the main attributes that will typically motivate a small allocation of cryptocurrencies in a traditional portfolio.
Bitcoin, and digital assets in general, cannot be ignored
While initially thought of as a niche asset class that appealed to a narrow pool of investors, digital currencies gained momentum as a mainstream investment opportunity.
“Crypto becomes a trillion dollar asset class, as several crypto metrics are now (again) measures in trillions” (The Block - research 2021).
Source: Coinmarketcap (March 2017-Jan2021)
Digital assets’ specific attributes are relevant to family offices
- Diversification: historically Bitcoin, and other crypto-assets as an asset class, is relatively uncorrelated to traditional markets as their drivers differ overall from the ones which apply to equities and bonds. Digital assets have their own intrinsic drivers, such as adoption of the underlying blockchain and services and are not influenced by traditional companies’ profits or governments’ monetary policies. While there might be short bursts of correlation in times of crisis, digital assets have historically proven themselves as a very diversifying asset class for over a decade. Lack of correlation might also be due to a lack of standards for valuing different sorts of digital assets.
- High performance contribution potential: the volatility of digital assets which can hold back some investors and be considered as a weakness might actually be an asset, if well managed. When considered as a small part of a diversified portfolio, their high volatility could actually offer a disproportionately high potential portfolio impact - this could be compared to a leveraged position with only a small initial investment at risk. As an example, if, at the beginning of 2020, 1% of a traditional portfolio (60% equities, 40% bonds), had been invested in Bitcoin, this tiny part would have weighted 16% in the global performance of the portfolio, thanks to an outstanding year for bitcoin (+303% in 2020) throughout the covid crisis.
- Store of value: unlike traditional currencies, some crypto assets like bitcoins have a capped supply meaning that the asset is capable of retaining value over time, and is not subject to any form of control or manipulation. It is therefore not unreasonable to see digital assets being used as a potential hedge against inflation and systemic risks in times of geopolitical crises. The Covid-19 crisis has led many governments to massively print money to support the economy. As these effects might lead to inflation and a debasing of the fiat currencies, some family offices are now looking for new alternatives. Bitcoin and many digital assets have confirmed their store of value feature throughout the year.
In the current environment of very low interest rates and economic crisis, digital assets are poised to be an alternative investment to family offices.
According to Howard Wang, ex-Bridgewater analyst: “As long as the world is flooded with money and safe assets offer poor compensation, Bitcoin will be relevant.”
Investing directly into crypto-assets can nevertheless be tricky as pricing and trading are very specific to this asset class. A safer and easier option would be to invest in some crypto instruments which have similar characteristics as ETFs (Exchange Traded Fund).
Such a product should combine the highest market capitalisations and most liquid digital assets and offers investors the opportunity to partake in this growing asset class. Trakx offers a good example of such options/instruments having developed crypto traded indices (CTIs). The company has launched 12 strategic index products, and some of them are particularly adapted to family offices’ requirements. Among the most popular thematics, investors may get exposure to:
- Top10 Ethereum replicates the performance of the 10 leading digital assets on the Ethereum blockchain. Among those some are centralised exchange tokens.
- Top10 DeFi replicates the performance of the 10 leading Decentralised Finance ("DeFi") tokens available on Ethereum. DeFi provides a digital alternative to the entire traditional financial services, not only payments but also loans, savings, trading or insurance, to name but a few.
- Top10 Crypto is tracking the global cryptocurrency ecosystem through the 10 largest digital assets, representing altogether between 85% and 90% of the total market capitalisation.
- Digital Inflation Hedge is designed to hedge against inflation and is composed of an equi-weighted basket of Pax Gold (digital asset, backed by physical gold) and a dynamic exposure to bitcoin. The exposure to bitcoin is controlled to lower its volatility to 15%, a level similar to gold’s long-term volatility.
Trakx offers sophisticated crypto investment strategies for family offices, private banks and HNWI looking for alternative investments with high potential and decorrelation from traditional investments. We provide digital-asset index products which enhance portfolio diversification with reduced fees. Our platform offers the compliance, custody and liquidity required by large investors.
Please contact Laurent at Trakx for additional questions.
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