Family offices – private wealth management advisory firms serving high net worth individuals and families – are rapidly embracing crypto assets as an alternative investment, according to a recent survey by UBS Global Family Office Report. The study found that 36% of surveyed family offices allocated investments in cryptocurrencies in 2019, up from 19% in 2018. However, despite growing interest, the survey also identified a lack of clear regulation, market infrastructure, and institutional support as major obstacles for family office adoption of cryptocurrencies.
Crypto-assets, such as Bitcoin, Ethereum, and other altcoins have gained increasing attention from institutional investors in recent years. Traditional financial institutions, including hedge funds, asset managers, and banks, have also started to offer crypto-based products and services to their clients. Family offices – who usually manage assets worth $100 million or more – have also started looking into the digital asset space in search of higher returns and portfolio diversification.
One reason for the growing interest is the year’s performance. Bitcoin and other major cryptocurrencies have shown remarkable resilience during the COVID-19 pandemic, outperforming the stock markets and gold. For instance, since the beginning of 2020, Bitcoin has gained over 50%, while the S&P 500 index has lost 4%. This resilience has led many institutional investors to see cryptocurrencies as a safe haven asset, and a potential diversification tool for their portfolios.
Another reason is increased regulatory clarity in some jurisdictions, where crypto assets are now treated as financial instruments and subject to licensing and market surveillance. In the US, for example, the Securities and Exchange Commission (SEC) has started to approve crypto-based trading products, and some banks have launched their crypto custody services.
However, despite the growing interest and regulatory clarity, the UBS report identified significant obstacles for family offices to participate in the crypto market. One of the major obstacles is the lack of clear regulation, particularly in jurisdictions where crypto assets are seen as unregulated assets. This lack of regulatory clarity can be a deterrent for institutional investors, as they need legal certainty to avoid any legal risk.
Moreover, the lack of institutional-grade infrastructure and service providers also poses a challenge for family offices. Unlike traditional asset classes, such as equities, bonds, and real estate, the crypto market has been largely unregulated, with many exchanges and wallets being unlicensed and unregulated. Additionally, cybersecurity threats, such as hacking and theft, still pose a significant risk for digital asset investors.
Family offices also face the challenge of accessing professional-grade research and analysis on crypto assets, given the lack of consensus within the industry regarding best practices and risk management approaches.
To overcome these challenges, family offices need to engage with service providers and consult with legal and regulatory experts to navigate the complex regulatory landscape. They also need to collaborate with established players in the crypto industry to leverage their expertise and connections. For example, some family offices have started to work with crypto hedge funds and investment firms that provide institutional-grade research and analysis.
Furthermore, family offices need to develop a clear risk management strategy to mitigate the potential downside risks of investing in digital assets. This strategy should be tailored to their individual needs and objectives, and should include measures for diversification, portfolio monitoring, and cyber-security.
In summary, Family offices are increasingly turning to cryptocurrencies as a potential investment opportunity. The resilience of major crypto-assets during the COVID-19 pandemic and improving regulatory clarity has made the crypto space more attractive than ever before. However, there are significant barriers to entry, including regulatory uncertainty, lack of infrastructure, and security concerns. To overcome these obstacles, family offices must engage with service providers, consult with regulatory experts, and work with established players in the crypto industry. With the right support, family offices can position themselves as pioneering investors in this fast-growing and exciting space.
The surge of interest in cryptocurrency investments is not limited to individual and institutional investors. According to a recent report from Ocorian, family offices, which are investment vehicles catering to high-net-worth individuals and their heirs, are increasingly allocating funds to digital assets. The report confirmed that 130 global family office professionals managing more than $62.4 billion in combined assets revealed that 90% of their clients are asking about or demanding the inclusion of crypto in their portfolios.
However, investing in cryptocurrency has its challenges for family offices, including regulation and practical issues, which can create inconsistencies between global tax regimes. Therefore, it’s essential for family offices to access and implement expertise to support them in making the right investment decisions.
As more clients seek crypto exposure, some family office managers are faced with compliance and regulatory issues, particularly due to the lack of uniform regulation pertaining to this asset class. This uncertainty is a significant challenge that needs to be resolved to draw more of these professional investors into the crypto market.
It is noted that younger, tech-savvy generations running family offices are looking to invest in crypto. However, given the risks and challenges associated with this emerging asset class, many are struggling to find the right support with the regulatory and reporting requirements. Amy Collins, head of Ocorian’s family office unit, suggests that the roadmap to increased crypto access among family offices lies in outsourcing. Many family office managers do not directly oversee all the assets in the portfolio but rather outsource some of the investment management work to third parties to improve costs and efficiencies.
While it is not impossible to deploy that strategy with digital assets, there is a need for improvement in this area. If these improvements are implemented, more family offices may start allocating funds to the cryptocurrency market, which could provide long-term support for the asset class.
However, despite the interest shown by family offices in crypto investments, the report reveals that 80% of family offices and high-net-worth individuals struggle to outsource to third parties supporting regulation and reporting obligations of digital assets. This indicates that the current infrastructure in the crypto market is still not sufficiently robust to accommodate the needs of professional investors, making it essential for the industry to continue developing and improving.
In conclusion, family offices have joined the growing wave of investors looking for opportunities in the cryptocurrency market. And yet, investing in digital assets comes with challenges, including regulation and practical issues. Improvements in outsourcing strategies and overall market infrastructure will be crucial in supporting the involvement of professional investors, such as family offices, in the crypto market. As the market continues to evolve and regulatory clarity emerges, we may see more funds allocated to crypto-assets by family offices eager to diversify away from traditional investments and capture returns in the fast-growing cryptocurrency market.