As Bitcoin surges, some family offices are bullish

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Bitcoin nearly hit its all-time high yesterday, breaking above US$65,000. The value of the cryptocurrency is currently buoyed in large part by the approval of a number of U.S. exchange-traded funds, as well as a potential supply squeeze with increased demand. But this follows a couple of years of a plunge in value of about US$45,000, with a history of scandals, thefts and bankruptcies in the industry.

For many Canadian family offices, which have lagged some of the enthusiasm of global peers, Bitcoin is becoming a more palatable investment.

This is in large part due to its rapid price growth over the past decade, both piquing their interest and stoking wariness regarding its volatility and future price trajectory, as well as the difficulty in valuing an asset that is not backed by anything.

The granddaddy of cryptocurrency shares characteristics of other investments, including gold, and yet it is unlike any other asset class today, argue its proponents.

“If you have short-term money you want to spend, you probably don’t want it in Bitcoin,” says Arthur Salzer, chief executive officer of Northland Wealth Management Inc., an Oakville-headquartered multi-family office.

“But if you have a three- to five-year time horizon or longer, allocating to it makes sense.”

Salzer adds many Northland clients agree, with some holding as much as 20 per cent of their portfolio in Bitcoin.

The investment thesis for Northland is not new. It has been evolving over the past six years, bolstered by emerging research, including a Yale University study that found a 1 per cent allocation to Bitcoin in a portfolio yielded 2 per cent alpha, with larger allocations creating more volatility but higher outperformance.

Indeed, despite its volatility, Bitcoin’s price growth is a compelling case for investors, up about 9,000 per cent in the last decade, according to CaseBitcoin.

Use case of Bitcoin as store of wealth

It has also taken time for securities regulators and astute investors – family offices included – to understand how it works.

“There is a journey everybody takes,” says Gary Coleman, president of Garibaldi Investments Ltd., a single-family office based in Winnipeg.

Bitcoin’s price growth is certainly an attention-grabber, adds Coleman, who became interested in the cryptocurrency in 2021.

Yet the use case for Bitcoin as a long-term store of wealth, similar to best-in-class real estate, is also of interest to many high-net-worth investors, including Canadian family offices, concerned about fiat currencies’ debasement as governments outspend revenue.

Gold has been the traditional hedge, but Bitcoin is arguably better, Coleman says.

“It’s not that I don’t like gold; I just like Bitcoin more,” noting Bitcoin is easier to store and more liquid.

Garibaldi’s cryptocurrency allocation accounts for 15 per cent of its portfolio, with 75 per cent of the allocation in Bitcoin and 18 per cent in Ether – the cryptocurrency supported by the Ethereum blockchain technology. The remainder is invested in lesser, even more speculative, cryptocurrencies.

Bitcoin as hedge to fiat currencies

Bitcoin stands alone due to its scarcity, stability, track record and popularity, says Samson Mow, chief executive officer of JAN3, a Bitcoin technology company based in Shanghai.

“The fiat monetary system is dying,” says Mow, who has consulted with family offices on Bitcoin’s uses, as well as with governments seeking to mine Bitcoin for revenue.

“The world has printed too much money, and so we have to get back to a hard currency, and for a lot of Bitcoiners, that’s Bitcoin.”

Many family offices share in that view, particularly because of Bitcoin’s unchangeable limit on how much can exist.

So far, more than 19 million coins have been mined, and the last, 21st million coin is forecast to be mined by 2140.

While speculative demand has largely driven Bitcoin’s price so far, future price growth will be increasingly driven by scarcity amid expected growing demand, Mow says.

What’s more, Bitcoin miners’ proof of work compensation consistently splits every four years, a built-in mechanism called the ‘halving’ to promote long-term price growth and stability. The next ‘halving’ is supposed to occur in April.

Generational differences in approach to cryptocurrency

That could increase Bitcoin’s price, but it may not, underscoring many family office clients’ uncertainty around the asset, says Scott Binns, partner at Richter business and family office in Montreal.

“There are still a lot of unknowns.”

A taxation expert for cryptocurrencies at Richter, Binns helps clients with cryptocurrency investments stay onside of shifting tax laws.

“We typically see generational differences among clients, where younger-generation family members will want some exposure.”

Yet Bitcoin’s relative nascency makes many family offices still leery of investing in it, he adds.

Scandals involving cryptocurrency trading platforms have not helped. Neither have problems with exchanges like Coinbase or, earlier Mt.Gox.

That said, high-profile scandals like the collapse of FTX Trading Ltd. – once one of the world’s largest cryptocurrency trading platforms – were not due to problems with Bitcoin, says Coleman.

“Rather Sam Bankman-Fried was the problem,” he says about FTX’s chief executive, convicted of fraud.

Bitcoin ETFs and potential supply crunch

Blackrock Inc.’s launch of the iShares Bitcoin Trust ETF among other U.S.-based ETFs further adds credence to Bitcoin as a legitimate, investable asset, now eligible for 401k retirement accounts, Salzer says.

So far, the iShares ETF launch has been among the most successful in ETF history, driven by investors bullish on its price potential.

“This is the first asset in the world that no government can steal from civilians,” Salzer cites as another reason for demand growth.

Supply already cannot keep pace with new demand. Mow notes that about 900 coins are mined daily, which will be cut to 450 in April with the halving, while new demand from U.S. ETFs alone is about 5,000 coins a day.

“So do the math.”

Many family offices have. That includes Northland, which helps clients mitigate Bitcoin volatility by rebalancing its allocation frequently.

Salzer further notes some clients have filled tax-free savings accounts with Bitcoin.

“If you could turn $75,000 into a million dollars over the next 15 to 20 years, why wouldn’t you?” says Salzman about Bitcoin’s growth potential, based on its compound annual growth rate of the past decade. Of course, its volatility makes precise performance predictions difficult, but Northland’s clients have bought in.

“We have a lot of $500,000 TFSAs already.”

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