Family offices tend to be conservative regarding wealth management, steering clear of volatile corners of the markets, including cryptocurrency – among the most volatile of investment themes to emerge in recent years.
“The naysayer case is often along the line, ‘I don’t understand it, so I won’t invest in it,’ and I hear that from a number of different family offices,” says Kevin Brent, chief investment officer of Bluesky Equities Ltd., the investment arm of a single family office in Calgary.
Yet Bitcoin – the most well-known of the thousands of digital cash alternatives now circulating – is a story that is hard to overlook, even for family offices, he adds.
Certainly it is the poster child for extreme volatility, with its price rising from about US$10,000 per Bitcoin last fall to a peak of about $60,000 in the spring, only to fall back to about $32,000 in July. Then in early September, its price jumped to about $52,000 before dropping to about $45,000 a few days later. It is currently back over $50,000.
But beyond the extreme price gyrations, Bitcoin’s growth in value is hard to ignore.
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At its inception in 2010, it was worth about 0.08 cents per coin.
Bitcoin’s rise as an alternative decentralized currency and as a store of wealth – often referred to as digital gold – is just the start, say those following the space, including a handful of Canadian family offices.
Other cryptocurrencies have substantial potential, too, as does the technology underpinning them – blockchain, says Brent.
Investing in cryptocurrency since 2016, Bluesky first used a third-party manager and then moved to managing its own portfolio of cryptocurrencies.
Like other investors with an interest in cryptocurrencies and blockchain – a decentralized ledger system that is highly secure and efficient – the family office sees wide-open opportunities for the nascent asset class.
One premise is simply the capital growth potential of Bitcoin and other popular cryptocurrencies, including Ether, or its platform Ethereum, he says.
A second is diversification.
Like hedge funds, private equity and venture capital, cryptocurrencies are another asset class to spread out risk and return, with Bitcoin now performing a similar role to gold, “only it’s a much more volatile inflation hedge,” Brent says.
Bluesky, however, is an outlier among Canadian family offices.
“Most family offices are not there yet,” says Martin Lalonde, president of Montreal-based Rivemont Investments, which launched the first actively managed cryptocurrency fund in Canada in 2017.
“They’re still concerned about the volatility and whether it will be there 10 years from now, so most of them have not turned the corner … but they will,” he predicts.
Other concerns about cryptocurrencies include the potential for cybercriminal activity – the FBI in July issued a warning about increasing cybercriminal activity in the crypto space. And it is still largely unregulated, carries liquidity and pricing risk, and faces potential obstacles, such as China’s recent ban on cryptocurrency transactions and mining, including foreign exchanges serving Chinese investors.
But Lalonde notes he has been involved in the space for about eight years and, during that span, interest in cryptocurrencies has soared, alongside Bitcoin’s value.
Ken MacLean, is a director at Colmac Capital Inc., based in Calgary, which co-owns and operates with other family offices a cryptocurrency mining operation in partnership with the Navajo Nation in New Mexico – an increasingly profitable business.
He views cryptocurrencies as a buy-and-hold, long-term growth opportunity for family offices.
The volatility aside, “you’re crazy if you’re not in it because it has consistently proven to beat the market,” MacLean adds.
Understandably, family offices may have difficulty assessing the investment opportunity. MacLean, who has only been following the sector since 2018, acknowledges even he “still has much to learn.”
“But with each layer you pull back, you go, ‘This makes a lot of sense as an investment.’”
He further notes Bitcoin increasingly seems like a “physical store of wealth,” much like real estate – an asset many family offices favour – which typically grows in value over time ahead of inflation.
But cryptocurrencies and blockchain technology may offer much more upside for patient investors than traditional asset classes.
Brent points to Ethereum as one example that could be even more revolutionary than Bitcoin. “It allows for a multitude of different applications to be built on top of it.”
In turn, Ethereum is more likely than Bitcoin to expand decentralized finance (De-Fi for short), which could upend the dominance of financial intermediaries like banks and stocks exchanges, he says.
With the technology potentially allowing for everything from the creation of tamper-proof digital smart contracts for the financial, legal and insurance industries, to non-fungible tokens (NFTs), “there are likely potential uses we do not even know about right now – similar to the Internet in the nineties.”
What’s more, Brent adds, family offices are well-positioned to allocate capital to this space without putting their overall wealth at risk.
“Our allocation originally was first measured in basis points,” he says about the asset class’s initial share of the investment portfolio.
That has since grown to about 1.5 per cent, he adds.
Other family offices might consider even larger allocations, MacLean says.
“I do think it’s something that you want to get 5 to 10 per cent of your wealth into.”
As for the space’s high volatility, “that’s just part of the game” for any rapidly growing new investment type, Lalonde adds.
“If you want that kind of performance, you need to be able to deal with the volatility.”
As MacLean notes, bumps and surprises are to be expected.
“We’re still in the early innings, but I believe this is an asset class that you will one day hand off to the next generation when, arguably, it could be worth $1 million a Bitcoin.”