Investment

Some thoughts on cryptocurrencies, the blockchain, and family offices

Has there been a revival of interest among family/private offices towards crypto/blockchain assets? Are private investment offices beginning to do more direct deals in these interconnected alternative investments?

It’s difficult to know with any certainty if they are becoming more confident towards crypto and blockchain assets. But some activity recently suggests one or two are doing deals.

Which cryptocurrency is going to be the internet of blockchains: In all probability, it will be the bitcoin blockchain, because it has this colossal first mover advantage…

A few weeks ago, the New York City-based Witter Family Offices, which is owned by Michael Witter and Sherry Pryor Witter, invested in Silvergate Bank, in advance of the bank’s Initial Public Offering announcement. Silvergate is a provider of financial infrastructure and services to participants in the digital currency industry. It’s a part of the highly prized infrastructure around cryptocurrencies.

Early this year, Two Russian family offices and a Hong Kong private investment group backed separate blockchain startups.

Larnabel Ventures, the investment office of Russian billionaire entrepreneur Mikail Gutseriev, and VP Capital, the investment office of Belarus IT entrepreneur and businessman Viktor Prokopeny, backed Currency.com, a trading platform for cryptocurrencies, based in Gibraltar and Belarus.

Hong Kong-based Mandra Capital, which manages the money of Chinese entrepreneur, Song-Yi Zhang, has invested in Chronicled. The San Francisco-based group uses blockchain and IoT (Internet of Things) to power smart, secure supply chain solutions.

And billionaire mining financier Robert Friedland, and his investment group Ivanhoe Capital Corp., funded Houston-based AI/blockchain e-commerce site Zwoop with $13 million.

Speculation has also emerged that some family offices are backing a few of the cryptocurrency banks that are about to emerge in the US state of Wyoming, following the state’s decision to allow digital currencies as legal tender. Some Middle East family office-type investors are poised to sign deals there, say insiders, although no actual names are mentioned.

Various polls show a rising number of family offices now think crypto assets are a viable new asset class. So, more and more sophisticated investors like family offices are beginning to believe cryptocurrencies have real legitimacy.

“One of the main reasons bringing more family offices back to the crypto table has been the price reset,” says Adam Grimsley, head of investment solutions at the London-based Prime Factor Capital.

“Entry price is always the most crucial point of any return. The market clearly went through a hype cycle in 2017 and 2018. As we have seen the market mature and prices become more attractive, institutional investors like family offices have decided to renew their interest.”

Like all the deals mentioned above, most see opportunities in the infrastructure linked to the sector  – things like crypto asset banks, crypto asset managers, exchanges, and blockchain e-commerce platforms. The infrastructure, say analysts, appears to be attracting the smart money, because of the potential to make millions of dollars from transaction fees earned from the buying and selling of crypto assets.  

But some cryptocurrencies are also looking more enticing after last years rout. Bitcoin, the most quoted and traded of all cryptocurrencies, has regained some of its lustre. And some experts reckon Bitcoin might increasingly dominate the cryptocurrency world in the years ahead.  

“Analysts often ask: ‘which cryptocurrency is going to be the internet of blockchains’,” says Dominic Frisby, the author of Bitcoin: The Future of Money. “In all probability, it will be the bitcoin blockchain, because it has this colossal first mover advantage, it also has the network effect.”

David Nage, who works for a family office and knows the world of crypto assets and blockchain well, reckons investors should start taking the asset classes more seriously. He recently pointed to an endorsement of crypto assets from Cambridge Associates, the pension and endowment advisor.

In a recent blog, Nage quoted a piece of research done by Cambridge Associates, which unlines how some heavyweight and well-established asset management groups are warming to crypto assets.  

“Although investors could rely on venture capital funds in their portfolio to determine their allocations to crypto assets, there are strong reasons to consider a dedicated crypto fund investment. First, the SEC cap on non-qualifying investment could restrict their desired exposure. Second, the space is highly technical, meaning late entrants and non-specialists will be operating at a disadvantage to investors immersed in the space. Lastly, we expect partners specializing in crypto at traditional venture firms to spin out and launch their own dedicated crypto funds, as has already been the case. Taken together, these reasons mean investors could miss out on investments with the most knowledgeable managers in an industry with large potential payoffs.”(Nage’s emphasis).

Beyond the legitimacy Cambridge is incurring on crypto assets as an investment opportunity, what this is saying is that indirect investments in crypto assets make sense.

And another factor that will generate more interest in crypto assets will be the next generation of investors. “One of the more qualitative factors that we have seen is that the next generation of the family members understanding and appreciate digital assets,” says Grimsley. “It speaks to their own experience and way of thinking about the world. They are keen to understand and invest in a sector which they see as driving the next revolution. They are sceptical of many of the financial institutions and strategies that previous generations have used.”

That said, many sophisticated investors will need more persuasion about crypto assets before investing. Given the volatility and the high-profile cases of fraud linked to a few crypto assets, some liken the assets to the hundreds of speculative bubbles that have existed in the past.

They may be wrong, and undoubtedly some investors will make fortunes from crypto assets – and the infrastructure around them.

But as some wise investor once said: “The market always pays a premium for a great business and assets that are simple to understand but hard to duplicate.”

And for most investors, crypto assets aren’t easy to understand and very easy to duplicate.

 

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