Scott Dunn and Bill Benton are principals of Guardian Bitcoin, a service that helps people store bitcoin and pass it to the next generation. They discuss whether family offices should consider adding bitcoin to their investment portfolios, as well as how to protect the asset from cybercrime.
Why would family offices consider investing in bitcoin?
Benton: Today, one bitcoin is worth about $110,000. The forecast for bitcoin in five years is roughly $1 million a bitcoin, and the base case for 20 years from now is $13 million per bitcoin. I think there is a tremendous opportunity here, because there is no ability to create more: 95% of all the bitcoin that is ever going to exist has already been mined, and conversely, 95% of the population doesn’t own any.
Bitcoin represents about 2% of investable assets in the world today. So if you are 0% allocated, that means you are shorting an asset that has appreciated by 10x in the last five years.
There are other reasons we think bitcoin makes sense for family offices. One is the long-term value that can be passed across generations in a private and frictionless manner. It’s a digital bearer asset, which makes it censorship and seizure proof when it is held in a self-custody or collaborative-custody manner.
And there is a wonderful opportunity for family offices to connect multiple generations of a family. You can have the older folks go on this journey with the younger folks — it’s something that everybody can learn about together.
How can investors hold bitcoin?
Benton: There are three ways to get exposure to the bitcoin price. You can buy it through an ETF, which is a derivative. You’re not actually holding the bitcoin, and all transactions are settled in cash.
The second way is to buy bitcoin on a crypto exchange like Coinbase, Gemini or Kraken. In this case, you have an IOU: Coinbase is going out and buying that bitcoin. You’re not in actual possession of it. One risk with having bitcoin or any digital asset on an exchange is that they are under constant attack from hacking groups around the world. It’s estimated that $11.4 billion in crypto assets was stolen from exchanges and related platforms over the past five years, with centralized exchanges accounting for 70% of the total.
The third way to hold bitcoin is self-custody. That’s what our service does. With our service, you are your own bank, and you are in complete control of your bitcoin. Self-custody is widely considered the safest way to hold bitcoin.
What are the advantages of self-custody?
Dunn: Bitcoin is a bearer asset, just like gold — but it’s better than gold, because it’s digital. The bitcoin network was created to eliminate the need for trusted third parties, like banks or other custodians — so the first two alternatives, ETFs and crypto exchanges, are single-handedly undoing the decentralized nature of the bitcoin network. You’re trusting a third-party custodian.
The attack vectors are greatly reduced when you take advantage of the bitcoin network’s decentralized, peer-to-peer architecture that empowers you to be your own custodian. Hackers are targeting where there are large concentrations of digital assets being held, and that’s at the exchanges.
How are taxes and inheritances handled?
Benton: From a tax advantage standpoint, when you self-custody bitcoin, it is a bearer asset, so it is the equivalent of having a bar of gold sitting in a safe. When the person that owns the gold passes away, their beneficiary can take possession of that bar of gold and move it into their safe.
With our service, we do that inheritance planning upfront. When we set up your wallet, you set it up so that when the wallet owner passes on, the bitcoin is privately passed to whatever wallet or wallets they would like. This is a fully integrated and automated feature of our wallet and service. Many bitcoin have been lost over the years due to poor succession planning. So, that is massive tax advantage No. 1.
No. 2 is that people who have held bitcoin for the past 10 or 15 years were never able to earn yield or pledge their bitcoin as collateral. Bitcoin is often referred to as pristine collateral due to its absolute scarcity and no counter-party risk. Now, you’re starting to see products that allow you to borrow against your bitcoin and be fully funded in 15 to 20 minutes. Wealthy families can take loans against their bitcoin holdings and never be exposed to capital gains tax and continue to accrue the appreciation of the collateral, which has averaged a 55% compound annual growth rate over the past five years. We believe bitcoin represents the ultimate ‘buy, borrow, die’ asset.
How can investors keep track of bitcoin?
Dunn: In the past, it’s been difficult for financial advisors to keep physical bearer assets in the book of business. However, bitcoin is digital, not physical, which changes everything. Our wallets are collaborative with multiple private keys: We collaborate with the clients or their family office, and the family office is a member in the client’s wallet. The family keeps a quorum of private keys (e.g., three of five private keys), so they are always in control of the bitcoin. The family office can hold a key, and in our case, Guardian Bitcoin will hold a key. This setup provides the most secure and redundant way to hold bitcoin. This also allows the family office to keep the books properly and keep the bitcoin on their client’s book of business.