From March 2020 to March 2021, the price of one Bitcoin had gone from $5,165 to $61,283, representing an eyewatering 1080% return. Needless to say, every family office in the world had crypto on their mind in 2021.
Then came the “crypto winter” of 2022 and 2023 that began with the infamous implosion of FTX. Suddenly, crypto became the boogeyman, as the investors that dipped their toes into the world of crypto got burned. As TradFi titans such as Blackrock and Fidelity wade into the industry and we enter “crypto spring,” family offices are beginning to wonder: Should we give it another try? How should we get exposure to one of the most volatile asset classes in the world?
Family Offices and Crypto
33% of family office professionals are actively investing in cryptocurrencies and may increase holdings. This includes 41% of family offices with less than $1 billion assets and 19% of family offices with greater than $1 billion in assets. This is a stark increase compared with the 16% of family offices that invested in cryptocurrencies in 2021.
According to Coinbase Institutional, a small allocation of crypto can increase risk-adjusted returns meaningfully. From April 2019 to March 2024, a traditional 60/40 portfolio resulted in 33.3% returns. But adding crypto holdings of just 3% of the portfolio increased returns to 52.9%. Adding 5% crypto increased returns to 67.0%. In addition to supplementing a total portfolio return, Bitcoin can offer diversification benefits as it has a low correlation with the S&P 500.
For the “crypto curious,” there are more ways than ever to get exposure, including investing in ETFs, direct ownership through OTC desk/exchanges, crypto funds, or publicly traded crypto companies.
ETFs
In the first half of 2024, the SEC approved a slew of Bitcoin and Ethereum spot ETFs, with the former seeing nearly $5 billion in volume in the first day of trading. The spot ETF approvals of the two largest cryptocurrencies, collectively representing ~70% of crypto market cap, reduces the friction for not only retail investors to get exposure with their existing brokerage accounts, but also for wealth managers that previously had no way of giving their clients exposure to crypto.
OTC Desks and Exchanges
While ETFs can be a convenient way to get exposure to price movement of Bitcoin and Ethereum, there may be other assets to which an investor may want to get exposure. Crypto exchanges like Coinbase can give an investor access to almost 250 other tokens such as Solana or Avalanche. For investors that are looking to make larger trades, over the counter (OTC) trading desks can facilitate large blocks while managing price movement. Popular OTC desks include Coinbase Prime, FalconX, and Kraken OTC.
Exchanges and desks can offer custody of digital assets or enterprise-grade infrastructure providers such as Fireblocks can manage custody and management of your digital assets. For the believers of “not your keys, not your coins,” investors can acquire crypto on exchanges or through OTC desks and store the tokens in a hardware wallet like LedgerX.
Crypto Funds
It can be prudent to back fund managers to navigate the volatile, technical, and regulatory complex industry. Funds such as Pantera, Brevan Howard Digital and Paradigm can give investors exposure from early-stage venture companies to liquid token management. These funds can give investors access to opportunities otherwise not available via ETFs or exchanges. When looking to invest in a crypto fund, it’s important to think about expected returns, net of fees, compared to expected returns of just buying and holding a crypto asset directly.
Publicly Traded Crypto Companies
For investors that don’t want direct exposure to specific cryptocurrencies, there are a handful of publicly traded companies that can provide indirect exposure to the price movement of underlying cryptocurrencies. Some examples include Coinbase, which is a cryptocurrency exchange platform that would give an investor exposure to crypto trading fees, and Marathon Digital, the largest crypto mining company, which would provide exposure to mining rewards.
Do Your Own Research
For family offices that are considering adding cryptocurrency exposure to their Investment policy statement, there should be extra emphasis on doing due diligence on all aspects of an opportunity. Until there is regulatory clarity and required disclosures, crypto projects, particularly non-US projects, operate in more of a grey area than other investment opportunities. Remember, just because Tom Brady endorses a crypto company, it doesn’t mean that it is guaranteed to be safe.
Justin Huang is a director at Wingspan Legacy Partners.
