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Family Offices and Crypto Assets – Adoption and Key Factors to Consider

As institutional interest in the crypto assets space is increasing steadily, family offices present an interesting case when it comes to the adoption of crypto. On the one hand, a family office’s main goal is to preserve the family’s wealth for generations to come, meaning they could take a more conservative approach to investing – usually family offices set fairly conservative benchmarks for their return on investment. The goal is often to preserve wealth by beating inflation; generating large amounts of alpha is not the priority. On the other hand, single family offices can be considered uniquely positioned to invest in crypto assets, due to their long-term investment horizon and the fact that they quite often do not need to comply with as many rules and regulations as regulated investors do, such as funds investing on behalf of their clients.

A survey published by Goldman Sachs in July 2021 found that 15 percent of family offices around the world and 25 percent in the Americas have already invested in cryptocurrencies. Another 45 percent globally are considering adding crypto exposure in the future. The report states that “some family offices are considering cryptocurrencies as a way to position for higher inflation, prolonged low rates, and other macroeconomic developments following a year of unprecedented global and fiscal stimulus.” With more and more financial institutions, such as banks and funds, actively participating in the crypto space, family offices too are showing increased interest and engagement.

However, there are a number of risks posing challenges to the adoption of crypto by family offices. These risks include 1) asset volatility risks, 2) regulatory risks, and 3) security risks.

Asset Volatility Risks

Cryptocurrencies are volatile assets. This volatility stems from several key factors: the cryptocurrency’s arguably small market size, especially outside of the Top 10 cryptocurrencies, the high level of open leveraged positions and the fact that the crypto market trades 24/7 (with lower liquidity on weekends, for example). The Speculation combined with the low barriers of entry allowing retail investors and the resultant often emotive reactions to market conditions and news also add to the market’s volatility.

All of these factors contribute to the volatility evident in cryptocurrencies, making it a perceivably risky asset.

Regulatory Risks

Crypto assets are still a largely unregulated space, and the regulatory uncertainty presents a potential risk to institutional investors (Bitcoin, having the highest level of decentralization is the safest asset from a regulatory perspective). However, most governments and regulators around the world are working on regulatory frameworks for the crypto space, and at DeFi Consulting Group, we think 2022 could see substantially more regulatory clarity surrounding crypto assets and decentralized finance.

To find out what else DeFi Consulting Group anticipates for 2022, read our crypto trends post here.

Security Risks

The third challenge for family offices – as well as any other investors – is that of security. Hacks, cyber breaches and, more generally, questions on custody security can contribute to a more cautious approach taken in the adoption of crypto investments.

While these different types of risks are significant factors to keep in mind as a family office, they can be mitigated.

Family offices’ long-term investment horizon can, for example, mitigate some of the volatility inherent in crypto assets, as well as having a diversified portfolio with relevant asset allocations. From a security perspective, the crypto industry is evolving at a rapid pace, with more secure and reliable infrastructure and solutions being built with the needs of professional investors in mind. Choosing reliable service providers, such as reliable institutional-grade custodians and insurance, can go a long way in mitigating security risks.

At DeFi Consulting Group, we provide tailored consulting services to our clients on questions related to choosing the right custodian solution and crypto service or infrastructure providers.

The pandemic and the resulting monetary policies have also changed the landscape of investing, with a good number of investors using crypto assets as a potential way to hedge against inflation, as well as investors’ risk appetites changing. According to a Forbes article, there has been a significant shift in risk appetite since the Coronavirus pandemic, with 59% of Family Office Leaders now saying they are more prone to taking risk.

Overall, family offices are increasingly paying attention to the crypto assets space, at different levels of maturity: from building awareness, getting educated or experimenting, all the way to really looking at crypto as a new asset class.

As the crypto infrastructure continues to improve and professional institutional-grade solutions for custody are becoming available, we are seeing a growing number of family offices showing interest in crypto.

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