Jul 25, 2023
Technology investments have been among the highest-growth, most attractive risk-return investments for over two decades. The internet, biotech, and fintech have all exhibited massive growth and substantial returns, especially when accessed through alternative asset investment funds. The hottest new sector is, of course, AI. However, there is one technology that is currently in the doldrums that may offer great opportunities for Family Offices.
Obscuring this opportunity is one central assertion that evades many sophisticated investors: crypto is a technology, not a casino.
(Terminology can be confusing when discussing blockchain technology. For more detail on how to consider differences and usage of terms like cryptocurrency, blockchain and web3.0, please click here.)
We have all read the headlines alluding to massive increases and decreases in the value of cryptocurrencies, making some rich and ruining others’ lives. So being fooled into thinking crypto is purely speculative by these large swings is natural. The asset class's volatility, not to mention hacks and regulatory uncertainty, dominate mainstream crypto coverage but serve to obfuscate the true nature and capabilities of the technology.
So, is cryptocurrency simply a failed experiment favoured by gamblers and scofflaws? Current investment patterns by many family offices suggest this may be the case. In a recent Goldman Sachs report on Family Office Investments, the proportion of Family Offices that are not invested and are not interested in investing in blockchain technologies rose an astounding 23% from 39% to 62%. Offices that indicated a future interest in investing in crypto fell from 45% to a paltry 12%.
There are also significant geographic disparities in the desire to invest in blockchain. In 2023, 63% of Family Offices from the Americas indicated no interest in investing in crypto, while in EMEA, 79% were disinterested. In APAC, only 43% were not pursuing crypto investments.
And yet most family offices who have invested are significantly more likely to increase their exposure than decrease it. In a report on North American Family Office investments from RBC and Campden Wealth, it was observed that of the 32% of Family Offices that had invested in crypto, 28% intended to increase allocation. In comparison, only 6% planned a decrease. Have these Family Offices got it wrong?
To assess the efficacy of their alternative investment strategies, consider our initial question. Is crypto a casino or a technology?
Blockchain technology is the next iteration of the internet that unleashes two important new capabilities, the transfer of value and smart contracts. Distributed ledgers on blockchains like Bitcoin and Ethereum can, at any moment, show completely transparently which wallet is in the possession of which asset. Smart contracts allow for the execution of code in a trustless, permissionless manner on a secure, distributed, accessible system. These two concepts may be hard to grasp, even for exceedingly technology-literate individuals, but they are revolutionary.
The transfer of value is the more straightforward of the two concepts. Blockchains are built upon thousands of validators which serve to reach consensus on which wallets are in possession of which assets. This function has proven highly effective and secure (think Bitcoin).
Added to this layer of distributed validators, smart contract blockchains allow any code to be deployed and interacted with. This means that anything which can be codified can be put on-chain and made available to anyone with an internet connection. Combined with the ability to track value, these smart contracts can mimic real-world financial applications (borrowing and lending, for instance), deeds (NFTs), and even social media. The added value is that these contracts can disintermediate massive, centralized competitors such as financial institutions or big tech companies. Therein we find the value and tremendously exciting nature of the technology.
The only real way to understand this technology and how it may change the way we interact is to see it in action. Sadly, most pundits who speak about crypto as an asset class have never interacted with a smart contract. Family Offices, companies, and even governments who make the leap find that it is typically a one-way street – you cannot unsee it. (For more information on Education sessions for family offices, boards, and business groups, please visit https://www.goldenpear.capital/education.)
However, just because a technology is interesting doesn’t make it a good investment opportunity, especially in an increasing interest rate environment where returns from other segments are notable. In a recent study by UBS which details Family Office investment patterns, the allocation from Fixed Income went from 11% in 2021 to 15% in 2023. With returns from relatively low-risk investments the highest in decades, it is hard to argue to take on unnecessary risk.
If we accept that the technology is revolutionary, early stage, and potentially very high growth, however, it should not be ignored. In fact, given how battered crypto prices are, one could argue that the best possible time to invest may be now. As of July 2023, the total crypto market capitalization was US$1.19 Trillion. That has decreased from a high of almost US$3 Trillion in November 2021. Some well-recognized assets are down substantially from their highs. Bitcoin is down approximately 55%, Ethereum roughly 61%, Matic is down 74%, and Solana is down a whopping 91%.
For sophisticated investors, recognition that an industry or an economy is experiencing challenging times typically represents a time to invest more aggressively for greater potential upside. Let’s look at an analogy.
First, let’s be clear that all technologies go through boom and bust cycles. In crypto, because value is so closely associated with the technology, and because part of the technology unleashes speculative elements, those cycles can be more pronounced and are unlikely to dissipate entirely over time. However, if we make comparisons to the bursting of the internet bubble in the year 2000, we can see that some of the same patterns are repeating themselves. In the below chart, we have overlaid BTC price (which is by far the largest asset in crypto and, therefore, a good benchmark for the asset class) with the dotcom crash.
The chart is compelling.
The next logical leap is to figure out how to invest and what to invest in. The two leading and most well-known cryptocurrencies are Bitcoin and Ethereum, but there are more than 25,000 digital assets listed on coinmarketcap.com. Researching the technologies and their prospects of even the top 100 projects would be overwhelming for a Family Office. In the early days of the internet, separating the hype from what was likely to be extremely revenue generative was challenging; the same is true in crypto. However, some new blockchains, Layer 2 blockchains, and the plethora of applications being built upon those blockchains offer tremendous potential to be the blockchain FAANGS of tomorrow. Identifying these assets requires a nuanced understanding of the ecosystem and how blockchain technology will likely be adopted. But just as a ridiculed but previously much-hyped online bookstore traded as low as 28 cents after the dotcom crash and became one of the world’s largest retailers, some of the applications being coded now that virtually nobody recognizes will become vital digital properties.
After reading this article, the critical question you should leave yourself with is the following: is crypto a transformative technology or a casino? One is worth investing in, and the other is not. The only way to determine the answer to this question is to see the technology in action. As educators in the space, we would be delighted to show you around:
Allan Matheson is the founder of Golden Pear Capital, a crypto asset-focused investment management company.
This article is for general informational purposes only. Any commentaries and information contained in this article should not be considered as financial or investment advice, and is not intended to provide legal, accounting, investment or tax advice. This article may contain the opinions, views or recommendations of individuals or organizations. These opinions, views and recommendations are provided for your general interest only and are not endorsed by Golden Pear. Every effort has been made to ensure that the material contained in this article is accurate at the time of publication. However, Golden Pear cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. Facts and data provided by Golden Pear and other sources are believed to be reliable when posted. Golden Pear cannot guarantee that they are accurate or complete or that they will be current at all times. Any information, including performance data available through any third party provider is not guaranteed to be current, accurate or complete and is subject to change without notice. Performance data represents past performance and is not indicative of future performance.
Eyes on the Horizon, Family Office Insights, One Goldman Sachs Family Office Initiative, Goldman Sachs, 8 May 2023, https://www.gsam.com/content/dam/pwm/direct-links/us/en/PDF/onegs_familyoffice_eyesonthehorizon.pdf?sa=n&rd=n
The North America Family Office Report 2022, RBC and Campden Wealth, 16 November 2022, https://www.rbcwealthmanagement.com/_assets/documents/cmp/the-north-america-family-office-report-2022.pdf.
Global Family Office Report, UBS, 31 May 2023, https://www.ubs.com/content/dam/assets/wm/static/noindex/gfo/docs/ubs-gfo-report-2023.pdf
All figures from coinmarketcap.com