Family Offices: Navigating Digital Assets & the Decentralized Economy

Family Offices: Navigating Digital Assets & the Decentralized Economy

August 30, 2022

2021 was a transformative year for the cryptocurrency industry. For years, the industry was dominated by retail investors, but that began to change as institutions started to adopt cryptocurrencies. A recent survey by Bitstamp found that 80% of institutions expect decentralized finance to overtake traditional investment vehicles within the next decade. This shift could have a major impact on the industry, including the way prices are determined and how new projects are funded. 

While the industry is still in relatively early stages, institutional adoption is a sign of market maturity and potential. Since the bullish run that started early 2020 and peaked when the market cap reached almost $3 trillion in November 2021, the industry has been in a downturn. However, with more institutional participation, 2021 is marked as a turning point for the entire cryptocurrency industry. 

Changing market dynamics

The Covid-19 pandemic has had a significant impact on the economy, and this is likely to continue in the short to medium term. Record-low bond yields and high inflation rates are just two of the consequences of the pandemic, leading to many investors moving their assets into safe havens. This resulted in large amounts of capital flowing out of the crypto industry - understandable given the current climate of uncertainty. 

However, this downturn could actually be beneficial for the industry in the long term. Unsustainable projects are likely to be forced out of the market, and serious players will have to improve their processes and strategies in order to survive. The outcome will be a more efficient and resilient industry better equipped to weather future storms. 

Bitcoin, the largest cryptocurrency by market capitalization, surged to new highs in November 2021 when it reached $68,000. Despite recent price fluctuations, Bitcoin remains a highly popular investment option due to its limited supply. There will only ever be 21 million Bitcoins in existence, and the halving protocol ensures that the rate at which new Bitcoins are created will continue to decrease over time. This makes Bitcoin a valuable asset with strong potential for future growth. 

In addition to Bitcoin, other major cryptocurrencies have emerged in recent years. Ethereum is the second-largest cryptocurrency by market capitalization and offers a fundamentally different experience to Bitcoin. Ethereum allows for decentralized applications (DApps) to interact with smart contracts programmed on the blockchain. This provides an enormous range of possibilities for developers looking to build innovative and disruptive applications. With its growing popularity and utility, Ethereum is poised to become a major force in the cryptocurrency space.

Institutional participation

The institutional adoption of cryptocurrency is also further establishing digital assets as a new asset class. In the previous 8 years, cryptocurrencies have largely outperformed traditional asset classes and have been an excellent tool for diversifying portfolios. 81% of the family offices that invest in cryptocurrencies only allocate 3% of their portfolio to digital assets. Research shows that their Sharpe ratio will increase by approximately 20% if 5% is allocated to the emerging asset class. 

The benefits of cryptocurrency investment are clear. However, many investors are still hesitant to put more than a few percent of their portfolio into digital assets, due to the volatile nature of the market. However, with proper risk management strategies in place, organizations investing a larger portion of their portfolio in cryptocurrencies can reap the benefits in the long run.

In recent years, there has been a growing trend among family offices to invest in cryptocurrencies. While there are different motivations for this shift, one of the most commonly cited reasons is the belief that DeFi (decentralized finance) has enormous potential. In fact, according to a recent survey, nearly 53% of family office investors said that they had purchased cryptocurrencies in order to gain a better understanding of DeFi technology.

How family offices can safely enter the digital asset industry

This report aims to provide an overview of the blockchain ecosystem and highlight some of the available investment opportunities. It also includes guidance on how family offices can allocate their portfolios, and ensure safe and secure custodial ownership of digital assets. By increasing awareness and understanding among family offices, more institutional investors will be drawn to the blockchain space which leads to greater innovation and adoption.

Hex Trust is a facilitator of such institutional adoption. Our mission is to provide the trusted infrastructure enabling banks and other financial institutions to integrate digital assets into their business models using a highly secure, scalable and compliant custody framework. To meet today’s demands of the innovating market and accelerate global institutional adoption, digital asset custodians have significantly evolved over the last decade. Initially, the core business was the safekeeping of digital assets, but now custodians have expanded to institutional-grade custody - providing infrastructure to not only secure assets under custody but also provide further connectivity for those custodied assets across DeFi, NFTs, Web3, and the metaverse.

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