How can a family office invest in bitcoin?
After 11 years of its existence, bitcoin has gone from a fringe to a mainstream concept. A recent wave of corporations and HNWI’s have been buying bitcoin as a way of combating the inflation that central banks are currently producing. So, how can family offices navigate the bits and bytes in the ether?
Cryptocurrency Published on Simple January 26, 2021

After 11 years of its existence, bitcoin has gone from a fringe to a mainstream concept. Bitcoin restores financial sovereignty to the user in the sense that the user can hold their own funds as well as send them directly to a recipient without the use of a middleman, such as a bank or payment service. A recent wave of corporations and HNWI’s have been buying bitcoin as a way of combating the inflation that central banks are currently producing.

Most recently, MassMutual – a 169-year-old insurance company with $30 billion in yearly revenue – bought $100 million in bitcoin last month. Jack Dorsey (CEO of Twitter), Tim Draper (Billionaire and VC), and the Winklevoss twins (most well known for their $65 million settlement against Zuckerberg for intellectual property) are also staunch advocates of bitcoin. With the thesis that bitcoin will be the single currency of the future and more disruptive than gold, these trailblazers are creating waves in the investment community.

In today’s ever-changing economy, with endless expansions of the money supply, family offices have an option to hold a form of money that is impervious to inflation. Family offices are showing an increased interest in bitcoin, but for many, it is still too much of an esoteric investment.

Holding on to Bitcoin

More corporations, family offices and HNWI’s have been buying bitcoin because it can’t be inflated away like fiat currencies currently are today. Bitcoin changes the existing paradigm, and it is humanity’s first real-world competitor to this monopoly that central banks have had on money itself. As a scarce asset, it was designed to maintain its value over time and be the most superior savings technology on the planet.

‘The interest in bitcoin and other non-yield-generating alternative investments could also increase in response to the Federal Reserve (and many other central banks), cutting their benchmark interest rate to zero (or below zero) this year. In a world where benchmark interest rates globally are near, at, or below zero, the opportunity cost of not allocating to bitcoin is higher.’ Bitcoin Investment Thesis, Fidelity

In the view of Fidelity – a company with over $3 trillion in assets under management –  there’s more risk to not owning any bitcoin at all. By that logic, if you sell bitcoin, you’re selling it for the very thing that prompted you to buy it; fiat currency. Related to this, Michael Saylor is the CEO of MicroStrategy, one of the largest business intelligence companies on the planet which now holds over $1.3 billion in bitcoin as their primary treasury reserve asset. In regards to how bitcoin can help families pass on their wealth throughout generations, he had this to say about the idea of selling it:

‘The wealthiest families in the world, they’re like these New York City families where you ask, ‘where does your money come from?’, and they say something like ‘my great-grandfather bought 4 city blocks in Manhattan’. So let me ask you this; if you owned a block on Central Park in Manhattan, do you think there’s any year in the last 100 years that it would’ve been a good idea to sell it, pay capital gains tax, and buy something else? So, what they do is they hold it for 100 years and as people print more dollars, the value of the property goes up at the rate the Federal Reserve prints’

As a result of the unlimited supply of fiat currencies, they are a poor method of storing value (saving) and an even more inefficient method of passing down wealth through generations. That being said, when one buys bitcoin, they are essentially embracing this fact by selling their fiat currency for it.

 

How can family offices navigate the bits and bytes in the ether?

Three steps for families to start investing in bitcoin

1. Determine the right portfolio allocation.

For institutions and HNWI’s, they’re currently allocating a small amount of their portfolio which can withstand the volatility while still capitalizing on the long-term gains that bitcoin has historically given. Some examples are Ricardo Salinas (2nd richest man in Mexico) who holds 10% of his liquid net worth in bitcoin, Paul Tudor Jones (billionaire and VC) who allocated about 2%, and Mike Novogratz (CEO of Galaxy Investment Partners) who advises that “everyone should put 2% to 3% of their net worth in bitcoin”.

2. Choose a broker.

Since family offices buy large amounts of bitcoin and need to do so in a small amount of time without the price drastically changing, they typically must go through a brokerage to do so. A lot of questions arise when deciding to buy bitcoin since it’s only an 11-year-old asset class and because it can seem technologically challenging.

As a result, family offices need guidance when getting involved and therefore would ideally buy bitcoin through a company that offers personalized approaches to helping them. Additionally, another factor worth considering is that the bitcoin broker to use will also depend on the region that the family office is based out of; this is because of the brokerage’s regulatory requirements in their area. In Europe, brokers such as Bitcoin Reserve specialize in serving HNW individuals and family offices and offer consulting services as well as overall guidance on the process. River Financial offers client advisors, custodial solutions, and educational resources for families in the United States. For other regions, the largest options to choose from would be Binance and Huobi.

3. Decide on how to store your bitcoin.

The brokerages listed above can assist with providing personalized options for storage solutions. However, broadly speaking, there are two main ways that family offices can store their bitcoin. The first option would be custodial storage, which is probably the most convenient method that a family office can use. Similar to keeping your savings account in a bank, there are companies that do the same for your bitcoin. Some of the most reputable providers are Knox Custody, Unchained Capital, and Vulpem.

The second option would be self-storage. If they wish to do so, family offices can store bitcoin themselves by using their own hard drive devices which can safely hold the funds offline. As mentioned earlier, bitcoin is able to be held by a family office directly without the use of a middleman, such as what a bank would do for fiat currency.

‘I compare it to the Internet. The Internet was a new way to transmit data. Bitcoin is a new way to transmit money. It’s going to take a long time. The good news is it’s a big opportunity. Money is a very big deal, and so if you can build a new way to deal with money, it’s very important and valuable. It just takes time.’ Marc Andreeseen, Billionaire and Venture Capitalist

With the unprecedented expansion of money supplies across the globe, and with billionaires and multi-billion dollar corporations recently buying bitcoin, it’s logical to claim that there is a strong potential upside for the future. As stated by Fidelity, the greater risk at this point is to not own any bitcoin at all.

About the Authors

Andrew Howard

Andrew Howard

Cryptocurrencies & Bitcoin

Cryptocurrencies are a sustainable and long-term solution to the challenges the world faces. I help Family Offices understand and invest in this emerging field

Connect with Andrew Howard View Andrew Howard Profile

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