Family offices back crypto with eye on digital infra potential
The digital asset industry has had a torrid year since the onset of the so-called “crypto winter” last November, with plummeting cryptocurrency valuations and, more recently, a series of crypto company collapses that has claimed the world’s third-biggest crypto exchange, FTX.
Yet interest in the space among Asia-Pacific family offices and high net worth individuals has remained keen, with a survey released last week showing that investor appetite shot up by double-digit percentage points in the key regional jurisdictions of Hong Kong, Singapore and Australia, even following the seismic event of the Terra Luna stablecoin collapse.
Although the survey was carried out during what some are now characterising as an interregnum between the Terra Luna bust and the implosion of FTX, many of the factors drawing family offices into the digital asset space remain unchanged – as do those prompting them to think twice about it.
The Private Wealth in Digital Assets Study 2022, commissioned by digital asset financial services platform Matrixport, produced by FT Longitude, and focused primarily on Asia-Pacific, found that the top three draws for family offices, high net worth individuals and other affluent individuals were the prospect of outsized returns, portfolio diversification and increased confidence in the industry following the entrance of institutional investment.
RISKS AND REWARDS
It also identified several potential obstacles to family office investment in the space.
“One of the insights was that even before FTX, the top risks that stood out were cybersecurity and fraud,” Eugene Lim, head of private wealth at Matrixport, told AsianInvestor. “This was surprising to us, because we’d always thought the volatility of the asset class and its inherent market risks put people off. But factors that came out on top as preventing investors from investing were actually platform risks and idiosyncratic risks that were impeding more allocation to this asset class.
Leo Wealth
“Interestingly, fewer of our survey respondents said that market volatility was stopping them from investing in digital assets. In fact, the innate volatility of crypto, specifically, can be very appealing to investors,” he said, pointing to the fact that almost half of all respondents in the survey said they would continue to hold digital assets even if they lost money, as they continued to believe they would see a significant potential upside.
“A lot of people still see crypto as a speculative asset class, especially in Asia,” Harmen Overdijk, chief investment officer at multi-family office Leo Wealth, told AsianInvestor. “They see it more as a trading opportunity, while perhaps in the US and Europe there are more long-term believers.”
Overdijk’s comments echoed those of crypto-trading platform Bitmex’s chief executive, Alexander Höptner, who, speaking at the TOKEN2049 digital asset conference in Singapore in September, emphasised the differences between digital asset markets in Asia and those in the US and Europe.
“[In] the US, it’s an asset to store, to hold,” he said, referring to digital property such as tokenised assets and non-fungible tokens (NFTs). “Europe is a bit in between … and Asia is all about trading. Now, all the discussions we have on all of our trading with all the [Asian] family offices – whether it’s art, whether it’s anything – it’s all about trading. ‘Hey, can we tokenize it? Can we trade it?’ That’s all the story.”
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Recent developments in the digital asset industry – not least the ongoing series of busts among crypto companies – have prompted much talk of an end to the feverish speculation with which the sector has become synonymous, and many parallels have been drawn with the turn of the century dotcom bubble, a similarly febrile investing environment in which internet behemoths such as Google and Amazon emerged from a graveyard of failed start-ups.
JRT Partners
The highest-profile casualty of the current digital asset market shakeout is undoubtedly FTX, which Tuck Meng Yee, founder of Singapore based single-family office JRT Partners, said did not represent a problem hardwired into digital assets and blockchain, but rather, the conduct of its operators.
“You've got software bugs, which can lead to systemic issues where people can hack certain protocols via certain software in order to steal coins, so there's that risk from the system side,” he told AsianInvestor. “But look at FTX – that wasn't really the problem. The problem was really human behaviour, which has got nothing to do with the promise of cryptocurrency.”
Yee said that JRT had invested in crypto primarily by purchasing more established coins, saying: “We’ve got a long position portfolio of some of the cryptocurrency coins that we believe in, which includes Bitcoin and Ethereum, because those are the currencies of note in the system. Everything else is a pseudo-equity, but Bitcoin and Ethereum are pseudo-currencies that power the rest of the ecosystem.”
PRACTICALITY, NOT PIXELS
Overdijk also said his firm advised clients to allocate a proportion of their portfolios to digital assets such as Bitcoin and Ethereum, to “stick to the big players”, and to look out for applications of digital asset technology with the greatest commercial potential.
“NFTs are a very interesting use of blockchain technology, but not for the stupid little digital apes and penguins,” he said. “They’re a very good use of technology for contracts, because you can't fake contracts or letters of credit on a blockchain. In international trade, NFTs could play a huge role. The companies that are going to use NFTs and develop blockchain technology for those kinds of uses are going to be the big winners.”
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Yee also focused on the digital asset ecosystem as potentially delivering returns for family offices, saying that it would succeed or not on the strength of its utility rather than simply being a place to park money and expect a yield.
“The value comes from whether there’s a valid use case,” he said. “That's the question you ask, regardless of any investment that you evaluate – whether it's real estate, or a company, or a cryptocurrency project, it's exactly the same question.
“Now that can be a question that's hard to answer, because a lot of stuff is ‘blue sky’ when it comes to developing new technology, so it doesn't matter whether the platform is using artificial intelligence or blockchain or whatever. I don't care what the end result is, I care that people come to that platform for the end result. For most investors, the default is: ‘I want to invest in a platform that will dominate that result’.”
Yee said the conceptual boundary between digital assets and the broader fintech ecosystem was an arbitrary one, explaining: “Fintech is seeping into the rest of the tech sector and into cryptocurrency technology, and incorporates blockchain and what makes cryptocurrency work. The underlying system – what people call ‘pipes and shovels’ – is something that everyone is keen on. So it doesn’t matter whether you’re crypto-native, or digitally aware or not – everyone agrees that fintech pipes and shovels are the places to invest in.”