Family Offices Are Building Up Positions in Cryptoassets; Could This Signal Risk-Management Failure?
June 03. 2021
As of June 1, 2021, the market capitalization of all cryptocurrencies was $1.63 trillion, 35% lower than the historical peak touched on May 12 this year. Still, the valuation is 504% higher than a year earlier, on June 1, 2020.
Various reasons can explain the sudden exponential growth in Bitcoin’s and other altcoins’ value in the past year. One of the reasons is the undesirability of traditional assets due to a torrid economic climate. But the cryptoassets’ price tanked almost as sharply as it rose. Unfortunately, this has come to be the story of cryptocurrencies.
Crypto Billionaires Can’t Enjoy Their Newly Minted Wealth in Peace
A consequence of the gyrating market capitalization of crypto assets is that crypto billionaires cannot place a firm valuation on their worth. One contributor to Forbes Magazine went as far as describing crypto wealth as “easy come, easy go.” According to the contributor, 12 crypto billionaires lost a combined net worth of $15.5 billion in just nine days – between May 10 and May 20.
At issue here is the wildness of the cryptocurrency (Bitcoin, to be specific) roller coaster. What kind of an asset sheds almost half its value in under ten days? Does anyone that invests in such a volatile asset have a sense of risk management? These questions increasingly bother experts’ minds as more fringe investors such as family offices throw themselves at crypto assets.
Family Offices Find Cryptoassets “Juicy”
One of the issues that raise questions about the firmness of crypto assets as investment vehicles is the inconspicuousness of Wall Street institutional investors. They say an asset is solid if Wall Street is buying.
A Bloomberg article quotes a survey by PricewaterhouseCoopers LLC, which established that institutional money is mainly absent in crypto hedge funds. The survey further reveals that 30% of the investment in crypto funds comes from family offices. It is not surprising that family offices find the sector “juicy,” especially after the massive bull run that began in early 2020.
The problem here is that family offices could be taking on too much risk than they can handle. It should be instructive to family offices that Wall Street is still skeptical of crypto assets.