Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Institutional involvement is often hailed as a linchpin for industry growth. This narrative has reached such an extent that the phrase "institutions are coming" is now a rallying cry for a legion of Bitcoin believers. However, these players are already beginning to materialize within the ecosystem—and they're chiefly in the form of single and multi-family offices.
Family offices enjoy a significant amount of privacy when it comes to their investments. As such, they remain virtually unchecked by the kinds of regulatory overwatch faced by retail investors, allowing them to diversify into a menagerie of options unavailable to others.
Unlike their systematically entrenched counterparts, family offices recognize the value in Bitcoin, beyond its distorted media portrayal. Why? Because family offices represent smart money. They scope past speculation and critically consider long-term implications. Unclouded by conjecture, these entities typically focus on statistics—continually hunting uncorrelated, scarce, and asymmetric assets to capture the greatest returns for their clients.
Bitcoin's First Family Offices
Several years ago, facilitating Bitcoin trades in institutional quantities was a near impossibility. The market was ill-equipped to handle such orders without causing significant slippage and—even if it could—exchanges would be hard-pressed to find a counter-trade willing to deliver such an amount.
Nevertheless, as Bitcoin's renown grew, over-the-counter markets (OTC) similarly matured. Now, platforms inclusive of sophisticated clearing and settlement mechanisms and even multi-party custodian solutions exist to smooth any of any quantity. With the procedures in place, family offices, both big and small, have started entering en masse.
While many of these entities choose to remain private, some bigger, Bitcoin-focused players have moved to the forefront. Among one of the most notable is Winklevoss Capital, founded by Tyler and Cameron Winklevoss. The famed Twins established the fund in 2012, focusing on tech-centric investments along with a dedicated focus on cryptocurrencies, Bitcoin, in particular—of which the pair boast being angel investors. Another prominent fund is Galaxy Investment Partners, the single-family office of venture capitalist and Bitcoin bull, Michael Novogratz.
Why the Interest?
Dependent on their appetite for risk, most recommendations for Bitcoin exposure range from 1-30%. Family offices are already starting to capitalize on this by allocating at least 1-5%.
Nevertheless, exposure, no matter how small, could prove extremely fruitful. Unlike many other assets, bitcoin displays strong asymmetric risk distribution, meaning that the reward—more often than not—outweighs the majority of the risk. In other words, bitcoin has infinite upside.
Family offices have historically understood the importance of diversification. Modern portfolio theory (MPT) sits at the basis of many a fund's methodologies. At its core, MPT advises against putting all your eggs in one basket. It also promises to diminish risk without lessening the return. However, there's one type of risk it can't protect against: systematic risk. Guarding against such market-wide volatility demands an uncorrelated asset, and that's where Bitcoin comes in.
For family offices, Bitcoin's uncorrelated nature is a crucial constituent of its attraction. Shortly after the 2007 financial crisis, institutions realized that their allocation within the stock market was overly excessive, and they've been on the hunt for uncorrelated assets ever since. Statistically speaking, Bitcoin has proven its uncorrelated worth throughout its lifetime, showing a correlation coefficient of approximately 0 (-1 equalling negative correlation, 0 implying a non-correlation, and 1 representing positive correlation).
As a result, Bitcoin's value proposition is only improving as systemic risk unravels the traditional financial system. While displaying a briefly correlated stint with the stock market in early March, Bitcoin broke free from the undiversifiable risk of the broader markets and followed gold's upward trajectory. Since its yearly bottom was carved on March 13, Bitcoin has recovered nearly 125%.
Bitcoin wasn't born to follow. It's earned the narrative of an uncorrelated safe haven due, in part, to its finite supply. Much like gold, Bitcoin's overall stock cannot be diluted—unlike the economy and, by proxy, the equities markets, which are easily influenced by government intervention. This bestows Bitcoin with the kinds of scarcity, uncapturable by traditional assets.
Experts have even gone one step further, suggesting that due to its similarities to the yellow metal, Bitcoin can serve as a global reserve currency—akin to the gold standard. With debt mounting at an unprecedented rate, the fragility of the financial system is starting to show. Similarly to how the Bretton Woods conference established a global financial reset shortly before the end of World War II, many believe now is the time for an economic overhaul—with Bitcoin at the helm.
The advantages of Bitcoin can no longer be dismissed, and the smart money knows it. It's now every family office's job—quite literally—to at least acknowledge Bitcoin, or else risk breaching fiduciary duty.