Things to consider before your family office enters the crypto space
Cryptocurrency has disrupted the market similar to how technology has. From hobbyists and at-home miners to serious investors and institutions, the world of crypto has caught on in the mainstream, and there is a growing class of investors who see digital currencies transforming the financial markets. While there is no guarantee, the momentum and popularity of crypto has captivated many – but is it a worthwhile endeavor for your family office?
In the last couple years, that answer has become “yes” for a growing number of family offices and ultra-high net worth individuals (UHNWIs). Here’s a closer look at a few of the key attributes of cryptocurrencies that are worth considering when evaluating adding them as an alternative investment vehicle for offices like yours.
Note: We are not financial advisors. Please do not use the below to make any financial decision.
We’re all familiar with the importance of diversity within an investment portfolio. You need a strategic blend of stocks, bonds, and other assets to optimize your risk and reward opportunity. But what about adding crypto into the mix?
Cryptocurrency has an extremely low correlation to more traditional asset classes like commodities, real estate, or bonds. In fact, its correlation coefficient is right around 0 when compared to those classes, making it a great way to diversify your portfolio and reduce risk.
Delphi Digital found that a portfolio made up of 57% stocks, 40% bonds, and 3% bitcoin yielded the highest Sharpe Ratio and the smallest max drawdown in simulated scenarios. But you shouldn’t stop at simply adding crypto to your traditional portfolio. You should also diversify by investing in several different forms of crypto, just as you would with stocks and bonds.
Advantage over gold
Cryptocurrency has several key advantages when compared to gold – the standard on which the U.S. dollar operates.
- Crypto is digital, not physical, meaning it is highly portable and accessible from anywhere on the globe by simply accessing the web.
- Unlike national currencies, crypto has the same value everywhere, eliminating the need for conversion processes and related taxes and fees.
- Crypto is highly divisible, as well. Bitcoin is divisible by eight decimal points, down to one hundredth of a millionth bitcoin (.00000001 BTC), compared to the divisibility of USD down to only two decimal points (or 1 cent).
In traditional investing, more risk means more chance and less risk means less chance, but this isn’t the case in crypto. Exponential yields of 20, 50, and even 100 times have been seen in recent years, while the investment itself is only limited to the total loss.
This means the upside of crypto investing is virtually unlimited, while the downside is quite limited, and that the small addition of crypto to your portfolio can end up being responsible for a large portion of the overall performance.
Family offices tend to be entrepreneurial in nature with an expedited decision-making process, which lends itself well to the crypto environment. Trading in crypto requires openness, access to capital, and the ability to react quickly to market changes – particularly given the volatility of prices.
Know what you’re getting into…
Getting involved in the crypto space makes a lot of sense for family offices – but only if you are informed on the markets and understand what you’re getting into. Crypto performs differently than traditional assets. Before you invest, make sure you know:
- How cryptocurrency works (the underlying code, the mining process, the halving, etc.)
- That it is highly volatile (study historic trends and short- and long-term outlooks)
- About different coins (bitcoin, altcoins, how to diversify, etc.)
…and then commit
In order to see the benefit from crypto, you need to invest enough to see significant returns. This doesn’t mean crypto has to take up a significant percentage of your portfolio, but it does mean you should invest enough that the reward can have an impact. If you bet small, you might only lose small, but it means you can only win small, as well.
Mine with Compute North
Compute North is an industry-leading hosting provider that helps family offices, fund managers, and more enter the crypto space. Again, we are not financial advisors and do not provide financial guidance, but we can share informational resources and help guide an organization through the key steps to get started with mining. Offering easy-to-use, powerful cryptocurrency mining hosting services that are equipped to handle large-scale operations, the strategic infrastructure that we have developed helps our customers capitalize on one of the most exciting opportunities available in today’s market.
Benefits of our services include:
- Cost-competitive infrastructure powered by renewable energy
- Secure environment to keep your hardware and your data safe
- Core infrastructure with power, space, ambient air cooling, internet access, physical racks and security
- And more
Contact us today to learn more about bringing your family office into the crypto space.