Ben Strack

<div id="highlights-block_61292de3bac49" class="highlights">
 <ul>
 <li>Family office interest in digital assets likely to increase as secure platforms emerge and regulations become more clear, Aite-Novarica senior analyst says </li>
 <li>Seek Capital managing director said digital assets has potential to be “very significant part of the future financial system”</li>
 </ul>
 
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More family offices are considering cryptocurrencies, but widespread adoption among wealth managers with fiduciary obligations could remain stymied in certain regions until regulatory frameworks become more clear.



A Goldman Sachs <a href="https://www.goldmansachs.com/insights/pages/widening-the-aperture-family-office-investments-insights.html" target="_blank" rel="noreferrer noopener">survey</a> conducted earlier this year found that while about 15% of family offices globally and about 25% in the Americas, have exposure to cryptocurrencies to date, almost half indicated they may be interested in initiating exposure in the future.



The report, released last month, reflects the views of 150 family office decision-makers from all major regions.&nbsp;&nbsp;



“Some family offices are considering cryptocurrencies as a way to position for higher inflation, prolonged low rates, and other macroeconomic developments following a year of unprecedented global monetary and fiscal stimulus,” the report states. “Of the approximately two-thirds of family offices that are actively thinking about an increase in inflation, digital assets emerged as one portfolio solution.”



Among those currently prepared for this economic environment, digital assets (42%) and precious metals (37%) are the most popular implementations.



While some family offices in the US and Europe are buying bitcoin and other digital assets as a hedge against cash, <a href="https://cms.blockworks.co/culture-and-crypto-collide-in-asian-family-offices/" target="_blank" rel="noreferrer noopener">interest is mixed</a> among Asia’s financial centers. Just under 10% of Asia and EMEA respondents had existing investments in cryptocurrencies, according to the Goldman Sachs survey.



<div class="wp-block-image"><figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="909" height="621" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg" alt="" class="wp-image-7228" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=909 909w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=376 376w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=382 382w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=321 321w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Image-8-27-21-at-12.31-PM.jpg?w=80 80w" sizes="(max-width: 909px) 100vw, 909px" /><figcaption>Source: Widening the Aperture: Family Office Investment Insights; Goldman Sachs, July 2021</figcaption></figure></div>



Wally Okby, a senior analyst for Aite-Novarica’s wealth management practice, said that in Switzerland, where digital asset regulation is very advanced, private banks have been delving into crypto. Such institutions want to appeal to family offices, for example, who may be allocating 1% or more to the space.



“Those private banks that have built the capability for private clients to trade and custodize certain crypto coins, it’s not just done in a vacuum, it’s done out of market demand,” Okby told Blockworks. “It’s growing fast but still nascent compared to where it’ll probably be or at least where I think it will be in a few years time.”



Okby wrote in a January report that certain global family offices don’t invest in digital assets because they can’t do so within a secure platform that accommodates classic banking and digital assets. As these platforms start to emerge, time will tell whether these clients will invest and develop the asset class to greater scale.



The Goldman Sachs report highlighted that some family offices don’t view cryptocurrencies as a good store of value, while other respondents said they had reservations about the underlying infrastructure or environmental impacts of bitcoin mining.&nbsp;&nbsp;



In the US, it is a “high hurdle” for many wealth managers with a fiduciary obligation to justify crypto investments, he said, especially because the regulatory frameworks around digital assets is not yet clear.&nbsp;



“Once a wealth manager says it’s a fiduciary, it’s very hard or virtually impossible to say … I’m going to suggest or recommend that you invest in a digital asset which is new, doesn’t have much of a track record and is reported to play a part in fraud and market manipulation,” Okby explained.



Wall Street giants like Morgan Stanley have begun <a href="https://cms.blockworks.co/morgan-stanley-to-launch-bitcoin-funds-for-wealthy-clients/" target="_blank" rel="noreferrer noopener">to offer clients exposure</a> to crypto through several funds. But Okby noted that limiting these offerings to its wealthiest clients with “an aggressive risk tolerance” gives Morgan Stanley some protection.&nbsp;&nbsp;&nbsp;



“I’m sure there are going to be those firms that are just not going to do it and there are going to be some who will do it,” Okby said. “&#8230;Wealth managers are not known to be comfortable with risk. When you talk about crypto, it’s risk, and especially if it’s unregulated, then it’s really risky.”



<h3>Increasing allocations&nbsp;</h3>



The London-based family office of billionaire Simon Nixon is set to increase its allocation to crypto and build out its staff focused on the sector. Nixon, who co-founded Moneysupermarket.com in 1993, reportedly manages more than $1 billion of personal assets in the tech sector.&nbsp;&nbsp;



“As a family office we are always looking to the future for planning how to deploy capital today,” said Adam Proctor, managing director at Seek Capital. “We feel crypto and blockchain and associated technologies more broadly as having potential to be a very significant part of the future financial system and hence looking to add dedicated talent to this area.”



The firm has invested in areas across crypto for many years, but the sector is becoming a more important focus, Proctor told Blockworks. He noted that Seek Capital is initially looking to hire an individual with detailed technical and industry knowledge of crypto and may add more resources over the coming years. 



The executive declined to comment on specifics about the size of Seek Capital’s current or planned future crypto allocation but noted that the firm would be looking to invest broadly in the sector. 



“At this stage, [we’re] keeping a very open mind,” he said, “and will then no doubt dive deeper into certain areas once we have more expertise on the team.”



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What Is the Future of Crypto Investment Among Family Offices?

<div id="highlights-block_6112e73dfc28b" class="highlights">
 <ul>
 <li>Off The Chain Capital uses its network of motivated sellers of blockchain assets to negotiate discounts and bolster returns </li>
 <li>The four models Off The Chain uses to value bitcoin each indicate that the cryptocurrency is undervalued</li>
 </ul>
 
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With many different investment options providing exposure to a maturing cryptocurrency market now available to investors, Blockworks is asking fund managers about the strategies they employ for their clients.&nbsp;



One such firm is <a href="https://offthechain.capital/about/" target="_blank" rel="noreferrer noopener">Off The Chain Capital</a>, which was founded as a family office in 2016. The company expanded beyond just serving family and friends in 2019 by opening up the fund to qualified outside investors.



To learn more about what makes <a href="https://cms.blockworks.co/off-the-chain-capital-announces-160-million-fund/" target="_blank" rel="noreferrer noopener">Off The Chain Capital’s</a> fund different from other investment offerings in the space, Blockworks recently spoke with Brian Estes, the firm’s CEO and CIO.



Strack: How would you describe your fund to a prospective investor?



Estes: “If I was an institutional investment consultant and I looked at what we were doing, I wouldn’t classify what we’re doing as a blockchain fund. I would classify it as a value investment fund with a specialty niche in blockchain assets.



“We’re looking for undervalued equity and mispriced digital assets, so we’re using … the Graham and Dodd value metrics &#8211; Warren Buffett uses these same metrics &#8211; to find undervalued value opportunities. We’re just focused on finding those in the blockchain space.”



Strack: What are the goals of the fund? How do you achieve those goals?



Estes: “The two primary goals are to outperform bitcoin and to do it with less volatility. There’s only two funds over the last four years that have outperformed bitcoin. Our fund is one of those, and the other one is <a href="https://privatefunddata.com/private-funds/polychain-fund-i-lp/" target="_blank" rel="noreferrer noopener">Polychain Fund I</a>.&nbsp;



“It was a big decision for us to actually open up the fund to outside investors because what I’ve told people for a long time is just buy bitcoin … and hold it for the next 10 years and you’ll do just fine. I didn’t feel comfortable charging people to manage their money when they can just basically do it for free by owning bitcoin. But once we figured out how to outperform bitcoin and do it with less volatility, that’s when we opened up the fund to outside investors.



“Our strategic advantage is [our] network. I’ve been in this space since 2014 and I have a pretty expansive network to help us source people who are forced or motivated sellers of blockchain assets. These are people who are early seed investors or early employees at blockchain companies, and these companies have been around like three to five years. Now they’re post-A round, they’re profitable, they have little or no debt, and they’re on a path to liquidity.&nbsp;



“What we’re looking for is those types of companies, but we want to buy those from early employees or seed investors who are needing liquidity or are motivated sellers so that we can negotiate a nice discount on those.”



Strack: How is your strategy different from others out there?



Estes: “If you look at where the money’s flowing and where the crypto assets are being managed, it’s almost all in the venture space. There are new venture funds popping up all the time and the existing venture funds like at Polychain, Pantera, Paradigm and a16z.



“a16z just raised 2 or 3 billion for <a href="https://cms.blockworks.co/andreessen-horowitz-launches-2-2b-crypto-fund/">their new crypto fund</a>, but all of that money is chasing a limited supply of new startups in the blockchain space, and we’re doing the opposite of that.&nbsp;



“We’re the only value manager I know of that we’re waiting for these new ventures to play out. We come in three to five years later when these early seed investors or employees need liquidity and then we’re buying basically at the same valuation from three to five years ago.”



Strack: Can you share an example of Off The Chain buying at a discount?&nbsp;



Estes: “Our first entry into <a href="https://bitpay.com" target="_blank" rel="noreferrer noopener">BitPay</a> we bought about nine months ago. BitPay has been around for 10 years. It’s the oldest surviving blockchain company, and our first investment was at the seed round valuation 10 years ago.&nbsp;



Their B-round was in 2018 and there were some sellers who wanted liquidity, so we were able to secure a significant discount on what the B-round was three years earlier.



Strack: What is a common misconception about your firm?



Estes: “People think we’re a bitcoin fund and we’re not. We have exposure to bitcoin’s performance but we’re doing it in such a way where we’re getting a discount on bitcoin.



“I’ll give you an example &#8211; 7% of our portfolio is in Mt. Gox bankruptcy claims. Mt. Gox was the largest custodian of bitcoin back in 2014. <a href="https://www.reuters.com/article/us-bitcoin-mtgox-bankruptcy/mt-gox-files-for-bankruptcy-hit-with-lawsuit-idUSBREA1R0FX20140228" target="_blank" rel="noreferrer noopener">They went bankrupt</a> and the bankruptcy trustee was able to recover 141,000 bitcoin, so if you had bitcoin at Mt. Gox, you’re due your proportional amount of the 141,000 bitcoin that they’re custodying today.&nbsp;



“These Mt. Gox bankruptcy claims they’ve been illiquid for seven years, and we started buying these two years ago. Our average cost is $1,247 per claim and there’s about $6,000 worth of assets in each claim if you count the bitcoin, the bitcoin cash and the currency.



“The bankruptcy is coming to an end. The trustee is making arrangements to distribute the assets and within the next year, we’ll be delivered $6,000 bitcoin, bitcoin cash and currency. So that’s what we’re looking for. That’s a way we get exposure to bitcoin but we’re getting like a 70% discount on bitcoin doing it that way.”



Strack: What do you think is a common misconception of the crypto space more broadly?&nbsp;



Estes: “You have to think differently about how to value blockchain assets, because we’re all used to valuing companies using a [price-to-earnings] ratio, or price-to-cash flow or price-to-book. Or we’re used to valuing bonds using credit analysis or real estate using cash flow or location analysis.



“But with blockchain assets, like bitcoin, these are networks, and the way you value a network is different from the way you value traditional assets like stocks, bonds and real estate. We have models that help us value bitcoin based off of network. One of those models is called Metcalfe’s Law, so we have this Metcalfe’s model that helps us value bitcoin.



“The misunderstanding that people have is they don’t know how to value bitcoin, and that’s the first thing you need to understand. Before you determine what price that you’re going to pay for it, you need to know what the value is. We have four models that we use to value bitcoin, and all four of these models tell us today that bitcoin’s undervalued, so now’s a good time to be buying it.”



Strack: Do you plan to launch other funds or strategies in the future?



Estes: “The answer is no, and the reason is that our competitive advantage is the network that we have to source these special opportunities. If we have a second fund, it’d be kind of a similar fund, and then we’re having to decide which fund to put these special opportunities in.



“There’s only a certain number of shares or dollar amount that we can source and we have plenty of capacity in our current fund to bring in new money. We could raise another $200 million in the fund and put it to work in the next 30 days.



“If we had a different strategy &#8211; and we’ve gone through this in our planning committees &#8211; what would that strategy be? One strategy is just to be a bitcoin-only fund, but that doesn’t do anything for investors. You’re charging people just to own bitcoin and they can just go buy bitcoin at PayPal or Coinbase or the Square CashApp or Venmo now. Why compete with that?