Summary List Placement
Steve Sokić has spent nearly three decades in wealth management. Earlier in his career when he met with affluent families, he would meet only with the patriarch, sometimes the matriarch as well.
But now he sees heirs in their 20s and 30s sitting at the table, and some of these tech-savvy millennials suggest cryptocurrency as a way to diversify the family fortune.
“Younger family members are getting involved in wealth stewardship much earlier,” Sokić, the head of private wealth at the $500 billion investor-services firm IQ-EQ, said. “And generally, younger people are looking at different asset classes that aren’t brick-and-mortar.”
Family offices are typically more conservative than institutional investors when it comes to portfolio strategy, but riskier assets have become more attractive with interest rates near historic lows. Between young heirs introducing their parents to digital assets and banking giants like Goldman Sachs and Morgan Stanley jumping on the Bitcoin bandwagon, more family offices are getting comfortable with cryptocurrency.
Millennials and Gen Z are leading the charge when it comes to purchasing crypto. In a survey of 2,000 US adults from Blockchain Capital, 46% and 55% of millennial and Gen Z respondents, respectively, said they planned to buying bitcoin in the next five years. (Only 8% of respondents who were 65 and up answered the same.) The average crypto owner is 38 years old, according to another survey by Gemini, a cryptocurrency exchange.
“It’s top of mind of every family office we are talking to,” Pat LaVecchia, the CEO of the digital-securities broker-dealer Oasis Pro Markets, said.
‘They thought crypto was a scam. Now they wish they had made that investment.’
Kent Swig, a third-generation heir of the $3 billion real-estate dynasty, made a splash in April when he secured $6 billion in gold to back his new digital token. Swig was introduced to cryptocurrency investing by his now 26-year-old son, Oliver, before launching Dignity Gold.
Most families with generational wealth are betting far less on crypto than Swig, LaVecchia said, and they are usually investing in Bitcoin or Ethereum.
“Is it a 50% allocation? No. Is it a 5% allocation? Maybe,” he said.
Paul Karger, a managing partner of the financial planner TwinFocus, tells his clients, a mix of professional money managers, former executives, and wealthy families, to hold at least a 1 to 2% position in digital assets, he said. He added that the attitude toward cryptocurrency had dramatically changed in the past year and a half, in large part because of the ease of trading. Clients can set up a Coinbase account and connect it to their bank account in minutes to dabble in trading. Many families get started in cryptocurrency by investing on a personal level before they bring it to their office.
LaVecchia knows families that missed out on opportunities to capitalize on crypto and don’t want to miss the boat again, he said. One family office told him recently that they had declined to invest in Coinbase 5 1/2 years ago when it was valued at only $415 million. Now it has a market capitalization of $59 billion.
“They thought crypto seemed like a scam. They didn’t understand it,” he said. “Now they wish they had made that investment.”
‘Regulation is the big elephant in the room’
Cryptocurrency’s fluctuations are a real concern, but families can afford to ride out the volatility, LaVecchia said, citing one office that planned to hold a Bitcoin investment for at least 10 years.
“The beauty of family offices is that it’s not hot money,” he said.
But the other risk of crypto is the potential for regulation. Cryptocurrency’s energy consumption and its popularity in illicit financing put it in government agencies’ focus, one investment chief told Insider.
“Regulation is the big elephant in the room that everybody’s kind of worried about,” Karger said. “But I think that risk has been mitigated quite a bit.”
It is highly unlikely the US government would ban crypto, which Securities and Exchange Commission Commissioner Hester Peirce said would be “foolish,” but there is still regulatory confusion over how cryptocurrency is classified. The Commodity Futures Trading Commission views Bitcoin as a commodity, while the IRS treats it as property, which means Bitcoin transactions are subject to the capital-gains tax.
Pepper Anderson, the CEO of Chilton Trust, is not so optimistic. The boutique wealth-management firm has not embraced crypto or even special-purpose acquisition companies.
“There’s an old adage as a portfolio manager that if you shoot the lights out this year, you’ll live in the dark next year,” she told Insider.
“While we’re looking to be opportunistic and like to cast a wide net, we’re not going to be at the forefront of something new or questionable,” she added. “I don’t know that it’s responsible for a firm like ours to deliberately embrace anything that is subject to such regulatory scrutiny.”
President Joe Biden’s plan to double the long-term capital-gains tax rate could also put a damper on Bitcoin’s prospects.
LaVecchia said that in the next three to six months, “we’re going to have a very different conversation about taxes,” but family offices have such a long investment horizon that they don’t need to panic.
“It’s like buying shoreline real estate,” he said. “One hundred years ago, nobody wanted to be on the shore because of the storms and the rats. Now it’s completely different.”