This article explores a too often neglected aspect of the current wave of popularity surrounding bitcoin: the attitudes of the investors themselves. We look at the research data that measures these opinions and present a case for those wealth managers and family offices still on the fence to look beyond the new client base when assessing the technology's potential.
If 2020 was the year bitcoin showed it still had life after a protracted bull cycle dating back to 2017, then 2021 will undoubtedly be remembered for its wholesale acceptance by the mainstream of wealth management and corporate finance. Bitcoin’s impressive, 100%+ surge over January and February was fuelled by a flood of institutional buy-ins and further bolstered by a slew of high-profile announcements around the adoption of bitcoin as a reserve treasury asset by large corporations.
A seismic shift in attitudes towards bitcoin and crypto
From Elon Musk’s $1.5 billion bitcoin bet, multi-million dollar bitcoin purchases by the likes of Square and Microstrategy, to MasterCard’s crypto-payments network revelations and the intensification of the US bitcoin ETF race, the first months of 2021 have seen cryptoassets placed firmly up the global investment and corporate agenda.
However, despite the obvious paradox of major institutional money arriving into a space that was largely conceived to mitigate against its excesses (2007-8 wasn't that long ago), Goldman Sachs, Black Rock, JP Morgan, Morgan Stanley, and other major financial institutions have entered the cryptoassets space with bullish gusto. The steady crescendo of recent announcements reflects rapidly shifting attitudes, where even two years ago, it would have been unthinkable to have several of the world's largest financial institutions participating in this new digital asset class while at the same time seeing major corporations drawing down dollar-denominated cash balances in favour of bitcoin.
Many investors have been in the crypto game for some time
Now, of course, it is easy to get swept up in the euphoria and forget that many of those now calling for a $100K+ bitcoin price were its most vocal detractors up until 5 minutes ago, it is important to bear in mind that many in the wealth management industry have been monitoring investor attitudes toward digital assets for some time. Here, a number of global surveys have been conducted by wealth management companies and investment houses have produced revealing data.
For example, one study conducted by the deVere Group, found that 73% of their high net worth individual (HNWI) client base had already invested in bitcoin, or planned to do so by 2022. It is no surprise that tracking the high-value HNWI segment is critical or the industry, and even more so given how recent social, economic, and political instability – all exacerbated by Covid-19 – have impacted their asset base. This has resulted in a greater need to achieve geographical diversification which has, in turn, generated more interest in alternative asset classes such as cryptocurrencies and even citizenship by investment (for more see How Citizenship by Investment trends reflect global HNWI investment priorities).
Millennials are driving the bitcoin boom, but crypto is transcending demographic groups
With the gradual retirement of the boomer generation giving rise to one of the biggest ever inter-generational transfers of wealth, an ever-larger number of millennials are joining the ranks of the HNWI segment. Here again, as millennials are the primary drivers of the bitcoin economy, their attitudes on crypto vs. traditional assets carry a lot of weight. In their 'Millennials and the Future of Money' report, Edelman Wealth Management found that 63% of millennial cryptocurrency users were of the view that bitcoin was a better investment than gold in a volatile economy, and 72% reported that crytpo is the future of the financial industry.
Figure 1: Millennials are positive about bitcoin as an investment and its disruptive potential
Source: Millennials and the Future of Money, edelman.com
As younger investors tend to be more FinTech savvy, cryptocurrency investing is typically seen as more of a young person's game. However, polling data suggests that this is not necessarily the case. Devere Group's global poll revealed that 70% of those aged over 55 were already invested in bitcoin and/or other digital currencies Even though the generalisability of internal client base data is limited, it does suggest that crypto investing has gained broad traction across demographic groups.
Appetite for bitcoin vs. traditional assets is rising but returns, not technology, is the real driver
Another important angle is to show how these attitudinal shifts are occurring relative to other major asset classes. The Tokenist recently conducted a study across 17 different countries on a total of 5,000 participants in 2017, and again in 2020, in order to gauge how attitudes toward bitcoin had changed relative to other traditional investments in that three-year period Figure 2. The study found that over 45% of respondents would prefer to own bitcoin over stocks, real estate, and gold, which is equal to 13% over the 2017 baseline. The study also found that a majority of male millennials now prefer bitcoin over government bonds.
Figure 2: Bitcoin's favourability is rising relative to major asset classes
Source: The Tokenist: Comparing Public Bitcoin Adoption Rates in 2021 vs 2017
Finally, while it is important to note that these shifts in attitudes explored above accurately reflect the broad uptick in investor interest in cryptoassets, this change is principally being driven by investment returns and not a preoccupation with the underlying technology. Indeed, it is well known that cryptocurrencies have been the top-performing asset class over the past decade, significantly outpacing traditional investments. Portfolio data shows that adding a 1% bitcoin allocation in a traditional multi-asset portfolio consisting of 49.5% global equities and 49.5% global treasures from 2010, yields an average annualised return of 148.5%, compared to only 7.5% without (Figure 3). However, though this highlights bitcoin's out-sized impact on a 'conventional' portfolio, regular rebalancing would need to be undertaken in order to bring volatility back into the realm of the acceptable from a fiduciary perspective.
Figure 3: Bitcoin's favourability is rising relative to major asset classes
Source: jeroenbloklandblog.com: Bitcoin as an asset class
Blockchain opportunities for innovative family offices go beyond bitcoin
The cross-section of data examined above provides ample context both for the rapid maturation of crypto markets and the recent surge in participation from the financial services industry. However, while much of the attention has been on large investors, it would be a mistake to think that family offices and smaller funds were sitting idly by. Indeed, the UBS Family Office report from 2020 showed that 57% of family offices believe blockchain will transform investing strategies and behaviours, and this sentiment was echoed in a Fidelity investment survey from 2019 that revealed that 72% of institutional investors – of which family offices are significant part – reported that they had no issues with buying cryptoasset-based investment products.
To some degree, this reflects the fact that many family offices are typically more entrepreneurial in that they often favour and invest in innovative technologies ahead of their larger institutional counterparts. But it is also an indication that family offices have substantially more freedom to engage in a range of cross-sector investments, and with a greater variability of growth perspectives and risk profiles compared with institutional funds that are highly restricted and regulated.
Innovative wealth managers must look beyond attracting new HNWI crypto investors and not miss the opportunity to explore how blockchain technology could be leveraged to reduce costs and increase efficiency in their own operations. Here, a 2020 study by Accenture and McLagan found that blockchain technology could cut costs in central finance reporting by 70%; company and central operations by 50%, enforcement by 50%; and middle and back offices by more than 30%.
All of this underlines the need for a truly holistic approach to the crypto space where innovative firms leave behind ‘off the shelf’ strategies as well as turn blockchain into a competitive advantage that puts them at the forefront of tech adoption in the industry.