Why Family Offices want to embrace Asset Backed Securities, Cryptocurrencies & Blockchain…?
What lessons can be learned from the poor performance of Crypto Hedge Funds and why these investments were never going to work!
For most of 2018 and the tail end of 2017 I have delivered numerous keynotes, chaired events, moderating panels at the Family Office and Investment Summits all over the world, where each time Bitcoin and Blockchain seem to hijacked the agenda and steal the show. Everyone wants to have a closer look at emerging asset classes, the option to tokenise company value and even the most conservative Family Offices want to take a look into Nakamoto’s workshop.
Why is this?
I try to draw attention to the failings of the current system and in a historical context remind everyone that Fiat currencies always go to zero, that no government in history has had the fiscal discipline to plan past a short term view of currency to get elected next time. And the FED and US Government doing a great job with the USD, which has already lost 95% of its intrinsic value, the world is looking to move away from the dollar economy, enforced onto us all after WWII as Europe was bust.
I am fortunate for a few reasons. My speaking splots often follow the dry, the stiff, the stale presentations of central bankers, asset managers and those who have been part of a polarising Capital Markets System for decades. So it is easy to get attention as people awake from ‘nodding off’ in their seats, put to sleep by yet another yield curve, another fund performance making a loss net of fees and bankers defending a draconian model that discriminates and distorts value. I have a view of both conventional Capital Markets with a technology bias having been in technology for 40+ years, and I have embraced each new tech wave as it arrives: mainframes, PCs, the Internet, mobile phones and now the Bitcoin Blockchain.
The audience generally comprises Family Offices, Sovereign Wealth Funds, Government officials, UHNW, Royalty and the plethora of VCs, Intermediaries and Wealth Advisors, all looking to feed from the trough of sovereign and personal might.
I remember the reaction in Dubai at the AIM Congress in 2018, I began by reminding people we are witnessing the end of “Capitalism in its current form”, enjoying the room as it became unsettled, edgy and as the rudely awakened was delivered. Largely because the Fractional Reserve banking system has allowed bankers to take financial alchemy to the brink, where in 2008 it had to be bailed out. But nothing has changed since Nixon abandoned Bretton Woods, as the US were struggling to pay back the value of Gold the FED had been given by the British and French to support a USD economy. But people have short memories and forget QE was another “lipstick on the pig” moment.
I then show the audience Crypto Capital Markets in action where $30billion has flowed into Blockchain and Crypto in recent years (at the time of writing this) and where in early 2018 the MktCap was worth a combined $1trillion. And despite 2018 Bear run crypto isn’t going anywhere except to $4trillion, then $20trillion and will pass current capital markets quicker than people imagine.
The big problem is systemic risk which is built into the current financial system because it is open to human intervention, manipulation and all paths lead to a rotten centre which offers no value add. It is a financial system engineered for a different purpose, at a different time and place, is now so outdated that those holding onto power will outlaw, crush or try to defeat any attempt to create a new system. To distribute wealth fairly.
This is also because incompetent governments need to manipulate interest rate policy and supply, making decisions based on short time horizons, to win re-election, that is now holding us all back, a slowing a natural progression progression of mankind. But then came Bitcoin, where some argue there is influence over price, although supply and what constitutes a good transaction cannot.
Today, Financial Markets rigidly restrict the movement and flows of capital, creating client elitism, a multi tier structure of exclusion and high fees and charges, no matter what the outcome. We all have to pay for their errors and proportionately the wealthy, Family Offices pay to keep the entire system afloat. But they are reluactants and the VCs especially have upset them deeply. Once Family Offices understand new asset classes we will at last get shot of the old system and herald the arrival of a super liquid, neutral and fair Crypto Capital Markets for everyone.
Capital Markets was built as an inefficient system from the beginning, with layer upon layer of intermediaries, advisors, counter-parties each with their hands out expecting to get paid. A centralised system where transaction flows, deals and control capital flows through centralised payment processors, central banks, third parties who add nothing more than friction time cost. Like the hierachy of an organisation structured around lines of decision making, capital markets power stems from the vested interests of those in government as parliament, showing us all they have lost touch and have no intention of delivering for the people.
It is a financial services model that creates financial products for the benefit of the system and not the customer, or those Family Offices putting capital into the system via Venture and Hedge Funds. Into over rated and produced synthetic financial products engineered to give third parties such as brokers an income for doing very little frankly, is not good use of Family Offices funds, nor is a 20% carry for ineffective VC partners.
Family Offices ask me this question: When will my current investments be under threat?
I frame my answer as follows:
Traditional safe haven options remain generally illiquid, land, property and limited for example artifacts. Then there is gold. Then there is cash, where its intrinsic worth is declining reliant on buying back in during recessionary cycles (Kondratiev seasons) as assets drop and people and companies are squeezed, by inflationary cycles and rising rates.
As I begin to explain to an eager audience of families, that have tried to ignore new emerging asset classes such as Cryptocurrencies (Bitcoin) and new decentralised Blockchain businesses, they soon realise they are not only guilty of a missed opportunity but will be considered a derivation of duty, as the new family generations take over. As wealth can dissapper faster than it was accumulated over decades and centruries by forfathers.
All current investments are being nibbled around the edges by technoogy advancements. Fast, cheaper and simpler models erode enterprise value of those business models that are under attack. Think Blockbuster, think todays retail markets Sears, think Nokia where the industry models on which they were built dont deliver and only customers laziness to move quickly breaths life into what is often a slow decline.
Any investment by Family Wealth in every Industry, Organisation and business model is being dis-intermediated by Blockchain technologies. The value is therefore at risk, from decline of fiat currencies and new models that deliver 10x improved experiences, transparency and therfore trust and removes the layers unwanted bureaucracy and cost.
Blockchain along with other sister technologies offer the opportunity to completely reinvent and design new operating models that kill off the dinosaurs. New business models expose the weak, the fat and comfortable that rely on vested interests of inefficient business and industry models that harbors stranded cost, to feed the layers of inefficiency (the brokers, intermediaries), hierarchal industry models that haven't changed for 100 years, supported by the theory of management and lines of authority, a new geneeration of millenials dont understand, dont want and will not be a part of.
Investing in Blockchain (crypto) is a natural hedge against the falling value of fiat…
It comes as no surprise Family Offices are fed up with VCs and traditional Fund models with their 20% carry, their risky investing strategy where they hope one in ten investments come good. And having worked with several families over the years many have set up new Blockchain front desks hiring in some crypto geeks and technologists. In my view the right move.
In 2018 during the crypto explosion I wonder how many people lost money. I am certain most assume it was the retail crowd that fuelled the ICO economy, but I have my doubts. The performance of the Crypto Hedge Funds who a year ago cockily boasted they were buying into the best big opportunities, the private SAFE of course, that exlcuded the crowd, raking in hundreds of millions to deploy to create the new Crypto Unicorns. It was of course a farce at best, as these hedge fund guys knew nothing about Blockchain, ex bankers that like the dot.com bubble saw noting more than easy money on a trend. We don’t need or want this behaviour, but that is what bankers do.
Well I have one thing to say to Family Offices and Institutions that put their wealth into these crypto funds. It was too early, you ignored facts, history and the truth as your broker and wealth advisor told you of the 4000x returns waiting. And now some have retracted at time when in 2019/2020 things will get very interesting from an investment position.
As with any first wave of a new trend, technology or industrial shift, you should know it is not until the second or third wave does investment longevity start to arrive. First, new markets need scale of activity and infrastructure to define it. Second, the early Blockchain projects issued tokens based on the Ethereum blockchain, where from say 40m Wallets there was a mere 4m active wallets.
So you lent a management team $250m to build some software for an addressable market of 40m, net 4m? Hedge fund decisions were poor, badly informed and reckless.
In 2016–2018 Blockchain had neither scale or infrastructure, and thus there was nothing to support these huge investments, and these funds are up to 80% down already. Overlaying a tired old VC model on Blockchain opportunities will just lose you money. The store of value is different.
Investing in Blockchain in 2019 will deliver better outcomes
2019 is the year of building Crypto Capital Markets Infrastructure. This is important as this delivers both liquidity and ‘exit ramps’ for investors to get into primary issuance and move their positions in secondary markets.
Regulated Crypto Exchanges is the game changer for investing in new asset classes and lots of new infrastructure is arriving. In so many ways the best investments Family Offices can make is in the underlying Crypto Capital Markets Infrastructure business like our own token launch platforms and regulated crypto and digital asset exchanges.
So what to do… Join the crypto collective or sit back…
Remember, new asset classes from tokenising assets, the value of a company and new service propositions built on Blockchains are inherently more effcient, have lower cost base and if designed well should scale at pace to 100m+ users, delivering rapid growth in values.
Investing in decentralised business models is an entirely different proposition and requires a new understanding of how value is created, stored and exchanged. What we call tokenomics, the secret sauce of everything crypto. And few understand it or can engineer tokens that work for all stakeholders.
“Ignorance is Strengthened”
Contact the author www.NickAyton.com