Why now is the time for family offices to regrow confidence in digital assets

It’s fair to say that the digital asset sector has taken a bit of a hammering over the past year but Jakob Palmstierna, chief executive officer of GSR, states the crypto winter is coming to an end and confidence is growing back stronger than ever. GSR has ten years of deep digital asset market expertise as a market maker, asset manager and active, multi-stage investor.

Here, Jakob, who has more than a decade of experience developing business and investment solutions in systematic investment management, talks about assuaging digital assets investment concerns, why now is the time to get on board and crypto’s bright future…

What are the origins and aims of GSR?
GSR has been in the digital asset ecosystem since 2013. We were one of the first market makers of one of the first cryptocurrencies, earning us the title of the oldest market maker in the crypto space. As the years have gone by, we’ve seen the evolution of crypto’s underlying technology, predominantly with smart contracts, and we expanded into market making across many different exchanges and tokens.

We are a systematic trading firm focused on digital assets and while we have been servicing the ecosystem - token issuers and exchanges - with liquidity for ten years, it allowed us to develop a deep understanding of both the qualitative and quantitative aspects of digital assets.

Alongside our market making business, we also provide OTC services, invest heavily into the digital ecosystem, and have built an investment advisory arm to provide institutional investors a way to access the emerging asset class. The GSR group has a 250-strong team and we aspire to be the main institutional service provider for everything trading and investing related in the digital asset sector.

According to Campden Wealth’s European Family Office Report 2022, common concerns surrounding cryptocurrency include a lack of regulation (61% of respondents), market immaturity (52%), and excessive volatility (46%). Are these viable concerns from your point of view?
We spend a significant amount of time with regulators globally and it has become clear that in the US, as we commence a new electoral cycle, cryptocurrency regulation has become a distinctly politicised matter. Many senior figures and politicians in the US were mollycoddling Sam Bankman-Fried, a major democratic donor and, even since the demise of FTX six months ago, we are still waiting for some form of disclosure on regulation in the US.

 However, we are seeing quite a lot of enforcement in the US with the stamping out of certain behaviours and that really is the first step to being able to introduce proper regulation. [Republican presidential hopeful] Ron DeSantis is making cryptocurrency a very big part of his agenda for the election and there is a lot of capital and talent across political lines in the US backing crypto, which gives us hope that progress will be made over the coming months and years.

So, what is happening across the rest of the world? We've seen that the Financial Conduct Authority (FCA) is now saying they want to embrace this new asset class. Switzerland is doing it as well, along with the Middle East, Hong Kong and Singapore.

The vote has already been cast, there are more digital wallets and people using crypto than ever before, it's something that people want. Whether it is because they want a means of storing value outside of the legacy American financial system, are using digital stablecoins for payments, or simply as an asset to trade.

‘Utility’ is something that people talk about a lot and there are hundreds of use cases for crypto that are both new or improvements to existing systems. One that excites me would be something like mesh networks that are competing successfully with 5G networks. But I wouldn't discount things that aren’t necessarily a generational shift in utility, because people just enjoy interacting with crypto a lot, be that through in-game assets or the gamification of Web3. To me, it's clear that crypto isn't going away.

Crypto adoption is immature for sure but, if anything, that's where you will find a large opportunity - you should want to invest in a nascent asset class. Over the next five to seven years, you will likely continue to see asymmetric returns where the upside potential compensates well for the downside. Volatility is likely to remain quite high as it so often is in nascent asset classes, likely in the range of 60 to 100%, but I'm not necessarily sure why this is such a concern, because with firms like GSR you can actually tailor your exposure using risk parameters, so you can consume whatever volatility you wish to have whilst aiming to protect your downside.

This is one of the few asset classes where you can put in and risk 1% and it can become 10% of your portfolio. If you look back in history to another nascent asset such as oil, the price was volatile and varied between 10 cents per barrel to US$20 in the years after 1860. At the time, fortunes were won and lost, but long term investors, most notably, John D. Rockefeller, is today seen as one of the biggest wealth creators of all time. He took the long view, had exposure to the asset class and wasn't afraid of volatility. It paid off in the long term.

European family offices invested in cryptocurrency have had to reassure themselves on the above issues and contend with a rapidly deflating price bubble. Nonetheless, the same report found that the percentage of family offices already invested in cryptocurrency has remained constant at 28% over the past year - and of these 27% are looking to increase their investment. Is this proof that the ‘crypto bubble’ is far from bursting?
If anybody thinks crypto is anything like the tulip bubble they shouldn't even consider getting into it. I urge everyone to treat crypto with the merit it deserves, it's now a more than US$1 trillion asset class that can potentially disrupt much of what we do. Over the course of 2023, despite it being ‘crypto winter’, Bitcoin has been one of the best performing asset classes.

If you look purely at the trading characteristics, it's a volatile asset class. But if you look underneath the hood, crypto is continuously driving real-use cases. Furthermore, we're seeing an increasing number of users, increasing blockchain transactions, interest in capital raising, more smart contracts deployed and a rising number of full-time crypto developers. So, yeah, I think that the story is pretty good.

Many family offices believe that crypto will be accepted globally as a ‘real currency’ and some governments are looking into establishing their own cryptocurrencies as we move towards a fully cashless society. Do family offices risk missing the boat if they don’t get into crypto now?
My very strong view is that if you have no allocation to crypto today, you are short. We live in a market cap-defined world and this is an asset class which has such transformative benefits and opportunities.

 I would say to family offices looking to get into crypto but don’t know where to start, the sensible course of action would be to start allocating to larger assets like Bitcoin and then diversify into different assets and strategies from there.

New investors want something that looks and feels like anything else they’re used to investing in with the only point of difference being that the underlying asset class is crypto, that's what we are trying to build with the investment advisory business.

The offering looks and feels like any other fund that investors would consider, we have the same sort of liquidity parameters and system administrators. We also provide a huge amount of educational materials and we have the same levels of reporting that investors are used to, so, from our point of view, if you previously found getting access to crypto hard, well, that’s now been solved.

Start looking into vehicles that you are familiar with and the only thing that's different is the asset class - don't feel that you have to learn how to manage on-chain wallets and non-custodial wallets, fund managers can take care of that for you.

As opposed to some more traditional asset classes, digital asset values can rise and fall very quickly in a short space of time. How should family offices best monitor this potentially volatile asset?
If you want to have an allocation and you have assigned a fund manager to manage it for you, you should have an understanding of the parameters they are expected to operate within. This should also be clear in the reporting that you receive.

Crypto is not an asset class where you have to be a very active investor. As with any investment, over time you need to build up some degree of expertise in whatever areas that you are investing in. At GSR, we produce a lot of thought leadership content that ranges from quite technical to more consumable pieces. Similarly, for our investment advisory business we have investment guidelines which are very clear about what we're doing. At the end of the day, you need to make sure what’s held and whether it is managed in the right way.
 

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