In the 2010s, Bitcoin was embraced by open-minded and tech-oriented individuals. When the Bitcoin price started to skyrocket, high net worth investors (HNWIs) didn’t want to stay aloof from the new trend and jumped on the crypto bandwagon despite the well-known risks.
Last year, financial consultancy firm deVere Group conducted a global survey among HNWIs. According to the poll, about 68% of them will be invested in cryptocurrencies like Bitcoin by 2022. A significant portion of them had already invested in cryptos as of 2019.
The survey involved more than 700 respondents from the US, the UK, Germany, Japan, Australia, and the UAE, among others. deVere Group classified HNWIs as anyone with one million pounds (about $1.25 million) or more in investable assets.
deVere Group CEO Nigel Green concluded:
“There is growing, universal acceptance that cryptocurrencies are the future of money — and the future is now. High net worth individuals are not prepared to miss out on this and are rebalancing their investment portfolios towards these digital assets.”
In 2018, Capgemini said in its World Wealth Report 2018 that 29% of HNWIs across the globe expressed high interest in buying cryptocurrency. Interestingly, over 71% of younger HNWIs wanted to receive crypto-related information from their wealth managers, compared to only 13% of HNWIs aged over 60.
In October 2020, JPMorgan analysts concluded that more institutional investors, including family offices and asset managers, were investing in Bitcoin rather than gold ETFs.
All in all, younger HNWIs realize that cryptocurrencies are here to stay as they have the potential to transform the financial markets. This trend is probably similar to the dot-com era. Yes — the bubble burst in the 2000s the same as the price of Bitcoin deflated after the all-time high of late 2017. However, those who survived the dot-com bubble are now ruling the internet and entire sectors. Think about Google, Facebook or Amazon.
We at OTCTrade.com believe that the crypto space is already becoming an integral part of the financial markets. We observe that HNWIs’ appetite for robust alternative investments like cryptocurrencies is growing. That’s why we created a platform that supports large crypto transactions — so that HNWIs and institutional investors could trade cryptocurrencies over-the-counter (OTC).
Why Should HNWIs Buy Crypto?
Indeed, there are several incentives to buy Bitcoin and some altcoins. The Capgemini report from 2018 showed that over 39% of crypto-oriented HNWIs said that their interest was driven by the potential investment return, while 19.3% regarded cryptos as an alternative store of value.
Bitcoin is regarded as an attractive investment option because it has an asymmetric return profile, i.e. the potential return rate exceeds the potential loss by a wide margin, to say the least. Normally, most assets have a symmetrical distribution of risk, e.g., more risk is associated with higher potential returns in a proportionate way. With Bitcoin, there’s an already increased risk that maintains at a high level. However, it is the potential return that makes the oldest cryptocurrency worth investing in. The crypto industry has demonstrated yields of x20, x30, x50, and even x100 over the years. The potential loss is limited to the total investment made in crypto, while the potential return is really unlimited, especially for buy and hold investors.
Another reason why HNWIs should look into cryptocurrencies is their low correlation to traditional assets like stocks, bonds, or commodities. Last year, crypto-oriented hedge fund Pantera Capital said that Bitcoin had an almost non-existent correlation to traditional assets, citing Binance and Bloomberg data from the previous three years.
Timeframe: Three-year weekly return correlations, Q2 2016 — Q2 2019; Source: https://medium.com/@PanteraCapital/the-simple-case-for-investing-in-blockchain-blockchain-letter-august-2019-b38cd100f9f3
Still, in 2020, Bitcoin has shown some correlation to the stock markets as the COVID-19 pandemic triggered the economic collapse.
Source: Investing.com
This happened because institutional investors exited the crypto market en masse to cash out amid a general panic. The stock markets have recovered thanks to central bankers’ massive stimulus programmes. So did crypto assets, as institutional investors came back feeling more encouraged.
Bitcoin correlation to the S&P 500. Source: Skew
The point is this: while cryptocurrencies may show a correlation to traditional assets in moments of crisis (though it’s not a rule, as they may be robust safe havens), they are moving independently when everything goes back to the old routine. That’s why HNWIs may feel the need to allocate a portion of their portfolios to crypto assets.
The Right Mindset of a Crypto Investor
Cryptocurrencies can give you back ten, twenty or even a hundred times more than what you had invested. However, the risks are not negligible — investors should strictly stick to certain principles related to risk management. It requires skills and dedication. It would be fair to say that trading cryptocurrencies is an art; hence, the title is right on point.
Past experience has shown that the following attitudes have more chances to achieve results:
Diversification — wealthy individuals should regard cryptocurrencies as a great asset group that can diversify their portfolios. Going all in crypto would be a mistake even though the industry is poised to expand in the next few years. If the market is bearish for years, which may happen, that may be unbearable, forcing many HNWIs to capitulate without profits.
Instead, allocating only a small percentage, even 1%, to cryptocurrencies could impact the performance of any portfolio. If HNWIs are ready to hold their position for longer term, they can endure the high volatility without serious problems.
Buy and hold — this approach is touted as one of the most lucrative strategies for the wealthy. However, actively trading cryptocurrencies has its own advantages as well. Buy and hold strategy is widely used among other asset classes, but it has its own name with Bitcoin — HODL. The spelling mistake turned meme describes the philosophy behind this strategy: the most ardent Bitcoin fans believe that the king of crypto will ultimately replace traditional money, so it makes no sense to sell it for fiat.
All in all, HNWIs should always think in the long-term, because this is the only way to mitigate volatility risks.
Store value — buying Bitcoin to store value is another intelligent approach. The cryptocurrency is often referred to as digital gold. One in five HWNI respondents in the Capgemini report said that they invested in cryptocurrencies specifically to store value.
Bitcoin has a deflationary model that caps its total potential supply at 21 million. It means that the cryptocurrency will become scarcer as time passes. Elsewhere, fiat currencies like the US dollar are gradually losing value because of their inflationary model encouraged by Keynesian economics, as the Federal Reserve prints unlimited cash. The American currency had lost over 96% of its purchasing power since 1913 — the year when the Fed was established.
https://fred.stlouisfed.org/series/CUUR0000SA0R
As crypto trader Tony Vays put it: “Bitcoin might be the greatest store of value in the history of the world. Yes, it’s volatile — as it’s only been useful for about seven years — but its ‘unconfiscatability’ property is unmatched. That is its true store of value, as gold is confiscatable and all other assets even easier.”
Whatever the motivation, OTCTrade.com can help you find the best deals. Out platform ensures high liquidity, which enables prompt price discovery. If crypto trading is an art, then we like to think our platform is the greatest instrument that can help you refine your skills.
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