Family Offices Flock to Crypto for Risk Reduction

Family offices are increasingly turning to cryptocurrencies like Bitcoin and Ethereum as a way to reduce risk in their portfolios, according to a recent survey by BNY Mellon. This may seem counterintuitive at first, but the reasoning is rooted in the low correlation between crypto assets and traditional asset classes.

The study found that 74% of family offices are either invested in or actively exploring cryptocurrencies, nearly double the 39% reported in prior surveys. This trend is driven by the desire to smooth out overall returns, as adding a small percentage of crypto exposure can significantly boost portfolio performance.

For example, between April 2019 and March 2024, adding just 3% crypto exposure to a standard 60/40 stock-and-bond portfolio reportedly elevated returns from 33.3% to 52.9%. However, typical allocations remain conservative, with family offices generally dedicating between 1% and 5% of their portfolios to digital assets.

But what's driving this shift? According to the survey, specialized custodial services have addressed concerns around key management, while spot Bitcoin ETFs have provided a familiar wrapper for crypto exposure. Some family offices have even anchored funds as large as $100 million in market-neutral strategies that harvest returns without taking directional bets.

However, there's a risk worth watching: if family offices are primarily allocating to Bitcoin as a diversification tool based on its historical low correlation to equities, this thesis gets tested every time Bitcoin trades in lockstep with the Nasdaq during a market selloff. If a future crisis reveals that Bitcoin correlates with everything else when it counts, the risk-reduction thesis could unravel quickly.