HNW Investors: 4-Step Guide to Getting Started with Crypto

As cryptocurrency trading volumes have increased and institutional involvement has risen over the last few years, it is no surprise that excitement amongst high-net-worth individuals is going up as well. Indeed, by some estimates, more than half of the world's HNW investors have already expressed interest in expanding their portfolio diversification strategies to include cryptocurrency and other digital assets.

Unfortunately, there isn't much information available online today that serves this particular segment of investors. It is amongst this blog's goals to remedy this problem, and to this end we have prepared this short introduction for HNW individuals that are just getting started with cryptocurrencies.

Step 1: Understand the Space

It still cannot be denied that cryptocurrency remains an emerging asset class as a whole. While certain coins (i.e. Bitcoin and Ethereum) might be well-established, new digital assets are initially released almost every day. It helps therefore to have a certain degree of understanding of the basic technology and principles behind cryptocurrency. This technology is most commonly referred to as 'blockchain.'

Research blockchain and diversify
When you buy a cryptocurrency, including Bitcoin, you are - in very simple terms - purchasing a part of a blockchain ecosystem. These are large, decentralised, computing networks that can be used for a variety of purposes, from processing transactions, to recording real estate sales and registering movement along international supply chains.

There exist a large number of different blockchains, and it is usually worthwhile to purchase coins and tokens issued on several. Different blockchain platforms are better suited to different use cases, and there is no telling which will be dominant long term.

Find out about other coins and tokens
In some ways, blockchain-based digital assets resemble an entire 'parallel system' to legacy finance and traditional capital markets. The various types of tokens each provide decentralised alternatives to existing assets. In doing so, they each provide certain key benefits to investors.

We recommend that you get acquainted with this range of new asset types. Buying BTC is different from buying a utility token issued on Ethereum, Polkadot or Cardano, and it is important to be able to distinguish the regulatory implications of, for example, a cryptocurrency from a security token or CBDC.

  • Cryptocurrencies: Currently the largest cryptoassets in terms of market cap, these are the coins most people think about - Bitcoin, Ethereum, Litecoin, etc. They provide an alternative to stores of value in the traditional economy, like gold and other precious metals.
  • Stablecoins: Today, the largest cryptoassets in terms of daily trading volume are stablecoins. These are digital assets that are designed to maintain a value that is equal to that of some fiat currency, cryptocurrency, or commodity. Most stablecoins maintain a 1:1 equivalency with the USD. They provide more streamlined cross-border transactions than does the legacy system.
  • Non-Fungible Tokens (NFTs): It is without any doubt that our lives are moving online. NFTs, simply put, provide a way for us to establish the ownership of things in the digital space. This emerging asset class is already gaining popularity among online content creators, including musicians, artists, and AR/VR developers.
  • Utility Tokens: Digital ecosystems often require their own internal currencies. Utility tokens serve this purpose, while also providing an outlet for companies and startups to raise funds through public offerings called initial coin offerings (ICOs).
  • Security Tokens: There are numerous reasons to digitalize capital markets. Security tokens are blockchain-issued digital assets that represent stocks, blonds, and other kinds of securities. These are offered to the public in Security Token Offerings (STOs).
  • Central Bank Digital Currencies (CBDCs): A major trend over the next few years will be the issuance of CBDCs by national governments. This is an attempt by governments to ensure that their currencies are represented in the digital space. We'll see with time how exactly these coins will be deployed and the effect they have on other cryptoassets.

Step 2: Learn to Learn

High-net-worth individuals are generally well-experienced in gathering information prior to making investments. However, even the most accomplished of investors find that the best crypto market insights are found through documentation and online media sources that are a few degrees removed from what they are used to. Namely, crypto investors pay attention to white papers (the crypto equivalent of prospectuses), pitch decks, and digital asset media.

White papers
There have been but a few examples of blockchain projects that started without releasing a white paper. In fact, it was Satoshi Nakamoto who set this precedent, publishing the Bitcoin white paper online in 2009. From the very beginning, these documents aimed to set out the general technical architecture and economic structures that would form the core of the proposed blockchain ecosystem.

Just as you read a prospectus when you invest in a stock, you should always aim to read the white paper of any project in which you aim to take any significant position. This will give you a basic idea of the technology and tokenomics involved in the project. You can use this information to understand how project developments can negatively and positively affect the price of your assets.

Pitch Decks, Talks, and Blogs
In some kinds of crypto investing — and particularly when it comes to utility and security tokens (ICOs/STOs) — you will feel a bit like a VC. You will spend your time reviewing pitch decks and listening to presentations made by project founders. Usually, the organizations behind these projects are quite proactive in terms of publishing these things online. If you feel a bit intimidated, not knowing where to start — don't worry. Most of this information can be accessed with quick searches on Google and Youtube.

You should also spend time visiting the project's official website. Some projects are more centralized, others less so, but in general the organizations that coordinate blockchain ecosystem development regularly post updates online. The Ethereum Foundation, for example, regularly posts a blog and papers that describe planned implementations. The Cardano Foundation publishes papers — written by academics — that serve as suggestions as to new innovations that can be integrated into their ecosystem.

Crypto Media
While today major financial news outlets do cover crypto markets, there exists an entire world of crypto-focused online publications, news aggregators, and market statistics platforms. We will name just a few of these online resources:

Crypto News and Aggregators:

Market Statistics and Blockchain Explorers

Step 3: Custody, Security, and Governance

One of the primary differences between cryptoassets and other investments is how they remain at all times in the custody of their owners. On the one hand, self-custody offers many benefits to the investor: There is no need to operate within business hours, depend on third-party service providers, or worry about institutional or government intervention. On the other, this puts a greater degree of responsibility into the hands of the investor.

Each member of a blockchain network - including regular crypto users, investors, and companies - can be identified using cryptographic addresses, referred to as public keys. These public keys, together with each user's "private" key - which is used to unlock the coins or tokens sent to the private key - are stored on something called a wallet.

There are two main types of cryptocurrency wallets: software wallets and self-custody. Software wallets generally store keys using secure cloud-based strategies, maintained by third-party providers (ie. Fireblocks). Self-custody solutions involve users keeping keys on a hardware device or piece of paper that they keep in their own home or in a bank vault.

Build Your Custody Strategy
As a high-net-worth individual, you will find many of the strategies utilized by retail investors to be inadequate for your needs. First, you are likely interested in longer-term custody. Second, your portfolio may be quite diverse, and as a result, complicated to manage all in one place. Third, your portfolio may be managed by multiple stakeholders, and you likely have multi-generational family obligations. Ultimately, writing your private keys on a post-it note and hiding it in your desk is not for you. You need to build your own custom cryptocurrency strategy that takes advantage of multiple storage solutions and that includes more complicated governance structures.

Types of Wallets and Custody

  • Exchange wallets: It is possible to hold tokens on most cryptocurrency exchanges. With these solutions, the private keys are stored by the exchange. This option is usually ideal for short-to-mid-term custody.
  • Cloud-based wallets: There exist a number of highly reliable crypto custody platforms that manage private keys for clients. Our partner Fireblocks is one such solution, splitting and storing keys on multiple clouds and behind hardware security modules - the very same custody used by major EMIs like Revolut, Wise, and Monzo. All AlterCap users get free access to this solution.
  • Hardware wallets: There are times when investors prefer to store crypto on their own premises. Hardware wallets provide an easy solution in these situations, enabling transfers to be validated while ensuring private keys can be stored in secure locations, including bank vaults and behind HSMs.
We recommend that your crypto custody governance structures resemble those which you have established for other investments. In particular, multi-signature wallets should be set up that require the approval of particular individuals prior to operations. Our team would be happy to walk you through this process.

Ensure a Last Line of Defense
Technology has progressed to a very large extent over the last few years, and with proper strategy, security of funds can be just about assured. However, just as governments insure bank accounts, a last line of defense is certainly worthwhile for cryptocurrency wallets. Fortunately, insurance policies that protect digital assets are currently offered by a number of leading providers. We always recommend Coincover, underwritten by Lloyd's of London, and can help to arrange coverage up to $1,000,000 for your digital assets.

Step 4: Find an Expert Partner

Apart from everything else, high-net-worth investors differ from other users of cryptocurrency in terms of time. While their understanding of the financial aspects of investing may be more sophisticated than other users', they likely have other work obligations and investments to manage. For these kinds of investors, finding a trustworthy crypto investment partner is essential.

AlterCap may just be the partner you need. We specialise in getting companies, individuals, and family offices started with cryptocurrencies. In addition to the expert consultation we provide to high-net-worth individuals, we have crafted a range of unique solutions geared to this kind of investor. In order to fit each investor's risk tolerance, each of our products vary across the volatility spectrum.

Our Products

  • Bitcoin Parity Fund
    Bitcoin Beta exposure that aims to establish an optimal level of return based on the risk-tolerance levels of clients. Volatility is matched to equity markets, capturing an upside of 20% and a downside of only 15%. Annualised returns: 19.62%
  • Bitcoin and Ethereum Trust
    Pure exposure to two of the most popular digital assets in a regulated unit trust. This is a true hedge in a world where fiat currency is being devalued. Tracks the price performance of BTC and ETH through a traditional investment vehicle.
  • Staking on Polkadot
    The world's first fully-insured staking product. Stake your tokens in order to participate in PoS as a validator. Receive per-year rewards of up to 10.5%.
  • Collateralized Lending
    Valuable liquidity for institutional investors and large holders of cryptocurrency. Borrow USD using digital assets as collateral. Annualised returns: 5-7%
  • Structured Products
    We are able to design and deploy structured products that meet your individual needs. During this process, we focus on factors such as volatility, directionality, and the client's risk tolerance.
  • DeFi Index
    Decentralised finance is the next frontier of disruption in capital markets. This first-of-its-kind index is a collection of the most promising aspects in the DeFi space, providing exposure to thematic growth.

Please do get in touch if you have any questions about these products or about digital assets in general. We would be happy to schedule a meeting.