Hoodies & HODLers
December 2017, a man in jeans, sneakers and a hoodie walks into Sharps Pixley on St James Street in London with a backpack on his back. He had just flown up from Italy and was due to fly back later that same day. When he boarded the plane in Milan in the morning he thought that he would be the only one walking into this prestigious store in London dressed in street clothes, the standard uniform of his seemingly far-off Silicon Valley peers. Instead he found himself standing in a line of back packs and hoodies nearly identical to his own, each there, like him, to store bars of gold, bought with cryptocurrencies, in safe deposit boxes.
Cryptocurrency (of which Bitcoin is by far the biggest) was the hot item that brought 2017 to a close with its soaring prices at the end of that year and deep drop just a month later in January 2018. The massive growth prompted even the least tech savvy to jump in and invest. But what of those who invested early? While the market has dropped from its record highs reached in 2017 (bitcoin reached its peak value of about $20,000 and its market cap $320B) if you bought enough Bitcoin when it was worth just pennies, at roughly $5,500 per coin today you would suddenly find yourself in the Very High Net Worth (VHNW) or Ultra High Net Worth (UHNW) population.
What do we know of this new very- or ultra-wealthy segment, who are they and why did they invest even a small amount to begin with? Now that they are rich, what will they do with their money? While the mantra “HODL” (hold spelled frantically, a phrase made famous through a blog post by one drunk frantic early investor back in 2013) is one heard time and again by those who have ridden the crypto storm over the years, those who have held long enough to see the market high in 2017 (whether they sold at the peak or kept HODLing), are now looking to diversify some of their holdings into other assets, such as gold.
The Rapid Adoption of Crypto-Currency Assets
With over 1,500 different currencies (including coins and tokens) in circulation, the total market capitalization seems to be about $180 billion as of April 2019 with Bitcoin making up a little over half of this at $96 billion. Due to its secret nature, the total number of investors is unknown, however we can look at the number of crypto-wallets as an indicator. In January 2012 there were just 412 Bitcoin wallets. By July that year there were about 10,000 and as of February 14, 2018 there were over 23 million. In the first 14 days of 2018 almost 2 million new wallets were added.
The Opportunists, the Criminals and the HODLers
With the increased coverage in mainstream media after the huge swings in price in 2017-2018, there has been much speculation about who is actually investing in digital currencies. Some deride the investors as naïve, some accuse them of being money launderers and some laud them as geniuses who have tapped into the future of currency. Established banks and venture capitalists see it both as a threat and an opportunity. Governments see it as a threat posed by those who want to avoid taxes and regulations, while many economists are calling it one of the biggest bubbles in history. Who is right and who is wrong? No one and everyone really, you simply cannot understand the market if you look at its acolytes as a cohesive whole.
We identified 3 very different profiles of cryptocurrency investors. Understanding the distinctions between them is key to shedding light on the motivations behind each type.
The Opportunists: These are the folks who would self-label as investors in cryptocurrencies. They are the latest on board, clamoring to get a piece of the frenzy. They are a large part of what drove the market up so wildly. And they incurred the biggest losses when the prices dropped. This group is interested in the asset value of the investment and not necessarily the philosophy driving it. They are not as tech savvy and tend to have a basic understanding of blockchain technology.
The Criminals: Until cryptocurrencies became (relatively) mainstream, it was commonly believed that it was the currency of black market criminals. Indeed, this is partially true as it does provide a path for anonymity that many international criminals prefer, especially when making large asset purchases and moving money from one country to another. According to Europol roughly 5 billion dollars is laundered annually through cryptocurrencies (3-4% of the total illicit proceeds in Europe) https://bbc.in/2YkU3jP
The Tech-Libertarians or HODLers: These are the believers. They are early adopters who got in to cryptocurrency due to their passion for cutting-edge IT, their fascination with the disruptive potential of blockchain and their libertarian beliefs. This group bought in for the ideology and have thus far followed the mantra of “HODL” throughout the volatility over the past several years. The recent market reaction, mass awareness and even the reactions of several governments to crack down and regulate cryptocurrencies only validates their belief that it is the currency of the future. They are in it for the long haul and believe digital currency is the future.
The first two groups have been around in one form or another for a long time and are fairly familiar profiles. It is the third group, the HODLers, who are most interesting. This group can be further categorized in subgroups to better understand them.
The Pragmatists: This group saw an investment opportunity that fits with their core libertarian values. As the market fluctuates they will take advantage of opportunities to sell some of their coins and make profit but also remain well invested as they believe the world will eventually convert to digital currencies and therefore the value will continue to rise over the long term. Their behavior can be further subdivided by age or life stage which better defines how they spend their money. They are at the point where selling 30% of their digital currencies would significantly change how they live their lives. Those with a family will be more prone to long term planning and diversifying their investment in alternative assets such as gold, the young, single ones are more willing to live the dream and spend.
The Fanatics: Made up of extreme HODLers or of extreme libertarians. They adamantly stick to their bitcoin or cryptocurrency investment, avoid converting into traditional currencies and tend to maintain a frugal attitude. They are so unwilling to part with a single coin they would rather take out a loan.
The Entrepreneurs: The wealthiest of the group, they have seen the full opportunity of the digital currency industry and have invested in both the coin and in new enterprises that build upon blockchain technology, such as Ripple or Ethereum.
As an example of the last group of Entrepreneurs, in 2018 Forbes published its list of “The Richest People in Cryptocurrency” which highlights about 20 people each with over $350 million in net worth at the time. Forbes admits it was not an exhaustive list with large room for error as the list only accounts for those who not only invested cash but also set up a business venture within the space, allowing room to speculate on their total wealth. Forbes’ list also does not capture the other segments, those who invested in the currencies early on but did not launch new ventures.
The majority of the HODLers were initially attracted to the idea of an alternative peer-to-peer currency fueled by technology and free from any government association or reliance on the established financial institutions and central banks, which speaks to their libertarian ideals. Bailey Reutzel wrote for Coindesk.com explaining “It's because bitcoin is an alternative, a counter-power, the resistance. And dammit, it's shown the resistance can work. It shows we can make our own things valuable. We can decide when we've had enough.”
So how wealthy are they now? In July 2010 the value of Bitcoin went from $0.008 to $0.08 in just 10 days due to significant increase in demand (bitcoinwiki.org). Someone who bought one coin at $0.08 would have seen an increase of nearly 25,000,000% when the value reached a high of ~$20,000 at the end of 2017. Even today as the value of Bitcoin continues to climb after crashing in early 2018, at a price of about $5,500, those early investors who held on to their coins can easily belong to the very-high net worth (VHNW) or ultra-high net worth (UHNW) groups.
Going under the pseudonym of Mr. Smith, an engineer working in his first job in Silicon Valley in 2010 described his entry into the market in Forbes.com. His “equally geeky” friends told him about Bitcoin. Like most of his peers, he was interested and wanted to learn more as he says, “I wanted to learn more about the underlying technology”. He then invested $3000 at $0.15 per coin. By today’s value he is worth about $110 million.
Bubble and Bust or Long-Term Value (or Noxious Poison?)
Cryptocurrencies are developed as an alternative to government backed currencies. They use blockchain technology to secure and time-stamp the transactions and link the coin to its owner, identified anonymously with a digital ‘fingerprint’. Bitcoin is the most popular and well known but there are over 1,500 other currencies available (including Initial Coin Offerings – ICOs - based on Ethereum). Blockchain technology was first introduced in 1991 but went largely unnoticed and unused until it was adopted by Satoshi Nakamoto in 2009 when he used it to create Bitcoin. The role that cryptocurrencies will play in the future of currencies is highly controversial.
“First, it’s like E-gold – scarce, divisible, transferrable, and not affiliated with any nation, which makes it intrinsically useful as a store of wealth for people who want to hedge against their local currency or traditional equity markets. Gold has been serving this purpose for a long time, but bitcoin is far superior because it can be transacted over the internet. Second, bitcoin enables transactions that are fast, cheap, and global”
Olaf Carlson-Wee, first person hired at Coinbase and paid in BTC since 2013 (cheapair.com)
According to Kenneth Rogoff, Professor of Economics at Harvard and former chief economist of the IMF: “the overwhelming sentiment” among crypto advocates is that the total “market capitalization of cryptocurrencies could explode over the next five years, rising to $5-10 trillion”
Prominent economists and bankers beg to disagree. Rogoff himself thinks that the “crypto evangelist” view of Bitcoin as digital gold, is “nutty,” and that Bitcoin’s long-term value is “more likely to be $100 than $100,000.” Joseph Stiglitz, Nobel-prize winning economist, professor at Columbia and former Chief Economist of the World Bank doesn’t see any future for Bitcoin “You cannot have a means of payment that is based on secrecy when you’re trying to create a transparent banking system”, Stiglitz expects any bitcoin price growth to quickly bring regulation from authorities: “Once it becomes significant they will use the hammer”. Jamie Dimon, J.P. Morgan’s CEO, calls Bitcoin a “Fraud” and “Worse than tulips bulbs”. Ben Bernanke, Former FED Chairman thinks that the decentralized nature of Bitcoin, which puts it outside government control, will trigger its downfall “Bitcoin is an attempt to replace fiat currency and evade regulation and government intervention. I don’t think that’s going to be a success”. Nouriel Roubini, who became a renowned economists after predicting the 2007 financial crisis, even believes that crypto-currencies are “the mother and father of all bubbles”.
On the opposite end of the spectrum, Bitcoin bulls include famous people such as Steve Wozniak (Apple co-founder), Peter Thiel (Paypal co-founder), John McAfee (founder of McAfee), Jack Dorsey (CEO of Twitter) and many other visionary Silicon Valley entrepreneurs. Some prominent bankers ae on the fence, with James Gorman (CEO of Morgan Stanley) calling Bitcoin “more than just a fad” and Lloyd Blankfein (former CEO of Goldman Sachs) who does not exclude that Bitcoin might become a “consensus currency”.
What explains the market value of Bitcoin? The market value of traditional currencies is supported by their legal tender, the market value of all other assets is based on their intrinsic utility and scarcity. But what justifies the value of Bitcoin? “Nothing”, according to its detractors. “The law of supply and demand” reply the crypto-evangelists.
Are there examples of other assets that have hold value for a long time without the support of a clear intrinsic value? The only examples that come to mind are metal currencies. Gold has indeed its intrinsic value, but that is not what determines its price. Gold’s market value is a function of its role as ‘reserve asset’. Can Bitcoin achieve comparable status to gold? Not impossible but hard to believe. Gold’s role has been consolidated over thousands of years and gold is actually in scarce supply. Crypto-currencies have only been around for a few years and they are not scarce. A single cryptocurrency like Bitcoin has scarce supply, but tomorrow there might be another cryptocurrency aspiring to usurp that role.
Shall we expect to see more VHNW and UHNW individuals among the HODLers thanks to further spikes in the value of crypto-currencies (already existing or still to be launched)? Or shall we rather expect the value of cryptocurrencies to drop to zero, and the recently created wealth of the world’s HODLers to be entirely wiped out?
Predictions of Cryptocurrencies replacing government-backed currencies are not based on any credible economic theory. But Cryptocurrencies and blockchains have “become the byword for a libertarian ideology that treats all governments, central banks, traditional financial institutions, and real-world currencies as evil concentrations of power that must be destroyed. Blockchain fundamentalists’ ideal world is one in which all economic activity and human interactions are subject to anarchist or libertarian decentralization” in the words of Roubini.
Indeed, Bitcoin fanatics, Crypto-currency entrepreneurs, and the many bitcoin bulls among Silicon Valley’s top managers seem to have created a sub-culture that constitutes the foundation of Bitcoin’s resilience. After its drop from the peak of December 2017, the HODLers have somehow sustained the price of Bitcoin, which (while trading at one quarter of its peak price) has been trading at around $5k for almost one year now. There is still a lot of attention placed on Cryptocurrencies from the media around the world. And financial speculators are still keeping a close eye on cryptocurrencies, trying to sniff the next big spike on the value of Bitcoin or the launch of the next successful crypto-currency. “Opportunists” will make and lose money, but the most tech-savvy HODLers might benefit from the Cryptocurrency popularity for some time to come and the number of VHNW and UHNW individuals in their ranks might well keep growing.
Goods and Services for the HODLers: Privacy and safety
As we look to explore the types of goods and services that would appeal to the HODLers, it is important to keep in mind not only their interests in innovation, disruptive technologies and libertarian values, but also their ‘aversions’. This is a group that is quite secretive to the point of paranoia. Anonymity is highly valued (whether they are spending, investing or giving) and trust is paramount. In fact gaining the trust of enough people to interview for this paper was in itself a big feat. Forbes list of the Richest People in Cryptocurrency in 2018, caused alarm and anxiety amongst those featured, who feared that they would be exposed not just to hackers but also to physical risks and theft. Wealthy HODLers are more sensitive than other wealthy individuals about their privacy because wealth held in crytpo-currencies is easier to steal by hackers or regular thieves (all they need is to get hold of your password). Understanding that privacy is paramount to their interests is important when engaging with wealthy HODLers.
Wealthy cryptocurrency investors will greatly appreciate any business or charity that adopts the technology and accepts Bitcoin payments or donations. There are understandable fears around the fluctuations in bitcoin value between the time a deal is agreed to and when it is complete (Bitcoin price can fluctuate by 5% to 20% per day so any merchant accepting Bitcoin could lose all its profit margin in a day given the price fluctuations) but because a final transaction can be instantaneous theis can be overcome by eliminating “holding” accounts and using services such as Bitpay to convert to local currency rather than holding Bitcoin.
Luxury and Leisure for a HODLer
A few folks in the luxury investment sectors (real estate, yachts, luxury cars, art etc.), have been early adopters, already accepting crypto-currencies, seeing the value of this technology early on. In real estate the first home bought using bitcoin was in Lake Tahoe, CA in 2014. The house sold for 2,739 Bitcoin, or roughly $1.4 million at the time. When looking at the increase in properties accepting digital currency payment recently, Charles Evans, a Bitcoin expert and economist at Barry University said, “This seems to be driven by international investors who are circumventing inefficient banking and currency controls at home and by U.S. cryptocurrency enthusiasts” (AFP wire service)
In the yachting world, Denison Yacht Sales also began accepting Bitcoin back in 2014 and has since sold more yachts to bitcoin buyers by converting to cash. Bob Denison, founder and president, also happens to be a cryptocurrency enthusiast and investor. He understands that opening up and accepting digital currencies allows the industry to include new types of customers.
Eleesa Dadiani and her Dadiani Gallery in Mayfair, London, became the first UK gallery to accept digital currencies in 2017. When speaking about why she began accepting cryptocurrency she sounds more like a HODLer herself, as she told BBC in 2017 "Blockchain is a borderless, open source, decentralised peer-to-peer network that governments cannot shut down," she says. "For me, the blockchain is going to be the biggest thing since the internet.”
Possibly even more revolutionary is artist Lincoln Townley who sold his first major work for Bitcoin at the end of 2017.
“My affinity with Bitcoin is visceral. It’s a decentralised peer-to-peer network and has resistance to any form of censorship which mirrors my own attitude to art: a currency that doesn't need a bank to guarantee its value is a perfect medium for an artist whose doesn't need an Academy to sanction the value of his work.” (Dailymail)
So where are the opportunities? The luxury car industry is another great example that not only can benefit from gaining access to a client who appreciates a global peer-to-peer currency but also matches the innate interest of the HODLers’ in industry-breaking technology. In fact, the ultimate status symbol amongst the crypto investors is whether or not they have bought their first “Lambo” (Lamborghini). Note that Ferrari is not as popular because of its association to the Fiat-Chrysler group (where FIAT brand reminds HODLers of fiat currency another name for Government-backed currency).
The art and collectibles world (both primary and secondary markets) attract the world’s wealthiest individuals with global art fairs and auctions that see bidding from around the world. As the market moves more and more into the digital space with online auctions and websites like Artsy.com or 1stDibs.com they too might start accepting bitcoin. The art world in particular is already adept at maintaining high levels of secrecy around buyers and sellers.
A Very Philanthropic Group
Early Bitcoin investors are proving to be a very philanthropic group. As their wealth soared in 2017, so did their donations. Fidelity Charitable revealed that donors contributed $70 million in Bitcoin and other digital currencies in 2017, making it the fastest growing asset in the fund. The Pineapple Fund, begun by anonymous Bitcoin investor “Pine” committed $86 million in bitcoin to a variety of charities.
Fidelity Charitable began accepting Bitcoin as a donation in late 2015. For the full year of 2016 they had just $7 million in donations, but after launching an advertising campaign in 2017, coinciding with a spike in Bitcoin price, those donations soared tenfold. A benefit to Bitcoin investors is that Fidelity is able to accept non-cash assets so that donors not only deduct the donation on their taxes, they can also avoid paying capital gains taxes and increase the value of their donation.
The anonymous donor “Pine” behind the Pineapple Fund was specifically looking for charities that are innovative, sustainable and in line with his (or her) own values. The Pineapple fund has thus far given to charities such as GiveDirectly which sends money directly to the extreme poor, Many Hopes Foundation a non-profit organization that has created a replicable model to equip abused children to defeat the causes of the poverty they were born into, and the Electronic Frontier Foundation the leading nonprofit organization defending civil liberties in the digital world.
“I primarily look at three things:
1) How impactful their work is, especially if they are making an impact on an international scale
2) Innovation they’re bringing to the table (e.g. Watsi with their peer to peer model)
3) Efficiency, sustainability, and their existing size. Bigger charities can take a larger amount of funds; I like supporting smaller charities too (and will be!) but I don’t want to overcrowd them.
But to be honest, the biggest factor is my gut. I only fund charities that I trust, and with trust, I believe they are best posed to answer the more micro questions, and do good in this world.”
Bitgive, Man on A Mission and Coinbase have services set up to help non-profits accept Bitcoin. Bitgive became the first tax-exempt charity in 2014. Its mission is to bridge the gap between innovative technology and its practical applications for nonprofits. It was founded exclusively to fund projects using Bitcoin, provides donors a way to track how their donations are used and ties them directly to a project outcome on their GiveTrack platform. The idea is that this high level of transparency offers a unique level of trust.
For charities there are a few key ways to connect with early cryptocurrency investors. First, accept donations in digital currency, whether directly or through services like Bitpay, or connect to a fund like Fidelity Charitable and Bitgive that accepts Bitcoin. Next, highlight the values of your organization that coincide with this group’s values. Ensure transparency to projects and donations, for example The Water Project sends an email with a project tracking link. Finally, provide anonymity for donors
On the whole, setting up to accept bitcoin donations is quite a simple process for charities.
“The process of accepting Bitcoin donations was very easy. A thorough but quick and very supported process of vetting by Bitpay to set up a standard account, a phone interview with a Bitpay representative to authorise an account able to receive unlimited funds, and then very clear instructions for how to process and even how to add a 'donate in Bitcoin' button to our website. It was a more streamlined process than opening a traditional bank account."
Thomas Keown, Many Hopes Foundation
Crypto-Money Management and Financial Diversification
As early investors in cryptocurrencies look to diversify a portion of their portfolio, they have questions and concerns that require a holistic view of their wealth and future planning. The issues they face are about how, when and where to divest and diversify, requiring a global view from wealth managers, a knowledge of estate and tax planning, and opportunities for alternative investments.
Much of the financial services industry is in a bit of a quandary when it comes to cryptocurrencies. Several large brands are keen to understand the technology and have embraced the future of cryptocurrency and blockchain technology. In 2017 Abigail Johnson, Chair and CEO of Fidelity Investments in Boston, made a speech endorsing Bitcoin, Ethereum and most importantly the future of blockchain. She has even set up a Bitcoin/blockchain incubator within Fidelity Labs which has been testing bitcoin micropayments and mining operations to understand how it can better serve its customers and improve on the technology for the future. Similarly, JP Morgan has it’s Blockchain Center of Excellence. However, these organizations are focused more on the long term advancements in technology and less on how to service today’s needs of the ultra-wealthy HODLers.
Retail banks are mostly concerned about the “Opportunists” in the ranks of their clients. They are advising clients not to invest in cryptocurrencies and some have stopped clients from using credit cards to buy any new coins (although it should be noted they do not stop use of debit cards).
However, there is already a burgeoning market of bitcoin-backed loans focused on those “fanatics” who would rather take a loan with interest rather than cash out on their coins. Appealing to their need for speed and immediacy, BlockFi claims you can apply for a loan in just minutes and receive approval within a day. While credit scores are often not checked and not affected by these loans, the standard KYC/AML procedures are still required.
Multi Family Offices (MFOs) have an opportunity to service this group as they are already well positioned to work with HODLers. MFOs cater to the UHNW segment and offer services that would greatly benefit this newly minted ultra-wealthy group. Because their clients are all UHNW families, they are acutely aware of tax issues like capital gains, generational wealth transfer and charitable giving, things that are of concern to digital currency investors. MFOs are established specifically to meet the investment, risk management, estate planning, lifestyle and tax needs of affluent families. They are also quite used to protecting the privacy of their clients. However, for an MFO to woo a HODLer they would need a resource dedicated to staying on top of the very fluid global regulations regarding cryptocurrencies.
Similarly, Wealth Management firms are also used to working with wealthy individuals and could be set up to support the needs of the HODLers group. They would need to develop specialized capabilities to add value to this category of clients, understanding their estate and tax planning needs and offering alternative investment opportunities as part of their portfolio.
Of the three main groups of cryptocurrency investors, those who are unique and new in the super wealthy market are the early investors, the believers and self-proclaimed HODLers. A group unlike any other torn between HODLing and diversifying or spending. A new breed of ‘nerdy’ the HODLers are not just tech geeks but have a value system rooted in libertarianism and firmly believe cryptocurrencies are the currency of the future to transcend government intervention in economic systems. Their belief, based on proof thus far, is that no other investment could possibly return as much as their crypto-investment. If looking to engage them then it’s best to highlight other reasons for diversifying and tap into their passions and interests. Spending $1 today is still the equivalent of spending $1000 to them. Owning physical assets is a risk, in their view governments are unpredictable and can take things you own (seize assets) at any moment. Thus, they are more prone to renting and having the ability to be fluid about where and how they live their lives.
To connect with them it is important to keep the following in mind:
● Show them that you understand their beliefs and back them by accepting crypto-currency. You can offset your risks by converting to cash quickly.
● Understand their sensitivities for privacy and for fluidity of movement
● Highlight the innovations of your product, service or charity that would appeal to them.