At least two cryptocurrency funds opened in 2017 for them
This story is part of a series on the future of investing
The Venezuelan bolivar, Carlos Mosquera Benatuil will begrudgingly admit, is a “real” currency. Bitcoin isn’t—it’s basically just a very long line of computer code. Yet there’s no question which the 35-year-old Caracas native prefers.
Mosquera is one of Latin America’s many bitcoin believers, scarred by the hyperinflation that’s ravaged the economies of Brazil, Argentina, Bolivia, Peru, and now Venezuela. The region’s tech-savvy middle class, he says, began adopting bitcoin a few years ago to protect their savings from rising consumer prices and currency controls. Now, Latin America’s wealthiest investors want in on the action. The growing interest from them could help propel investments in the currency going forward.
At least two cryptocurrency funds catering specifically to this set opened in 2017 as demand for digital assets in the region grows. Family offices make up the great majority of the funds’ clients, according to recent interviews with the funds’ founders. “Latin America is very volatile,” says Rome-based Mosquera, whose hedge fund, Solidus Capital, invests in the eight biggest cryptocurrencies and digital assets sold via initial coin offerings. (He won’t disclose the size of the fund or its performance.) “Cryptos are turning into a new haven for these families.”
Two funds is a small number, to be sure; more than 100 hedge funds are focused on crypto-currency globally. But these modest beginnings also speak to bitcoin’s drug-dealing, money-laundering notoriety, which scared off Latin America’s risk-averse family offices. Then came 2017. Even the region’s billionaires haven’t been able to ignore bitcoin’s gravity-defying climb into finance’s rafters. The cryptocurrency surged from a low near $750 in January to a high-water mark above $16,000 in early December, with plenty of dramatic moments along the way. Nor have the wealthy been immune to Latin America’s recent patch of anemic growth. Family offices in emerging markets fared worse than anywhere else last year, with average gains of 6.2 percent vs. North America’s 7.7 percent, according to a UBS/Campden Research report.
Mosquera says his clients are interested in more than the spectacular returns. They’re also betting on the underlying blockchain technology, which cuts third parties out of money transfers and records transactions in a tamperproof online ledger. For his part, he first became enamored with bitcoin in 2013, when it traded for about $70; he saw it as a viable solution to the skyrocketing prices eating into Venezuelans’ savings and spending power. Bitcoin also provided a way to skirt the government’s tightening controls on access to U.S. dollars—“the most prized asset in Venezuela,” Mosquera says. “If you have dollars, even if you don’t have a lot, inflation makes you rich in little time.”
Two years later, with the country’s economy continuing to unravel and the government becoming increasingly wary of cryptocurrencies, he took advantage of his European passport and escaped to Rome. Mosquera focused on trading before starting Solidus, and he began accepting funds from family offices based in Central America, Mexico, and the Caribbean about seven months ago.
Roberto Ponce Romay says 12 family offices make up the majority of the investors in his Miami-based Crypto Assets Fund, which he opened in September. “We’re convinced this will become a new asset class, just like stocks and bonds,” says Ponce, who founded private equity firm Invermaster Ventures 10 years ago after quitting his job as a manager at consulting firm Bain & Co. Argentine investors make up a third of the current fund, Colombians and investors from other Central American nations make up another third, and the rest is split among families from other Latin American countries, Ponce says.
Invermaster’s Crypto Assets Fund, which has $15 million in digital coins under management, acts like a passive index fund, with the weighting of each coin corresponding to its market capitalization. Ponce says by 2018 he plans to open a second cryptocurrency fund, CAF 2, which will be more actively managed. His goal is to increase CAF to $50 million under management and to raise $100 million for CAF 2, which he’ll invest entirely in cryptocurrencies.
Of course, Latin America’s crypto boom extends far beyond funds for the wealthy. Jorge Farias, the Venezuelan chief executive officer of Panama-based digital currency exchange Cryptobuyer, says his clients use crypto-currencies for everything from sending money to faraway relatives to buying apartments. Western Union Co. charges heavy fees and takes several days to send a cash payment, he says, while immigrants can send money home through bitcoin almost instantaneously using Cryptobuyer’s ATMs. Unlike with Western Union, remissions sent through a platform such as Cryptobuyer can remain in bitcoin, say, and then get withdrawn in a local currency as needed—helping to slow the erosion caused by inflation in a place such as Venezuela, where price increases could top 2,000 percent next year, according to the International Monetary Fund.
Cryptobuyer transactions in Venezuela have tripled since the beginning of the year, according to Farias. And it’s not just about a young man in Madrid sending money to his mother in Caracas anymore. Farias’s clients include engineers, freelancers, and web designers who demand to get paid in crypto-currencies from their employers abroad, he says. It’s all been an important development for the so-called unbanked—those without bank accounts who keep their money in cash. Because of the growing penetration of smartphones in the developing world, crypto-currencies offer a mechanism for savings and money transfers outside the realm of the banking industry.
“There are countries today without potable water where everyone has a cellphone,” says Farias, who hopes to install 200 crypto ATMs throughout Latin America. “Anyone who has a smartphone can have a bitcoin account, which is something that couldn’t happen before. So its niche really is the whole world.” Farias says the appeal is widening to mainstream companies in places such as Panama, including hotels, as more and more of their clients inquire about using the cryptocurrency as an alternative to cash.
Obviously, bitcoin isn’t without its detractors. While JPMorgan Chase & Co. CEO Jamie Dimon famously called bitcoin a fraud and a fad that “won’t end well,” he’s said resorting to crypto might make sense in a country such as Venezuela. Vanguard Group Inc. founder Jack Bogle recently ratcheted up the rhetoric when he said to “avoid bitcoin like the plague.”
Trading volume in cryptocurrencies has increased and risen faster in countries with capital controls and weakening currencies. In Venezuela, for instance, bitcoin’s weekly trading volume spiked to a record in April when antigovernment protesters and police started clashing in violent riots.
In Argentina, volume climbed to an all-time high in June, when former President Cristina Fernández de Kirchner—whose policies, including strict capital controls, left the country mired in a recession—said she would run in legislative elections.
Not all investors in the U.S. are as skeptical as Dimon and Bogle. Even hedge fund manager Mike Novogratz, who’s called bitcoin “the biggest bubble of our lifetimes,” is starting a $500 million cryoptocurrency fund; billionaire venture capitalist Mark Cuban has also said he’s invested in bitcoin and ICOs. So much enthusiasm has made companies scramble to set up everything from regulated exchanges to derivatives trading and private-key vaults, which could also make the exotic assets more palatable for institutional investors. What makes family offices unique is their ability to quickly jump into the market, as they have fewer regulatory and bureaucratic hoops to go through than mutual funds and hedge funds.
As the world’s wealth transfers to younger tech-native generations, there may be less skepticism about virtual currencies as well, says Crypto Assets Fund’s Ponce. “You have the grandfather who is looking at this with a lot of skepticism and fear,” Ponce says from his office in Costa Rica. “Then you have the younger generation—the 35-year-old who’s come back from getting a master’s degree abroad and is very intrigued.”
But even the biggest crypto bulls advise caution because digital currencies are probably the most volatile tradeable assets out there. “This is an asymmetric investment where we recommend putting in 1 percent of the portfolio,” says Solidus’s Mosquera. “If there’s a doomsday scenario and in three years you lose 1 percent of your assets, you can make up for that with the 99 percent in a couple of months. But the potential upside of that 1 percent can be much greater than what the 99 percent can do in a decade.”