My last article on private credit capital sourcing talked about the growing opportunity in onchain HNWIs and what is required to reach them.
So when I came across the news headline that Citi Ventures participated in a seed-round founding of Vega, a startup to “democratize private wealth management” this week, my brain started racing because that sounded awfully like what crypto is solving for…
So I decided to dig in a bit deeper. I wanted to find out a few things:
How big is the wealth management market? Both offchain and onchain.
What is the landscape of product availability and penetration level?
What opportunities are there in the onchain wealth management market?
I will share what I have found out in this week’s newsletter. Let’s dig in.
HNWI Market Size
According to Capgemini’s 2023 Wealth Management Report, there are 3 different tiers of HNWIs:
Millionaires next door ($1 million - $5 million)
Mid-tier millionaires ($5 million - $30 million)
Ultra HNWIs ($30 million+)
Now what is interesting is the total amount of wealth held by them. Bain’s study on the subject gives some illuminating insights.
For the HNWIs category, the millionaire next door and mid-tier buckets hold far more total wealth than the UHNWIs. According to Bain’s chart, in total they hold approximately $60 trillion in investable assets.
What about onchain wealth distribution?
Well let’s start with the basics. There are around $130 billion stablecoin onchain. Of which, let’s look at the affluent to mid-tier millionaires.
Referring back to my previous study, there are:
21,551 wallets holding $100k - $1mil USDT
3,686 wallets holding $1mil - $10mil USDT
13,317 wallets holding $100k - $1mi USDC
2557 wallets holding $1mil - $10mil USDC
Additionally, this chart from Breven Howard’s latest report on stablecoin shows that there are roughly 1,000 wallets holding $10 million+
Of course the onchain numbers are relatively small compared to offchain numbers. However, given the nascent stage of the onchain wealth market, each additional onboarded HNWIs would add non-trivial incremental value.
Wealth Management Landscape
According to Citi’s press release, “while UHNWI and their family offices have long received high-touch/white-glove services from private wealth managers and private banks, due to the high cost of those services they have traditionally not been extended to the lower HNWI tiers.
Often lumped together with the mass affluent segment ($100,000 - $1 million) category, these 2 tiers of millionaires tend to be offered stock and bond based investment products… because the retail wealth managers who service them lack access to more sophisticated products”
Clearly the millionaires next door and the mid-tier HNWIs are being underserved in terms of product accessibility as well as attention and touch-points from private wealth managers.
But wait. Only being offered stock and bond based investment products… Where have I heard of that before?
Remember these headlines crossing Bloomberg in early 2023?
While the millionaires in the offchain world may be suffering from a lack of access to sophisticated financial products, millionaires in the onchain world didn’t even have access to US Treasuries and stocks until very recently.
Opportunities
Since the crypto wealth management landscape faces largely the same problems as the millionaires in the offchain. Let’s see what we can learn from Vega’s go-to-market strategy.
Vega plans to tackle the market In 3 ways:
Investment products: Vega is going to offer institutional asset classes both public and private. The firm is going to offer high-yield cash management options to take advantage of current high interest rates.
Leverage and liquidity solutions: Vega seeks to enable users to borrow funds against their investments in illiquid asset classes. The firm is also building a secondary marketplace for clients to sell their alternative investments to other clients on the platform.
Comprehensive financial and estate planning.
From a product perspective, while the meteoric rise of tokenized US Treasuries have caught attention of many in the industry, it is but one asset class. The phenomenon of capital rushing to take advantage of the current high rates is wholly dependent on the macro environment. When that changes, capital will seek alternatives.
However, currently there are very few non-crypto related options. Apart from a few small private credit opportunities, much of the traditional financial world is inaccessible from crypto rail.
Consider Europe's $450 billion High Yield market. The current spread on these debts is at 18% vs 10% in the US. When stablecoin yield in crypto is barely 3%, opportunities to allocate a portion of portfolio for 20% fixed return yield are interesting to look at. If 10% of the stablecoin capital is able to flow into these assets, that would be $13 billion into a $450 billion asset class. A non-trivial incremental capital.
Secondly, just like Vega’s plan to unlock more liquidity from asset holdings, we too need to enable liquidity for investors in what would otherwise be illiquid asset classes through the secondary market to allow more capital efficient investment strategies.
The current repo experiment based on tokenized US treasuries is around $25 million. This is less than 10% of the total tokenized US treasuries. For the other $400million tokenized private credit, there is no secondary market, lending or trading. This means there are roughly $700mil “trapped” capital holding tokenized assets onchain that could be unlocked to improve capital efficiency.
Lastly, if you ARE a private banking client, you are used to highly attentive service with dedicated points of contact for everything from asset allocation to tax planning. However such a client focused distribution and service team does not exist in crypto. I daresay there are barely more than 2 BD people with each onchain asset management team who are tasked with deal sourcing as well as investor/client relations tasks.
This is simply unworkable. For everyone involved. In order to reach the 40,000 wallets holding at least $100k and to establish and strengthen that relationship, we need dedicated education/marketing, distribution, onboarding and ongoing support channels.
Conclusion
Crypto stablecoin market stands at around $130 billion, roughly 22% of the Bitcoin marketcap and 11% of the overall crypto marketcap. This is down from the $250 billion peak in 2021 but up from $0 billion in 2019.
The usage of stablecoin is growing rapidly as crypto penetrates more markets around the globe. For example the weekly active addresses using stablecoin has grown from practically 0 in 2019 but has now reached 5.5 million in 2023.
This pool of capital is set to grow further due to a few catalysts, including overall crypto market growth and broader adoption amongst EM users looking for USD access, yet it is severely underserved. There is no onchain wealth management project of size. Various tokenization startups are the only outlets offering access to non-crypto correlated investment opportunities.
Yet the current lack of education/marketing, distribution and high-touch point support channels in addition to a limited number of tokenized opportunities are preventing the market from reaching its potential. To change that, we need to improve the product availability as well as streamline the client acquisition funnel, from education and marketing to sales/BD and client support.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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