Advisors Warming Up To Bitcoin

Fear of missing out is a real thing. Look no further than the bitcoin market.

Almost 10% of advisors today are allocating to bitcoin, according to a survey released this week from Bitwise and ETF Trends. That, at face value, may not sound like much, but that number represents roughly a 50% growth in the number of advisors investing in the cryptocurrency versus just a year ago.

What’s more, the survey, which reached 1,000 financial advisors, found that almost 20% of advisors who have not jumped into bitcoin yet are most likely doing so this year. And about 76% of advisors think that more than a third of their clients are already investing in the cryptocurrency “outside of their advisory relationship.”

‘Reputational Risk’

As one analyst put it at a (virtual) industry event earlier this year, advisors may be finding that the “reputational risk” of missing out on the opportunity in bitcoin is now greater than the risk of getting the bet wrong. Bitwise’s survey would seem to suggest that might very well be true, as investors demand access for bitcoin, and they wait for no one to get it.

So far, the demand for bitcoin has found its way into the cryptocurrency directly, which can be bought through a brokerage account.

It has also landed in funds such as the Bitwise 10 Crypto Index Fund (BITW), which owns 10 different cryptocurrencies, and has bitcoin leading the mix with about 80% of the portfolio; and the Grayscale Bitcoin Trust (GBTC), which is a physical bitcoin trust.

These portfolios, each costing 2% in fees, often find themselves battling large premiums because they behave almost like closed-end funds, meaning investors pay more for a share than the underlying is worth.

The ETF Dream

For now, they’re as good as access gets for those looking to invest in bitcoin through a fund. But imagine seeing an ETF tackle these inefficiencies through the creation/redemption mechanism, while lowering costs and fees, and democratizing access as the wrapper is known to do.

It wasn’t that long ago that there were as many as nine bitcoin ETFs in SEC registration. It was a mad race to be first—a race that ended in a resounding “no” from the Securities and Exchange Commission, which must approve any ETF. The SEC has yet to thaw on the subject of bitcoin.

But that could change. Yes, we’ve been saying that for almost five years, only to have our hopes dashed by regulators, but that’s what many are hoping for in 2021.

Van Eck Reenters Race

At least one ETF issuer turned down by the SEC in late 2018 is already back with another proposed bitcoin ETF in registration.

The VanEck Bitcoin Trust, detailed in late December, will hold bitcoin, custodied in cold storage, and determine pricing based on the MVIS CryptoCompare Bitcoin Benchmark Rate, which takes into account prices across five different bitcoin exchanges, according to the prospectus. Included here are Bitstamp, Coinbase, Gemini, itBit and Kraken.

If approved, VanEck’s trust would be the first ETF to access the space. VanEck hasn’t disclosed planned fees, but most expect the ETF to cost notably less than the 2% price tag on BITW and GBTC.

Speculative Money

There are plenty of naysayers about the opportunity in bitcoin, and more broadly, in cryptocurrencies. Some say the action in the bitcoin is still mostly speculative money making waves in an unregulated market. They could be right. This could be the opportunity of a lifetime, or the biggest regret in recent memory. Who knows?

What we do know is that, as this survey shows, financial advisors are increasingly adopting bitcoin into portfolios, and for reasons that have nothing to do with speculation.

What’s been driving demand for bitcoin among advisors is a growing concern about inflation hedging and diversification—the need for uncorrelated return streams. There’s also concern about the outlook for the U.S. dollar in the face of a ballooning U.S. balance sheet, and of course, some FOMO.

Remember that advisors are fiduciaries, and roughly one in 10 have jumped into bitcoin as they fulfill that role. That’s no trivial fact.

 Cinthia Murphy at [email protected]

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