With the introduction of bitcoin ETFs in U.S. public markets, the long-awaited entry of large money managers into the cryptocurrency space is now a reality. For the wealth management industry, which oversees approximately $30 trillion in assets, this could unleash a torrent of new opportunities. According to analysts at Standard Chartered, the industry could witness fund inflows ranging from $50 billion to $100 billion in 2024. Fueled by the increasing popularity of bitcoin as a benchmark asset among the younger generation, the demand for exposure to digital currencies is unprecedented.
A New Benchmark for Asset Allocation
As Anthony Pompliano, founder of Pomp Investments, puts it, “Bitcoin is beginning to become a benchmark asset for the younger generation.” Recognizing that most investors struggle to outperform benchmarks, Pompliano emphasizes the importance of including bitcoin in one’s asset allocation to keep up with the changing investment landscape. The remarkable rise of bitcoin, reaching levels not seen since December 2021 with highs of $49,000, has sparked a renewed interest among investors. Despite a subsequent dip to around $43,000, bitcoin recorded a staggering 150% growth in 2023, leaving many institutional investors who missed out on the rally eager to get involved.
The reluctance of fiduciaries, financial advisors, and banks to engage with cryptocurrency in the past stemmed primarily from its unregulated nature. However, the playing field drastically shifted on Wednesday after the Securities and Exchange Commission (SEC) cleared the sales of spot bitcoin ETFs. This regulatory approval enables investors to access bitcoin in a manner similar to purchasing traditional stock and bond index funds. Despite the SEC Chair Gary Gensler’s cautionary stance on crypto investments, it hasn’t deterred activity in the market. Mutual fund manager Advisors Preferred Trust, for instance, is investing up to 15% of total assets indirectly in bitcoin through funds and futures contracts.
Embracing Passive Investment Strategies
The rise of passive investment strategies has prompted many funds to seek ways to enhance performance. The availability of bitcoin ETFs is likely to attract the attention of passive funds looking to optimize their asset portfolios. Among the 11 issuers granted initial approval for a bitcoin product, Bitwise Asset Management’s Bitwise Bitcoin ETF stands out with its low fee of 0.2% of holdings. Chief Investment Officer Matt Hougan notes that their ETF aims to target financial advisors, family offices, and even wirehouses, all part of a vast multi-trillion dollar market. Hougan adds that advisors are increasingly allocating 1% to 5% of their portfolios to crypto, highlighting their interest in gaining exposure to this emerging asset class.
A survey conducted by Bitwise Asset Management and VettaFi, a data-driven ETF platform, reveals that 88% of financial advisors interested in purchasing bitcoin were awaiting the approval of a spot bitcoin ETF. The survey further indicates that advisors who already allocate to crypto have doubled their investments, with large allocations (over 3% of a portfolio) growing to 47% in 2023. Hougan notes that for the majority of people, a low-cost bitcoin ETF provides the easiest gateway to enter the crypto market. The first week of trading in bitcoin ETFs on platforms such as Robinhood saw substantial volume, with 81% of trading occurring in individual accounts and the remainder in retirement accounts.
Retirement Plans and Crypto Exposure
Prior to the SEC’s approval, the 2022 CFA Institute Investor Trust Study discovered that 94% of state and local pension plans had some crypto exposure. The arrival of bitcoin ETFs potentially offers retirement plans greater legitimacy and lower costs when it comes to expanding their allocations to cryptocurrencies. Financial firms have begun to provide guidance on the best approach to enter the crypto space. Galaxy Digital suggests that the most significant improvement occurs when portfolios transition from 0% to a 1% bitcoin allocation. WisdomTree, on the other hand, highlights the risk-return improvement of adding bitcoin to a traditional portfolio consisting of 60% equities and 40% bonds, while Fidelity notes that bitcoin has historically boosted portfolio returns but often comes with substantial volatility.
Castle Island Ventures founder Matt Walsh predicts that funds focusing on high-growth tech stocks will be the first to embrace the crypto market. However, he also sees broader appeal, envisioning commodity-based portfolios, such as gold-based funds, recognizing bitcoin as a kind of digital gold. These alternative investment avenues provide investors with additional choices for diversification and exposure to emerging trends within the wealth management industry.
The introduction of bitcoin ETFs in U.S. public markets marks a significant milestone for the wealth management industry. With the potential for substantial fund inflows in the coming years, the appeal of bitcoin as a benchmark asset and the growing interest among financial advisors, the floodgates are indeed opening for money managers seeking access to the primary digital currency.
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