If you’re an ETF fan, you’ve probably been watching the race to the first bitcoin ETF with interest. If you’re a financial advisor, the news likely brings a combination of excitement, relief, opportunity — and responsibility.
Today, ProShares launched the ProShares Bitcoin Strategy ETF (BITO), an exchange traded product that offers high correlation to the price of bitcoin through the use of bitcoin futures contracts. If predictions are correct, then we can expect a wave of similar futures-based offerings from Valkyrie, VanEck, and Galaxy to begin trading in the coming days.
“Bitcoin is the currency of the digital economy; borderless peer-to-peer electronic cash,” said Steven McClurg, the CIO of Valkyrie Investments. “This is yet another step toward further adoption.”
For advisors, the benefits of bitcoin in an ETF wrapper can’t be emphasized enough. As Simeon Hyman, head of investment strategy group at ProShares, put it, “Now you can put [bitcoin] right in your brokerage account along with everything else as a nice, prudent allocation. Maybe it’s your inflation hedge, or your virtual gold, or your alternative currency. It’s a real diversifier, and they are few and far between these days.”
That’s good news, because client demand for crypto exposure is only accelerating, as highlighted in a recent survey conducted by ETF Trends and Bitwise Asset Management. As a result, more have either implemented crypto allocations in client portfolios or initiated plans to do so. So today’s announcement has not taken advisors by surprise, but instead may have added more impetus to jump-start these plans.
This is what I think today’s bitcoin ETF launch means for financial advisors.
#1: Advisors Can Now Satisfy Client Demand
One of advisors’ most significant concerns has been that clients go “rogue” and invest outside of the advisor’s management, disrupting the overall stability of their investment plans. In fact, three out of four financial advisors believe that at least 38% of their clients have an allocation to cryptocurrency outside of their management. This demand will only continue to increase as the price of bitcoin rears within 8% of its all-time high of $64,899 (as of this writing).
A bitcoin ETF allows financial advisors to finally meet those clients’ needs, using the well-regulated and well-understood vehicle of an ETF. It gives advisors a better chance of being part of their clients’ crypto investment strategy, and incorporating that strategy into the overall portfolio allocation.
#2: The SEC Has Validated the Concept
Advisors are all about providing the proper balance between risk and reward. The approval of a bitcoin ETF by the SEC doesn’t come with an endorsement, but it does offer a much-needed level of validation. With this, advisors can now come to the table for their clients bearing a certain level of confidence and credibility.
#3: An ETF Offers Highly Correlative, On-Platform Exposure
The most widely adopted advisor brokerage platforms don’t offer the ability to buy bitcoin directly. Until now, the closest available investment option has been the Grayscale Bitcoin Trust (GBTC). While GBTC does offer bitcoin exposure, its structure means that the product can trade at significant discounts and premiums. Still, for many advisors, it has been the only game in town.
Futures-based ETFs offer an alternative. Futures exposure isn’t the same as spot, of course, but historical data shows that bitcoin futures exhibit a very high correlation to price of bitcoin. It won’t be exactly the same exposure — but for many clients and contexts, it will be more than good enough.
#4: Advisors Have More Tools in the Alts Toolbox
Traditional asset allocation has been challenged by inflation, low yields, high stock valuations, and more — and advisors expect even more challenges to lie ahead. Recent advisor polls by ETF Trends consistently reveal that advisors are shifting away from traditional allocation models (like the 60/40 portfolio) and are increasing their clients’ allocations to active fixed income, alternative income sources, dividend strategies, and commodity allocations. Bitcoin provides another alternative for diversification in a non-correlated asset.
#5: Bitcoin Can Attract the Next Generation of Clients
Although a growing number of clients are investing in crypto, or are at least “crypto curious,” most existing clients still have little or no crypto assets in their portfolio. As an anecdotal aside, I have many Baby Boomer friends, both in and out of the advisory business, who know a little about crypto, but few who have their own Coinbase account.
Here’s the good news: As an advisor, you can provide the authentic introduction, education, and implementation of an allocation strategy to your older clients. Even if your older clients are numb to crypto, there’s a good chance that their children aren’t. Here’s your opportunity to connect with them too.
We’ve Come a Long Way. So What’s Next?
The first bitcoin ETF application was presented to the SEC by Tyler and Cameron Winklevoss in 2013. Since then, the ETF issuer applications have increased in numbers, with revisions and enhancements along the way. The SEC has been very communicative to those presenting applications, giving feedback, and asking for data, research, and opinions.
The SEC maintains a level of mystery about the potential for approval of additional crypto ETF structures. Many hope that the approval and widespread adoption of multiple bitcoin futures ETF applications will lead to the approval of a “physically backed” bitcoin ETF in early 2022. But only time will tell.
Although the futures-based strategy is now granted, it’s still important to understand the advantages of this structure, along with the potential weaknesses. Recently, Dave Nadig, CIO and director of research at ETF Trends, synthesized the academic research on the bitcoin futures market provided to the SEC, and he also highlighted some potential drawbacks of the futures structure. Meanwhile, Lara Crigger, managing editor of ETF Trends and ETF Database, presented some of the biggest benefits a bitcoin futures ETF can provide advisors. All this and more, including breaking news and deep analysis, can be found in our Crypto ETF Channel.
All this excitement feels a little like the old days of ETFs, when the industry was much smaller and scrappier than it is today. In November 2004, State Street launched the first physically-backed gold ETF, the SPDR Gold Shares ETF (GLD). Jim Ross, who was behind the launch, was “thrilled” when the fund attracted $1 billion within the first week of trading. “When it hit $5 billion, we were pinching ourselves,” said Ross. GLD would go on to reach $84 billion in assets under management in 2020.
Will a bitcoin ETF be the next GLD? Hard to say — and I can’t predict the future any better than anybody else. What I can say with certainty is that the bitcoin ETF opens a wealth of opportunities for advisors, and I, for one, am excited to see where those opportunities lead.
For more news, information, and strategy, visit the Crypto Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.