Data from a new survey on financial advisor attitudes towards crypto helps examine the state of the cryptocurrency universe and reveals the investment community’s outlook for crypto and blockchain in 2019.
On the recent webcast, The Outlook for Crypto in 2019 (And What Financial Advisors Are Doing About It), Matt Hougan, Global Head of Research at Bitwise Asset Management, explained that while cryptocurrencies took a hit in 2018, the volatility, while painful, is fairly typical of this nascent asset class. For example, during the June 2011 through February 2013 cycle, cryptoassets plunged 93%. From the April through November months of 2013, cryptos declined 70%. From December 2013 through February 2015, cryptos plummeted 83%.
“The thing about each of this booms and busts is that each one does important work. More people know about and believe in bitcoin today than did in 2015. More infrastructure is built. More venture capital is invested. As our good friend Mark Yusko says, the virus is spreading. The rails are in place for future movements,” Hougan said.
While the asset may be volatile, crypto can be a valuable component in a diversified portfolio if used properly. Looking at the impact of bitcoin in a portfolio starting in 2014 through November 2018, Hougan found that bitcoin’s low correlations, combined with the strong returns crypto over long time periods, has made it uniquely valuable in a portfolio setting. For example, he pointed out that a five percent allocation to bitcoin, rebalanced on a 50% tolerance, would have increased portfolio returns by 17%, boosted the Sharpe ratio by nearly 50% and performed without impacting the max drawdown of the portfolio.
“We have not historically had an asset with low correlations, high returns and daily volatility. It’s a new beast, and it can be uniquely powerful in a portfolio context,” Hougan said.
Furthermore, if we look past the performance over 2018, last year was actually a great year for cryptos. We saw futures launch on both CBOE and the CME, two of the five largest futures exchanges in the world. The SEC clarified that ethereum did not qualify as a security. Major market makers entered the space, with firms like Jane Street, Flow Traders, and Susquehanna – and as hedging options expanded, spreads came in dramatically. Endowments like like Yale, Harvard, MIT And Stanford made their first allocations.
Things are looking up ahead as well. Fidelity plans to launch a digital assist platform in 2019. NASDAQ plans to launch bitcoin futures. NYSE’s parent company is launching physically settled futures and custody. Firms like Bitwise and VanEck are working on an ETF. Facebook is considering launching a stablecoin.
To get a better pulse on the investment community’s response to bitcoins, Bitwise and ETF Trends conducted a survey of 151 qualified financial advisors, including RIAS, broker-dealers, financial planers and warehouse reps, and gauged their attitudes towards cryptocurrencies.
The surveyed financial advisors revealed that 19% of respondents held crypto in their personal portfolios, with RIAs more likely to own crypto than other managers. While 19% of advisors said they owned crypto in their personal portfolios, only 9% of advisors in allocated crypto to client portfolios.
Looking ahead, 22% of advisors expect to include crypto in client portfolios by the end of 2019, and all advisors with allocations expect to retain those positions this year, while an additional 13% intend to raise allocations from zero.
More investors are taking an interest in cryptoassets. Over the past year, 79% of all advisors received questions about crypto assets. Among financial advisors, 44% of surveyed respondents said between 1% and 5% of clients asked questions about crypto in the past year while 2% reported receiving questions from a majority of clients.
The survey also found that individual investors have been independently looking into crypto without their advisors’ help. One-third of all advisors said that they knew that clients were investing in crypto outside of the advisory relationship, and a further 32% said that they weren’t sure and thought it could be the case.
Surveyed advisors revealed that low or non-correlated returns with other assets was the most popular reason to include cryptoassets in a portfolio, followed by high potential returns, something new to offer clients and clients asking about it. The majority of respondents also categorized cryptos as a form of alternative asset sleeve.
Despite the growing buzz, the advisors had a large number of concerns when asked what was preventing them from investing in crypto, or from increasing their exposure, with no idea how to value cryptocurrencies topping the list of worries, followed by regulatory concerns, volatility, lack of an easily accessible investment vehicle like ETFs or funds, and custody concerns. However, advisors said that they would be more comfortable if the market experienced better regulation, had better custodial solutions, provided better product education and offered an ETF investment vehicle. Advisors overwhelmingly preferred ETFs over other investment vehicles when asked hwo they would invest in cryptos, with 58% pointing to this fund vehicle.
Financial advisors who are interested in learning more about the cryptocurrency market can watch the webcast here on demand.