Financial advisors who are interested in dabbling in cryptocurrencies may find out what their peers think about the asset class as Bitwise and ETF Trends present the results of the 2020 Crypto-for-Advisors survey, exploring how wealth managers have included crypto assets as part of client portfolios.
In the recent webcast, Crypto for Advisors: A Growing Opportunity, Matt Hougan, Global Head of Research, Bitwise Asset Management, outlined the great year for cryptocurrencies, with Bitcoin (BTC) surging 308% in 2020 and their own Bitwise 10 Large Cap Crypto Index rising 295% as well.
“In a word, it’s going ‘great’,” Hougan said. “2020 is shaping up as a transformational year for crypto, marked by extremely strong returns, regulatory progress and the entry of a significant number of major new investors into the space.”
Looking ahead, Hougan highlighted three main factors that may contribute to the growth of cryptocurrencies, including rising concerns about inflation, significantly less supply, and the rapid normalization of crypto.
Specifically, the Federal Reserve’s balance sheet has grown more this year than in any other year while the U.S. budget deficit is expected to reach almost $4 trillion in 2020, compared to less than $1 trillion in 2019. Investors are worried and searching for an efficient hedge against the risk of unexpected inflation. For example, hedge funder Paul Tudor Jones bought Bitcoin to hedge against rising inflation.
Supply-side fundamentals are also in Bitcoin’s favor. Every four years, the supply of new Bitcoin created is cut in half. These events are known as ‘halvings’. In May 2020 the Bitcoin network went through its third ‘halving’, which cut the supply of new bitcoin in half.
Additionally, as more become acquainted with Bitcoins, we are witnessing a rapid normalization of the asset class, with early majority, late majority, and laggards buying into the market. For example, Nasdaq-listed Microstrategy raised Bitcoin holdings to $425 million after its second purchase. Square bought $50 million, arguing that crypto “aligned with company’s purpose.” PayPal is allowing Bitcoin and crypto spending. BlackRock even said Bitcoin could replace gold to some degree.
How Are Financial Advisors Using Crypto?
In the latest Bitwise / ETF Trends 2020 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets, which included 994 qualifying financial advisors across independent RIAs, broker-dealers, financial planners, and wirehouse representatives, 76% said they do not own crypto in their personal portfolio.
About 19% of respondents said clients did not ask about crypto in the past 12 months. The 26% survey participants revealed clients do not invest in crypto on their own and 38% indicated they did not know about any of clients’ crypto investments.
The majority, or 91%, of participants do not allocate crypto to client accounts. However, in the year ahead, only 15% said they will definitely not allocate any crypto to client accounts and 28% indicated they will probably not, which leaves plenty of room for potential conversations with clients.
Among the most popular reasons for adding crypto to a portfolio, survey participants highlighted low or uncorrelated returns with other assets, high potential returns, something new to offer clients, that clients are asking for it, and inflation hedging.
“Low correlations are a key driver of advisor interest, and using crypto as a hedge against inflation is gaining traction, with the latter up from 9% to 25% of advisors surveyed,” Hougan said.
51% of respondents indicated that they would fund an allocation to crypto in client portfolios through an alternatives category, while 18% would allocate through cash, 17% through equities, 10% through commodities, and 5% through fixed-income.
So far, a majority, or 54%, of respondents pointed to regulatory concerns as a major impediment to preventing them from investing in crypto. Other factors that are preventing crypto allocations include volatility, lack of easily accessible investment vehicles, uncertain valuation of crypto assets, lack of understanding, custody concerns, cybersecurity, confidence about talking in-depth about crypto to clients, criminal association, reputational risk, and potential for scams.
“Most advisors have clients who are asking questions about crypto and are finding it increasingly important to educate themselves about the space,” Hougan said.
Looking ahead, financial advisors want improved regulation, better education, launch of a tradable ETF, better custodial solutions, easier trading, and less volatility before they see more widespread recognition of cryptocurrencies as a viable asset class. If all of these factors were supported, 64% of respondents would use a cryptocurrency-related ETF to access the asset class. 16% said they would use direct ownership of the individual coins.
“2020 was a transformative year for bitcoin and crypto, with rising concerns about inflation, shrinking supply, and the rapid normalization of the asset class combining to help drive up prices,” Hougain added. “Advisors are increasingly allocating to crypto in this climate, with the percentage of advisors allocating in client accounts up nearly 50% year-over-year. 2021 could be a significant year for advisor adoption if current trends hold. 17% of advisors not allocating today plan to allocate in the year to come, according to the survey.”
Financial advisors who are interested in learning more about cryptocurrencies can watch the webcast here on demand.