With the introduction of Bitcoin
ETFs trading on U.S. public markets, numerous large money managers, who were
previously excluded from the cryptocurrency sphere, now have a viable avenue to
engage with the leading digital currency.
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This development holds significant
implications for the $30 trillion wealth management industry, potentially
heralding a surge in participation. Analysts from Standard Chartered project
substantial fund inflows, estimating a range between $50 billion to $100
billion in 2024.
Anthony Pompliano, the founder of Pomp Investments, highlighted the evolving role of Bitcoin as a benchmark asset, particularly gaining prominence among the younger generation. Pompliano noted, "Bitcoin is beginning to become a benchmark asset for the younger generation. We know most investors can't beat benchmarks, so adding the new benchmark to your asset allocation is the only way to try to keep up." This suggests a shifting trend where investors consider incorporating Bitcoin into their asset allocation strategies to align with evolving market benchmarks.
On Thursday, Bitcoin surged to a
peak of $49,000, reaching levels not witnessed since December 2021. However,
the cryptocurrency experienced a drop on Friday, settling around $43,000. This
upswing marked a 150% increase in value over the previous year, rebounding from
a severe selloff in 2022.
The rally in 2023, though, saw a
significant portion of the investment landscape miss out. According to Jan van
Eck, the CEO of VanEck, fiduciaries, financial advisors, and banks had been
explicitly instructed in the past to steer clear of cryptocurrency due to its
largely unregulated nature.
This cautious stance underwent a shift on Wednesday when the Securities and Exchange Commission (SEC) granted approval for the sale of spot bitcoin ETFs. This decision enables investors to engage with bitcoin in a manner akin to purchasing stock and bond index funds. Despite stern warnings from SEC Chair Gary Gensler regarding crypto investments, the newfound regulatory clarity has not deterred market activity.
Advisors Preferred Trust, the
mutual fund manager overseeing the Hundredfold Select Alternatives Fund, is
making a strategic move by allocating up to 15% of the fund's total assets for
indirect exposure to bitcoin. This exposure is achieved through investments in
funds and futures contracts, as outlined in a recent prospectus.
Anthony Pompliano notes that "most passive funds are looking for ways to
increase performance," reflecting a broader trend in the financial
landscape.
Bitwise Asset Management, among the
11 issuers granted initial approval for a bitcoin product, is taking steps to
capitalize on this growing interest. The Chief Investment Officer, Matt Hougan,
highlighted the Bitwise Bitcoin ETF, offering the lowest fee at 0.2% of
holdings. This ETF primarily targets financial advisors and family offices.
Hougan emphasized the significant market potential, stating, "That includes RIAs [registered investment advisors] and includes, eventually, wirehouses — that is a many trillion dollar market." He added that advisors are increasingly setting aside allocations of 1% to 5%, indicating a growing interest in crypto and an eagerness for an ETF to facilitate their involvement.
According to a survey conducted in
collaboration with VettaFi, a data-driven ETF platform, Bitwise discovered that
88% of financial advisors interested in purchasing bitcoin were awaiting the
approval of a spot bitcoin ETF. Among advisors already involved in crypto
investments, the percentage with large allocations (more than 3% of a
portfolio) more than doubled, reaching 47% in 2023 compared to the previous
year.
Matt Hougan from Bitwise noted,
"For the vast majority of people, a
low-cost bitcoin ETF is going to be the easiest way to do that,"
highlighting the potential significance of such ETFs in facilitating broader
participation in the cryptocurrency market.
Data from Robinhood reveals that
81% of bitcoin ETF trading volume in the initial week originated from
individual accounts, with the remainder in retirement accounts.
Even before the SEC's recent announcement, the 2022 CFA Institute Investor Trust Study reported that 94% of state and local pension plans already had some exposure to cryptocurrencies. The introduction of new products, such as ETFs, could offer increased legitimacy and lower costs for retirement plans seeking to enhance their crypto allocations.
The financial industry is currently
providing diverse guidance on the optimal approach for entering the
cryptocurrency space.
Galaxy Digital, in an October
report on its website, highlighted that the most significant marginal
improvement occurred when portfolios transitioned from a 0% to 1% bitcoin
allocation. As far back as 2019, WisdomTree noted that incorporating bitcoin
into a traditional 60% equities and 40% bonds portfolio "can improve the risk-return profile."
Moreover, from 2014 to 2019, even a mere 1% allocation resulted in an 8.3%
outperformance compared to the base portfolio.
Fidelity, in its analysis through mid-2022, observed that adding bitcoin to a portfolio enhanced returns during specific periods, although it introduced substantial volatility. The firm acknowledged that, to date, bitcoin has not served well as a hedge against inflation, attributing the challenge to the historical low levels of inflation during most of bitcoin's existence.
Matt Walsh, the founder of Castle
Island Ventures and former leader of Fidelity Investments' blockchain and
cryptoasset initiatives, anticipates that funds with a focus on high-growth
tech stocks are likely to be the quickest to enter the market. However, he also
sees broader appeal, suggesting that commodity-based portfolios, such as
gold-based funds, may view bitcoin as a digital gold alternative.
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