For a long time, Catherine Valega, a wealth consultant at Green Bee Advisory, wasn’t sure if she really needed her Chartered Alternative Investment Analyst certificate. Nowadays, the Boston-based advisor is getting overwhelming interest in cryptocurrency from her clients, and not just the recent graduates coming out of Harvard and MIT. One 65-year-old plumber recently complained to her about his bitcoin wallet getting hacked.
“I was like, holy cow. How did he even learn about this?” said Valega. It’s just so fascinating. I need to be ahead of this trend to help my clients invest more securely.”
So she took the Digital Assets Council of Financial Professionals (DACFP)’s class organized by Ric Edelman, the founder of DACFP. The $649 online class is composed of 11 online modules ranging from blockchain technology to tax and regulations on digital assets.
Valega is not the only advisor rushing to get ahead in the cryptosphere to meet clients’ demands. Samuel Deane, founder of Deane Wealth Management, said his firm works exclusively with millennials in technology, many of whom already own crypto. These clients don’t necessarily need advice on what to invest in and what not to invest in. They just need some expert opinion on how crypto fits in their overall financial pictures, Deane said.
“That gives me an opportunity to educate myself on this sort of new and emerging asset class, and I realized I can actually be a fiduciary and provide guidance to the best of my knowledge,” he said.
For advisors, cryptocurrency is increasingly too impactful to ignore. Eighty percent of financial advisors are being asked about cryptocurrencies, according to research published by Cerulli Associates. And in the next two years, 45% of advisors expect they will be using cryptocurrency as an investment at some point per clients’ requests.
But it’s still early days. Currently, 14% of advisors are using or recommending cryptocurrencies and only 7% of advisors report that their clients are investing in cryptocurrency based on their own recommendations.
“It takes time to ramp up the sales cycle, educating the advisors about crypto itself and how to talk to clients.” said Christopher King, CEO and Founder of Eaglebrook Advisors, a crypto SMA platform with $150 million asset under management. “We think that a lot of the capital is going to flow into this asset class through the advisor channel. It just takes time for these firms to get on board.”
With client interest surging, cryptocurrency is emerging as a new battlefield to win clients, and an increasing number of advisors are getting up to speed on the emerging asset class. With large institutions like hedge funds, pension funds and sovereign funds all eyeing the space, industry insiders also believe that crypto exposure will help advisors become more marketable if they are hunting for new jobs.
Investing in crypto through traditional vehicles
The majority of interested advisors are approaching cryptocurrency through traditional investment vehicles they already understand, like the Grayscale Bitcoin Trust (GBTC), a trust company that stores bitcoin offline, and the SEC-approved futures-based Bitcoin ETFs, including the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF).
While some experts believe that financial advisors who invest in cryptocurrencies indirectly will not have to worry about the complex storage and security procedures required of cryptocurrency investors, others say that current vehicles available on the market are each deeply flawed and are far less efficient than direct ownership of cryptocurrencies.
“It’s pretty hard from an advisor perspective to put your clients into a product that is dramatically inferior, ”said Ben Cruikshank, Head of Flourish, which recently launched Flourish Crypto, a crypto investing platform for financial advisors. “You don’t want to have an investment vehicle that is far lagging the investment performance of direct ownership.”
Cruikshank said futures-based bitcoin ETFs face tracking error issues similar to any futures-based products, where investors may not be gaining the exposure they are intending.
There is also a situation in which longer-dated futures contracts have higher prices compared to short-term contracts, known as contango, which could lead to losses for funds that track the prices of volatile assets like bitcoin.
This means that the returns from funds like BITO based on bitcoin futures contracts can be much different from bitcoin's spot price. Publicly traded trusts like GBTC also do not easily or directly track the price of Bitcoin, which is difficult for advisors, according to Cruikshank.
“With tens of millions of Americans investing in crypto directly, placing clients into highly inefficient, high-fee investment products can be difficult for fiduciary advisors to justify, particularly as advisor-centric direct ownership solutions such as Flourish Crypto increasingly become available,” Cruikshank said.
The current ETFs and trusts available are only designed for bitcoin and cannot meet advisors' demands in other cryptocurrencies like ethereum. Cruikshank said their trading activities suggest advisors are moving beyond just bitcoin alone and show interest in ethereum as well. In aggregate, Flourish Crypto clients hold bitcoin and ethereum at a ratio of 70% bitcoin to 30% ethereum.
“Next year is the year,” is the catchphrase for those watching for a spot-based bitcoin ETF approved by the SEC, but some industry experts believe that it won’t come until 2024. Some believe that exchange regulation will need to come before a spot-based product is approved. Others believe we may never see a spot Bitcoin ETF approved in the U.S. because the SEC may view the product as a currency.
Direct ownership through platforms
As spot cryptocurrency ETFs continue to be hampered in the U.S. by the SEC, advisors who prefer to access cryptocurrency directly on behalf of their clients, or do not want to wait for a spot bitcoin ETF, are relying on retail trading platforms to gain cryptocurrency exposure.
Platforms like Cruikshank’s Flourish are trying to fill in the gaps by providing advisors with technology, compliance and tax infrastructure they need to trade digital assets. Flourish Crypto has attracted 60 RIA firms, which have an average of $1.5 billion in assets under management.
“Advisors have a very specific and often conservative way of talking about investments and portfolios,” said Cruikshank. “They don’t have to believe that crypto is heading to the moon, but there is asymmetrical upside potential.”
Another is Eaglebrook, the Edelman-backed crypto SMA company that just raised $20 million
But those platforms are still in their early days, and spot ETFs might end up being the preferred avenue for advisors to gain exposure to cryptocurrency, said Matt Apkarian, senior analyst at Cerulli.
“It is going to be a race to zero just like the rest of the financial services industry. Whoever can offer the exposure at the easiest and the cheapest is probably going to be the winner,” Apkarian said.
Apkarian also believes that while active strategies are going to have some exposure in the high net worth space, the majority of investors and advisors are going to chase heavily passive and index-based vehicles.
“Before cryptocurrency is standardized, a lot needs to happen around regulation of exchanges and valuation methodologies,” said Apkarian. “The SEC needs to make sure that once they give this pseudo stamp of approval by regulating it, investors are protected and will be able to get in and out of the investment as they need.”
