Of all the investment options that financial advisers have at their disposal to offer clients, virtual currencies are being touted by only a small number who dare to dabble in such things. But that may be about to change.
Growing ranks of retail and institutional investors drawn to bitcoin and its imitators have already been hit by a boom and bust in the sector. In 2017, bitcoin rose from under $2,000 to more than $19,000 per unit by the end of the year. Yet by January 2019 it had collapsed below $4,000. Last March, US economist Nouriel Roubini described crypto as “the mother and father of all bubbles”, noting that other “top ten” cryptocurrencies had suffered steeper falls of more than 90 per cent.
However, a partial recovery in the value of bitcoin and some of its rivals over the past year seems to have reignited interest in the sector.
About 6 per cent of financial advisers asked in December about their clients’ portfolios said they had allocations of cryptocurrencies, according to a study released in January by Bitwise Asset Management, which runs a range of cryptoasset index and beta funds. A further 7 per cent said they would probably or definitely follow suit in the coming year.
Some 17 per cent of the 415 advisers surveyed — including registered investment advisers (RIAs), broker-dealers, financial planners and wirehouse representatives — indicated that they owned “bitcoin, ethereum, or other cryptoassets” in their personal portfolios.
Hunter Horsley, chief executive of Bitwise, insists that cryptocurrency is established as an asset class just like oil, gas, gold or other precious metals. “It is here to stay,” he says.
More than half of advisers in the survey said that cryptoassets offered a useful hedge to their clients’ portfolios because of the low or uncorrelated nature of their returns when compared with traditional asset classes. Another 30 per cent of advisers mentioned the high potential returns; 26 per cent said clients were asking for them; and 23 per cent said that it was something new that they could offer clients.
But opinion on the suitability of investments in virtual currencies remains sharply divided. More than half (56 per cent) of respondents cited regulatory concerns as the biggest obstacle in preventing them from increasing their investment in cryptoassets or making their first allocation.
Others argued that cryptoassets remained “too volatile” (43 per cent), while many advisers also cited the lack of “easy accessible investment vehicles like ETFs or mutual funds” to justify exposing clients to the sector (39 per cent).
Attempts by proponents to widen access to investing in virtual currencies and their derivatives have come up against regulatory constraints.
Last year, Bitwise itself failed in its attempt to have one of its funds, the Bitwise Bitcoin ETF Trust, authorised for trading on the New York Stock Exchange. The US Securities and Exchange Commission rejected the application, stating that the proposal did not comply with rules aimed to prevent “fraudulent and manipulative acts”.
That ruling coincided with the decision by Facebook to abort plans to launch its own cryptocurrency, Libra, in the face of a backlash from regulators and politicians concerning its potential misuse, in a retreat that has also stymied the sector. Bitwise subsequently dropped its attempt to secure SEC approval for this full listing earlier this year. But the group appears undeterred. Last month, it indicated it would instead push ahead by seeking to market its cryptoproducts via OTCQX, the less stringent over-the-counter market.
The aim is to make shares on one of its funds, the Bitwise 10 Private Index Fund, tradable through traditional brokerage accounts such as Charles Schwab, Fidelity and TD Ameritrade by the end of 2020. Mr Horsley says his ambition is to establish Bitwise as the “Vanguard for cryptocurrency”
Daniel Simon, chief executive of fintech comminations agency Vested and author of The Money Hackers, argues that financial advisers will need to respond to what the next generation of investors will be interested in — and this includes cryptoassets.
He points to a Charles Schwab report published in December that revealed that while stalwart companies such as Berkshire Hathaway, Amazon and Microsoft ranked among the top investment picks for baby boomers and Gen Z, millennials were more prone to put money in cryptoassets.
The fifth most popular investment choice among millennials in the study was Grayscale bitcoin Trust, ahead of Berkshire Hathaway and Netflix — which Mr Simon views to be remarkable. Advisers “need to have a sense of the millennial client who asks you what they should be doing,” he says.
But sceptics remain. Peter Schiff, chief executive of broker-dealer Euro Pacific Capital, hit back at the notion of cryptocurrencies as a hedge to traditional market volatility. “The only people who will ever buy bitcoin are speculators, which is why bitcoin will never become a safe haven,” he tweeted this month.
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