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Original title: How Advisors Are Investing In- And Coping With- Crypto?
By Steve Garmhausen
Translator: Winy
More and more financial advisors are becoming interested in investing in cryptocurrencies. However, many complex issues remain to be resolved before it can be put into practice. The following content is what you need to know.
Investment advisors may avoid investing in Bitcoin and other cryptocurrencies for a variety of reasons. Because cryptocurrencies are largely unregulated. To put it mildly, their prices are volatile. It is also still in its early stages to use it for fintech infrastructure such as custody, accounting of digital assets, etc.
But cryptocurrencies are here to stay, neither sad nor happy. Investors have already seen Bitcoin's price surge above $61,000 from $7,300 in early 2020. Investors consulted with investment advisors, or invested directly in Bitcoin. More and more financial institutions have also begun to accept bitcoin: PayPal will support customers to use bitcoin transactions, and Fidelity Investments (Fidelity Investments) has also begun to support specific customers to use bitcoin for loan collateral. And like many other companies, Fidelity is planning to launch a bitcoin ETF.
Last month, Morgan Stanley and Goldman Sachs announced they would offer wealthy clients exposure to cryptocurrencies. The move makes them the first major U.S. banks to support such operations.
In November, Mariner Wealth Advisors began enabling clients to learn about and advise on Bitcoin, making it the largest independent registered investment advisor offering such services. “We know that not every client needs it,” said Mariner CEO Martin Bicknell, “but we think it’s strategic for our advisors to learn about bitcoin and help clients with it when they need it. "
Bottom line: cryptocurrencies including Litecoin and Ethereum, and especially Bitcoin, which dominates the digital currency market, cannot be ignored. Even if consultants are not advising them, they need to recognize that competitors may, or are doing so, both now and in the future.
Only a small number of advisors will allocate crypto asset investments, including Ripple, Stellar, etc. In a 2021 survey of 994 advisors by Bitwise Asset Management and ETF Trends, 9% said they already provide such services. Of the advisors allocating to cryptocurrencies, 58% are independent registered investment advisors (RIAs). 54% of respondents cited its low correlation with other asset classes as the top reason for allocating to cryptocurrencies, while 38% cited "high potential return" as the main reason.
Some advisors offering bitcoin guidance are part crypto enthusiast and part pragmatist. Bicknell is a bit of both. Bitcoin appealed to him, he said, because it encapsulated his passion for innovation, disruption and investment. At the same time, he also said that the company's 350 advisors have received related inquiries from customers, and many customers have already invested in cryptocurrencies before November. Bicknell hopes that these clients will be able to receive the guidance of the consultant.
Mariner announced its partnership with Washington-based Eaglebrook Advisors late last year. Eaglebrook Advisors provides independently managed account services for Bitcoin and digital assets. So far, Mariner has trained 30 consultants on cryptocurrencies. Each advisor must be approved by the firm before directing clients to invest in crypto assets.
It's not hard to understand why a company like Mariner is so different when it comes to cryptocurrencies. When Bitcoin was first launched in 2009, it had almost no market value. By December 2017, its price had surpassed $19,000. The price of Bitcoin has been fluctuating. As of January 2019, the value of one Bitcoin had dropped to $3,400.
On at least two occasions, including one last year, bitcoin lost roughly half of its price in an hour. In March of this year, it fell 16% in 12 days before bouncing back. Many advisors say investors only need to keep their investment percentages in the single digits because of the huge price swings. (Interestingly, the first recorded transaction using bitcoin occurred in 2010, when a software programmer in Florida bought two pizzas for 10,000 bitcoins. Those bitcoins are now worth about $580 million.)
Ric Edelman is now the founder of Edelman Financial Engines, the largest independent RIA in the United States. A 1% allocation is appropriate, he said, saying: "Even if it becomes worthless, that doesn't threaten your investment. It's annoying, but it doesn't do fundamental harm." , which could have a meaningful impact instead."
Edelman Financial Engines does not allocate cryptocurrency investments, the firm has only used mutual funds and ETFs, and has not yet used a single cryptocurrency fund. Edelman himself started buying bitcoin in 2014, and the cryptocurrency accounts for more than 1 percent of his net worth.
Houston-based Interaxis provides cryptocurrency-related learning to advisors. The firm’s co-founder, Adam Blumberg, said the consensus cap is between 3 percent and 5 percent, depending on a client’s risk profile. Regulators may be skeptical about investing in alternative allocations above 15 percent, Blumberg noted.
Many advisors are treading cautiously because of regulatory uncertainty. Douglas Boneparth is president of New York-based Bone Fide Wealth, which has $86 million in assets. He said he started providing education on digital currencies five years ago as more and more clients asked or indicated they wanted to invest in cryptocurrencies, and some clients joined companies that already held cryptocurrencies. About 20 percent of Boneparth’s 110 client households own cryptocurrencies, with bitcoin accounting for the majority.
Boneparth does not recommend cryptocurrency investment allocations. However, when clients inquire, he explains the different approaches to investing in crypto assets, the risks and potential rewards, and how they can be incorporated into more traditional portfolios.
Understanding cryptocurrencies, and scripting client conversations, as the firm Boneparth has done, is a key part of the foundation many advisors are now laying. Blumberg suggested that one of these scripted conversations should be reserved for the next bitcoin crash.
Advisers configuring cryptocurrency investments should amend their Form ADV with the SEC to reflect the nature of the cryptocurrency offering and, if necessary, state that compensation options include fee-for-service. The inclusion of cryptocurrencies in investment policy statements is also a prudent step for those advising on assets.
Isaiah Douglass, a partner at Vincere Wealth Management, said he has used the statement to formally lay out the risks. And, he has been advising on bitcoin since last summer, and revealed that a dozen of Vincere's clients are currently invested in cryptocurrencies, and several others have taken an interest in it.
A core element of Bitcoin Consulting is how to charge for the service. If there were cryptocurrency ETFs, it would be simple: Manage cryptocurrency investment allocations in the same account as other assets. Asset-based fees will be charged as usual. Advisors have been waiting years for such an ETF. Edelman likes to joke that he expects the ETF to be approved within 18 months, a phrase he has been saying for five years.
Several applications are still awaiting SEC approval; Grayscale Bitcoin Trust (GBTC) applied to convert to an ETF; and a handful of asset managers, including Fidelity and VanEck, have also applied for new Bitcoin ETFs.
SEC Chair nominee Gary Gensler has a good understanding of cryptocurrencies and their underlying technology, giving an introduction at MIT. To this end, the cryptocurrency community has made many efforts. But whether he will change his attitude towards bitcoin ETFs as a result remains to be seen.
Meanwhile, there are some crypto investing solutions that address asset management (AUM) fees. However, they differ from ETFs in that they have higher minimum and management fees. For example, Eaglebrook SMA's management and custody fees add up to 1.3%. Alternatively, advisors can set up crypto accounts and sub-accounts directly through the Gemini exchange and charge AUM fees. "Doing this requires a lot of work and knowledge, and can easily create compliance issues," Blumberg warned.
As the world waits for a true retail cryptocurrency fund, the Grayscale Bitcoin Trust has become a popular solution with over $36 billion in assets. The security consists solely of bitcoins and is traded only over-the-counter. Its expense ratio is 2%, and it has recently moved from trading at a premium to a deep discount, adding to the risk.
A more flexible option is Bitwise Asset Management's Bitwise 10 Crypto Index Fund (BITW). The fund, which tracks the 10 largest digital currencies, has an expense ratio of 2.5 percent and trades at a 55 percent premium to its net asset value.
There are also some cryptocurrency hedge funds, high minimum investment, management fees, and some other disadvantages of hedge funds, which prevent them from benefiting from the accounts of wealthy clients.
In some cases, fee-for-service is the only method of compensation. For example, a cryptocurrency owner concerned about a custodian being hacked might opt for a “hard wallet,” the digital equivalent of a safe. Fees incurred in this case can be calculated based on cryptocurrency consulting hours and time spent helping customers purchase and securely hold cryptocurrencies.
For Douglass, crypto advisory services are easily included in the monthly plan fee using payment software AdvicePay. The firm’s monthly advisory fees are divided according to complexity, with clients with more than $100,000 in crypto assets placed in the highest tier. These fees are charged in addition to asset management-based fees.
While advisors are capable of advising and allocating investments in cryptocurrencies, the infrastructure certainly has room to grow. One of the technical challenges, Blumberg said, is the lack of unified reporting and analytics, which makes portfolio management difficult. He said: "When you allocate 5% of the investment ratio for Bitcoin, the price of Bitcoin increases, and the investment ratio rises to 8%, which makes it difficult and expensive to rebalance the ratio back to 5%. When When custodial companies like Fidelity or Schwab can take custody of cryptocurrencies, or when there is a good data highway, some of these problems will be solved.”
One noteworthy development: Bank of New York Mellon (BNY Mellon) announced in February that it would build a digital asset custody and management platform, but it is unclear whether it will support client accounts for financial advisors. “The digital asset custody product will be available later this year and, pending the necessary approvals, will serve BNY Mellon’s diverse client base,” a company representative said.
How big will the cryptocurrency consulting market grow? Regulatory uncertainty, as well as the onerous steps required to buy, hold and integrate cryptocurrencies into a portfolio, could limit this potential unless an SEC-approved single-currency ETF is launched. “From an advisor’s practicality standpoint, it’s a golden ticket,” Boneparth said.
Nearly 50% of advisors in the Bitwise/ETF Trends survey said the launch of a bitcoin ETF would make it easier for them to allocate crypto asset investments. However, some see the merits of being a cryptocurrency consulting first mover. One of them is Douglass, who started last summer asking clients about their views on bitcoin.
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