Advisors, be honest. There's a fair chance clients are increasingly inquiring about cryptocurrency and that you've noticed the uptick in those inquiries this year.
With Bitcoin, Ethereum and many more digital assets delivering jaw-dropping returns at various points this year, it's only natural that more clients are getting interested in crypto. However, Bitcoin and friends repeatedly show that digital assets aren't for everyone. Advisors, of course, know this, so while it might feel like everyone is interested in crypto, the asset class isn't applicable for all clients. Not even close.
Fortunately for advisors, there are avenues for satisfying crypto-curious clients without steering them into direct ownership of Bitcoin or another digital assets. Equities, yes equities, can do the trick for crypto exposure to some extend. Coinbase's (NASDAQ:COIN) April direct listing shined new light on crypto-related stocks, but the fact of the matter is the group was growing for some time.
“Over the past two years, an increasing number of new crypto-focused companies have come to market, including crypto miners, crypto mining equipment manufacturers, crypto-focused asset managers, and more,” according to Bitwise Asset Management. “Dozens more are in the queue, with multiple billion-dollar-plus startups readying their businesses for IPOs in the next couple of years.”
Banking on Bitcoin (and more) with Stocks
Whether it's with a regulated crypto exchange operator like Coinbase or fintech giants such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ), investors are making indirect bets on digital assets. However – and this is something for advisors to discuss with clients – some stocks are more correlated to crypto price action than others and that's what clients are likely craving as replacements for direct crypto ownership.
“For investors, these companies are often seen as a way to gain indirect exposure to cryptoassets like bitcoin. While track records are short, the data we have so far supports this narrative: Correlations between crypto equities listed for over six months and cryptoassets have typically been in the 0.50 to 0.75 range,” notes Bitwise.
Not surprisingly, stocks within the crypto ecoystem are primarily growth fare, but there is a pleasant surprise. Advisors don't always have to subject clients to frothy valuations with crypto stocks. As Bitwise points out, its Bitwise Crypto Innovators 30 Index trades at multiples similar to those sported by the S&P 500 while offering significantly more growth opportunities.
The Bitwise Crypto Innovators 30 Index is the underlying benchmark for the Bitwise Crypto Industry Innovators ETF (NYSE: BITQ), which debuted in May and already has $74.29 million in assets under management.
Crypto Stocks Are Actually Familiar Propositions
One way for advisors to effectively convey the crypto equity scene to clients is that clients are probably more familiar with what moves stocks like Coinbase or MicroStrategy (NASDAQ:MSTR) than they realize.
For example, clients that previously owned commodities equities know that those shares are usually spurred by the price of the underlying commodity. Likewise, investors that have been involved with bank stocks that interest rates play a major role in charting the performance of those shares.
The situation is similar in the world of crypto equities, though correlations to digital assets run higher for a miner like MicroStrategy than an exchange operator like Coinbase.
“Crypto miners, for instance, tend to have significant operating leverage to crypto prices and therefore their share prices tend to exacerbate the crypto price cycles,” according to Bitwise. “Other industry players, however, have valuation drivers that might be not entirely influenced by crypto prices. Exchanges are a prime example, as they derive their revenues from trading volume, which might not always move in tandem with crypto prices (and can even spike during short pullbacks), or from additional services that they can add on top of trading fees.”
Bottom line: Crypto ownership is a stretch for some clients, but the audience for some of the specific stocks mentioned here or the BITQ ETF is significantly larger and that's something for advisors to think about.
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