How to Help Nervous Clients Nibble at Bitcoin

Plenty of advisors likely know this already, but the first bitcoin exchange traded fund debuted Tuesday, marking a momentous occasion in ETF industry histor.

The ProShares Bitcoin Strategy ETF (NYSEARCA:BITO), which could imminently be followed by several competitors, lived up to the hype. It closed its first day of trading with $570 million in assets under management. Take it from someone that's covered ETFs for 13 years. That's a stellar one-day showing and one of the best on record.

BITO's immediate success is attributable to a theme advisors have been hearing plenty about over the past year: Pent-up demand, though obviously not of the pandemic-related variety. Investors have been clamoring for a bitcoin ETF for awhile now and while futures-based strategies, of which BITO is one, aren't exactly what crypto enthusiasts were hoping for, but at this point in the bitcoin ETF game, we're very much at the something is better nothing stage.

With all that hoopla comes the likelihood that advisors will field some questions about BITO, its upcoming rivals and whether bitcoin is appropriate for some client portfolios. Some clients are understandably apprehensive, but advisors can help assuage that skittishness by discussing “indirect” bitcoin exposure.

Leveraging Commodities for Bitcoin Exposure

As noted above, BITO is a futures-based ETF and bitcoin futures have been trading in the U.S. for several years now. Some clients are likely already somewhat familiar with futures because that's the asset class that serves as the foundation for a plethora of commodities ETFs.

That gets us to this important point: Some commodities ETFs are making for room for modest bitcoin allocations. That group includes the WisdomTree Enhanced Commodity Strategy Fund (GCC). GCC is an actively managed ETF so it has some flexibility. It can devote up to 5% of its roster to bitcoin futures though it currently allocates 3% to the largest cryptocurrency. Here's something clients will find interesting: WisdomTree trimmed GCC's gold exposure to make room for bitcoin.

“The 3% allocation to bitcoin futures was made from the Fund’s position in gold, which stands at approximately 9% after the rebalance. This move was motivated by the view that bitcoin is often compared to ‘digital gold’ as a store of value and use case, which is being expressed for GCC via bitcoin futures,” says WisdomTree analyst Jianing Wu.

Commodities ETF dipping toes into bitcoin waters could a positive for the bitcoin store of value crowd. At the very least, it's additive to the supply/demand argument that so frequently permeates commodities conversations.

“Going forward, bitcoin’s pricing could gradually shift toward the demand side, similar to gold’s, which depends on how much the system is used and how successful it is in evolving into a store-of-value vehicle,” adds Wu. “However, investors who believe in such, must have an appetite for short term volatility and risk. The risks such as regulatory uncertainties, price speculations, and technological development difficulties must be kept in mind of.”

Bitcoin/Commodities ETF Marriage Makes Sense

Advisors know there are two primary reasons to integrate commodities into client portfolios: To guard against inflation, which is highly relevant today, and to reduce correlations to other asset classes like bonds and equities.

Up 13.39% year-to-date, it's fair to say GCC is accomplishing the goal of being sturdy against an inflationary backdrop. The Bloomberg U.S. Treasury Inflation Protected Securities (TIPS) Index is barely higher this year.

Second, commodities deliver the reduced correlation goods. The Bloomberg Commodity Index has a correlation of just 0.60 to the S&P 500 and is negatively correlated to the Bloomberg Aggregate Bond Index. Bitcoin fits in on this front.

“We view bitcoin futures as a potentially compelling asset for addition to a commodity strategy such as GCC that seeks to provide returns uncorrelated with equities and fixed income. Historically, bitcoin has a correlation well below 0.5 against most major asset classes,” notes Wu.

To be precise, from the end of 2017 through the end of the third quarter 2021, bitcoin's correlations to the S&P 500 and the “Agg” was just 0.32 and 0.09, respectively.

Put it all together, and bitcoin, even in modest doses, can enhance commodities ETFs and clients can access those products and get some bitcoin exposure without fear of enduring the volatility an all-in commitment to the digital asset brings.

Related: Advisors, Get Ready. Bitcoin ETFs Are Coming.