Bitcoin prices and those of other digital currencies are retreating, but it appears more advisors are taking a long-term approach to this asset class. Moreover, data confirm more advisors see benefits in allocating some portion of client portfolios to crypto.
In fact, a new Nasdaq survey of 500 financial advisors who are currently or mulling crypto exposure on behalf of clients believe the ideal crypto allocation is 6%. That’s mostly inline with or just slightly below traditional rules pertaining to commodities exposure.
That’s not to say bitcoin and the like are supplanting commodities – not yet anyway. But the reality is advisors see a place for digital assets in client portfolios and that’s a long-term positive for this still young asset class.
What Advisors Really Want
The Nasadaq survey underscores a pivotal point regarding how advisors embrace bitcoin: They really want a spot bitcoin exchange traded fund.
While 2021 brought significant advance in the U.S. in terms of bitcoin ETFs, the funds on the market today are futures-based products. That’s better than nothing, but futures-backed ETFs have histories of high fees and the potential for disappointing long-term performances so it’s no wonder that advisors want a spot bitcoin ETF to come to market.
“72% of advisors would be more likely to invest client assets in crypto if a spot ETF product were offered in the United States,” according to Nasdaq. “Among advisors already investing in crypto, 86% expect to increase their allocations over the next 12 months, while 0% report plans to decrease. Of the same group, 50% are already using Bitcoin futures ETFs and 28% plan to start using them in the next 12 months.”
Still, the Securities and Exchange Commission (SEC) continually rejects applications for spot bitcoin ETFs. Following the SEC’s recent approval of Teucrium’s futures-backed bitcoin ETF, there’s some hope that the regulatory agency is running thin on excuses for not approving a spot product.
The reason for that optimism boils down to the Securities Exchange Act of 1933 vs. the Investment Company Act of 1940. The latter governs the established bitcoin futures ETFs in the U.S., but the former is what Teucrium filed under. Grayscale, the company behind the famous Grayscale Bitcoin Trust (GBTC), believes its effort to convert GBTC to spot ETF form was given credibility by SEC approval of the Teucrium fund.
“As recently as last week the SEC cited the different set of standards under the ‘40 Act as being the reason to continue to deny/reject spot bitcoin ETFs registered under the ’33 Act,” wrote Grayscale CEO Michael Sonnenshein on Twitter. “As of today (Wednesday), those arguments have been significantly weakened as the SEC approved the Teucrium bitcoin futures ETF, which is registered under the ’33 Act, and not the ‘40 Act.”
Unfortunately, advisors aren’t optimistic that the desired spot bitcoin ETF will soon come to market.
“Despite strong interest in a passive approach to crypto and a spot crypto ETF, the surveyed advisors are not confident that such a product will be approved in 2022. Only some 38% find it likely, 31% find it unlikely, 24% find it neither likely nor unlikely, and 7% are not sure,” notes Nasdaq.
Who’s Using Crypto
To date, crypto penetration among advisors is decent, but there’s ample room for growth and that could be facilitated by easing of compliance protocols that forbid some advisors from allocating to digital assets.
“The survey finds that crypto adoption is highest among registered investment advisors (RIAs), with 34% of RIAs using crypto compared to 19% of independent broker-dealers (IBDs) and 17% of wirehouse advisors,” says Nasdaq.
One of the truly interesting points in the Nasdaq survey is that 98% of advisors surveyed want to learn more about crypto and that’s confirmation the asset class is here to stay.