“Bitcoin is beginning to emerge as a benchmark asset for the younger generation,” said Anthony Pompliano, founder of Pomp Investments. “We know that most investors cannot beat benchmarks. Therefore, adding the new benchmark to your asset allocation is the only way to keep up.”
Bitcoin rose as high as $49,000 on Thursday, reaching levels not seen since December 2021, before falling to around $43,000 on Friday. After a brutal sell-off in 2022, it rose 150% last year.
Much of the investment world missed the 2023 rally. According to Jan van Eck, CEO of VanEck, many fiduciaries, financial advisors and banks have been explicitly told in the past not to “touch cryptocurrencies,” largely due to their unregulated nature.
That changed on Wednesday after the Securities and Exchange Commission approved the sale of spot Bitcoin ETFs, allowing investors to access Bitcoin the same way they buy stock and bond index funds. SEC Chairman Gary Gensler continues to issue stern warnings when it comes to crypto investing, but that isn't slowing down activity.
According to a recent prospectus, mutual fund manager Advisors Preferred Trust invests up to 15% of total assets in indirect Bitcoin exposure through funds and futures contracts for its Hundredfold Select Alternatives Fund.
Pompliano says, “Most passive funds look for ways to improve performance.”
Bitwise Asset Management is one of the 11 issuers that received initial approval for a Bitcoin product. Chief Investment Officer Matt Hougan said the Bitwise Bitcoin ETF, which offers the lowest fee at 0.2% of holdings, is primarily aimed at financial advisors and family offices.
“This includes RIAs [registered investment advisors] and ultimately includes wirehouses – that's a multi-trillion dollar market,” Hougan said, adding that advisors are “increasingly” carving out a 1% to 5% allocation. “We know they’re interested in crypto, and we know they’ve been waiting for an ETF.”
In a recent survey of financial advisors conducted in collaboration with VettaFi, a data-driven ETF platform, Bitwise found that 88% of advisors interested in purchasing Bitcoin waited until a spot Bitcoin ETF was approved. For advisors already investing in cryptocurrencies, large allocations (more than 3% of a portfolio) more than doubled to 47% in 2023 compared to the previous year.
“For the vast majority of people, a low-cost Bitcoin ETF will be the easiest way to achieve this,” Hougan said.
According to Robinhood data, 81% of Bitcoin ETF trading volume in the first week was in personal accounts, with the rest in retirement accounts.
Even before the SEC's announcement on Wednesday, the CFA Institute's 2022 Investor Trust Study found that 94% of state and local pension plans have some crypto exposure. The new products may offer more legitimacy and lower costs for retirement plans looking to increase their allocations.
Financial companies offer different advice on how best to enter the market.
In a report on its website in October, Galaxy Digital said the “strongest marginal improvement” occurred when portfolios moved from a 0% to 1% Bitcoin allocation. Back in 2019, WisdomTree said that adding Bitcoin to a portfolio that is traditionally 60% stocks and 40% bonds “can improve the risk-return profile” and that from 2014 to 2019 “even an allocation of One percent led to an outperformance of 8.3% compared to the basic portfolio.”
Fidelity analyzed performance through mid-2022 and found that “Bitcoin has historically increased a portfolio's returns during certain periods, although it has also been accompanied by significant volatility.” So far, the company said, Bitcoin has not proven to be a hedge against inflation proven, but acknowledged that “this assessment was challenging as inflation has been low for much of Bitcoin’s history.”
Matt Walsh, founder of Castle Island Ventures, who previously led a number of blockchain and cryptoasset initiatives at Fidelity Investments, said the types of funds that are moving fastest into the market are likely to be those focused on high-growth tech stocks focus. But he also sees a broader appeal.
“I think you could also see it in commodity-based portfolios, like gold-based funds, that look at this as a kind of digital gold,” Walsh said.
REGARD: SEC approves Bitcoin ETFs