- Without a crypto exchange-traded fund, there is little incentive for registered investment advisors to put client cash into crypto
- The closest ETF-adjacent products leave investors paying sky-high premiums
- Low volumes on regulated exchanges may delay the launch of an ETF until 2022
With Bitcoin expected to extend its record 2020 rally, investors want in, putting pressure on registered investment advisors to expand client portfolios into digital assets. But without the approval of a cryptocurrency exchange-traded fund, RIA’s are having a hard time getting their collective $4 trillion in retail assets into digital currencies.
Most RIA’s collect an asset management fee based on the value of their client’s account. Advisors custody client assets to a firm, like TD Ameritrade or Charles Schwab Corp., where they serve as the brokerage platform for the buying and selling of securities based on instructions from the investment advisor.
Because Bitcoin and other digital tokens are not securities, they are not available on most custodial platforms.
“If a platform does not allow us to buy bitcoin, then I have to move that money somewhere else,” said Ric Edelman, founder of RIA Digital Assets Council, with more than $200 billion in assets under management, in a recent Blockworks webinar. “And the ‘somewhere else’ may not facilitate our ability to collect the fee that we would otherwise collect from the client’s account.”
Increased investor demand, combined with strict regulations from the Securities and Exchange Commission, has led to the creation of a variety of ETF-adjacent investment vehicles, such as the Grayscale Bitcoin Trust (ticker GBTC) and the Bitwise 10 Crypto Index Fund (ticker BITW).
These products are structured similarly to an ETF in that they trade like stocks, but they come with high premiums, which go toward custody and security costs. A Bitcoin ETF, in contrast, would trade at net asset value, meaning investors would not have to pay extra for digital asset exposure.
“ETFs are very familiar to both advisors and their clients, they are low in cost, they have maximum liquidity and they are regulated by the SEC,” said Edelman. “The familiarity alleviates many uncertainties that advisors and their clients would otherwise have regarding digital assets.”
The SEC has denied every past bid for a Bitcoin ETF, but some are betting that a change in leadership, coupled with broader institutional acceptance, will lead to a more positive crypto sentiment. VanEck Associates Corp. filed for the VanEck Bitcoin Trust in December 2020, making the firm the latest to attempt a Bitcoin ETF launch.
“The market has done a tremendous 180 on their stance on Bitcoin and cryptos and I think you’re going to see that there is still a lot of interest that is going to grow in the entire crypto market,” said Edward Moya, senior market analyst at Oanda Corp. “There is now a belief that this is not going away anytime soon and there is no doubt that blockchain is here to stay.”
Chris King, founder and CEO of Eaglebrook Advisors, is betting that we won’t see a crypto ETF until 2022, pointing out that the regulated exchanges will need to see a major increase in volume before an ETF can be priced and come to market.
“But, by that point, I think everyone in the crypto space thinks that bitcoin is going to be a lot higher, so you really need to find an investment product that works for you now,” said King.