Crypto the next big trend in financial planning

There are a plethora of reasons for advisers to dismiss Bitcoin and other crypto assets as a worthy holding in clients’ investment portfolios. For one, they’re for the most part unregulated. To say they’re volatile is an understatement. Let’s not forget the serious fraud and theft concerns that accompany it. But crypto is here to stay, like it or not. 2021 is shaping up as a transformative year for digital assets, marked by exceptionally strong returns, regulatory progress, and with so many major institutions moving so aggressively into this space.

The wide acceptance of Bitcoin by institutions is better seen when you look at GrayScale, the world’s largest crypto asset manager for institutions, which currently holds over $30 billion in Bitcoin. According to Ross Stevens, CEO of NYDIG, a leading financial services firm dedicated to Bitcoin; NYDIG already has enough institutional buy orders lined up to push its Bitcoin holdings over $25 billion by the end of 2021.

JP Morgan recently surveyed 3,400 investors representing over 1,500 institutions; they’ve established that 11% of the respondents work at firms that trade or invest in crypto while 89% do not. Out of respondents from firms that do not trade or invest in crypto, 22% said they believe their firms will likely invest in crypto assets in the near future. As more become acquainted with crypto, we are witnessing a rapid normalisation of this new asset class, with the early majority, late majority, and laggards buying into the market.

In the latest The Bitwise/ETF Trends 2021 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets, which includes 994 qualifying financial advisers across independent RIAs, broker dealer representatives, financial planners, and wirehouse representatives, 81% of financial advisers reported receiving queries about crypto from clients in 2020. “Most advisers have clients who are asking questions

about crypto and are finding it increasingly important to educate themselves about the space,” says Matt Hougan, Chief Investment Officer at Bitwise.

However, only a small fraction of advisers actually allocate to crypto assets. The number of financial advisers allocating capital towards crypto has increased 49% in 2020, from 6.3% to 9.4%. Of the investment advisers who have not yet allocated to crypto, 17% stated they will “definitely” or “probably” invest in digital currencies in 2021, up from 7% in 2020. Financial advisers are more likely to invest their own money in crypto, with 24% stating they already own Bitcoin, Ethereum, or other crypto assets in their personal portfolio, up from 17%.

54% of respondents described “low or uncorrelated returns with other asset classes” as the main benefit of cryptocurrency exposure. In addition to its low correlation with major asset classes, 38% of financial advisers said the high potential returns found in the crypto market made exposure to this asset class attractive for client portfolios. Additionally, 28% of advisers enjoy the fact that it’s something new to offer their clients, with another 27% viewing client demand as a reason for eyeing crypto. Crypto’s role as a potential hedge against inflation moved up a prominent position for advisers in 2021, with 25% of advisers in this year’s survey highlighting “inflation hedge” as crypto’s most attractive feature, up from just 9% last year.

51% of respondents indicated that they would fund an allocation to crypto in client portfolios through an alternatives category, while 18% would allocate through equities, 17% through cash, 10% through commodities, and 5% through fixed income.

54% of respondents pointed to regulatory concerns as a major impediment to preventing them from investing in digital assets. Other factors that are holding back crypto allocations include volatility, uncertainty on how to value crypto assets, lack of easily accessible investment vehicles, custody concerns, lack of understanding, criminal association, not confident talking about crypto to clients, reputational risk, potential scams, and bubble talk.

Going forward, financial advisers want better regulation, better education, launch of a tradable bitcoin ETF, better custodial solutions, easier trading, and less volatility before they see more widespread recognition of cryptocurrencies as a viable asset class.

64% of advisers chose “ETF” as the most appealing investment vehicle, followed by a distant 16% for “direct ownership of individual coins”, and 10% liking “traditional mutual fund”. Alternatively, 43% of advisers would prefer an actively managed fund, while 36% would be willing to choose a diversified index fund. Just 3% thought a hedge fund was the right approach.

Despite the growth in financial advisers making allocations to crypto, Bitwise’s CIO remarked that “the survey shows it’s still early days for crypto, with less than 10% of advisers allocating today.” Adding “At the same time, adoption and interest are growing: The survey suggests the number of advisers allocating could double or more in the year ahead.”

Financial advisers are increasingly looking for exposure to alternative assets, and interest in crypto is growing fast. The number of crypto naysayers within the investment adviser’s community is also falling, with the number of respondents predicting Bitcoin plummeting to zero dropping from 8% last year to just 4% this year. On the contrary, the number of advisers predicting $100,000+ Bitcoin price within the next five years has increased from 4% to 15% in a single year.

The stories are there for advisers to tell their clients and infrastructure is being built to help make the crypto space a smart play in wealth management. Crypto is definitely not for every client, but it’s strategic for advisers to be educated on the topic and to be able to help clients with an investment when it makes sense. It’s time for financial advisers to meet the future of digital investments.

Kimora Diep