19 January 2021

Are Advisers Investing Client Assets in Bitcoin?

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The popularity of cryptocurrencies is gaining steam with large industry players ramping up offerings tailored to institutional investors, but growing investor demand is expected to soon spill over to financial advisers.

While prices of Bitcoin fell as much as 17% this week — the biggest drop since March — the slip is minor compared to its broader rally. The cryptocurrency jumped 50% in December alone, while surging to $34,000, ad hitting all-time highs on Sunday, according to Bloomberg.

There has been increased institutional adoption of digital assets, as well, with 36% of institutions surveyed invested in the asset class and more than six in 10 investors agreeing that digital assets have a place in portfolios, according to Fidelity research.

In that light, Fidelity Digital Assets announced a new offering that enables advisers on Fidelity’s institutional-grade digital assets custody platform to pledge bitcoin as collateral for cash loans. While Fidelity’s offerings are catered to institutional investors, the expectation is more advisers will become interested, according to Christine Sandler, head of sales and marketing at Fidelity Digital Assets.

Fidelity Digital Assets, which launched in 2018, currently has 100 firm clients including RIAs, family offices, hedge funds and banks, according to Sandler. The custodian is also working to eliminate some of the inherent frictions for advisers looking to hold Bitcoin in a portfolio, she said.

The investor interest in digital assets is not just institutional, as Silicon Valley-based Blockchange is also looking to bring cryptocurrencies down to RIAs by rolling out its digital asset management platform designed for advisers in July.

The cloud-based investing platform gives advisers discretionary investment management over digital assets including Bitcoin, Ethereum, Bitcoin Cash and Litecoin, among others, purchased through a qualified custodian and exchange.

RISKS AND REWARDS 

Even with institutional investors interested, advisers are remaining skeptical of Bitcoin, and other digital assets, for individual investors as cryptocurrency’s short historical record is too murky to trust in client’s portfolios.

“I caution my clients against speculating in digital currencies,” said Matt Morris, an adviser with Sanderling Finance. “A broker may argue its suitability for a particular client, but I don’t think financial advisers operating under a fiduciary standard have any grounds to recommend it.”

The problem with digital assets is that the risks and rewards aren’t quantifiable, according to Morris. There are other alternatives that have a more robust history and are subject to additional regulation to promote investor safety. The products also perform based on quantifiable data, like earnings, dividend payout and book value, Morris said.

The lack of guidance on custody is likely slowing adoption as lawmakers urge the SEC to clarify how brokers can hold digital securities.

Still, cryptocurrency advocates point out that the digital currency is a noncorrelated asset class that can serve as a safe store of value when markets get choppy.

But that argument wasn’t holding water earlier this year when global markets continued to slide in response to plummeting oil prices and growing panic about the economic fallout from the coronavirus. While the S&P 500 and Dow Jones experienced some of their steepest drops in history, Bitcoin performed even worse.

That type of volatility has stopped Michael Caligiuri, founder and CEO of Caligiuri Financial from promoting cryptocurrencies to his clients, for now.

“Advisers need to be extremely clear about the risks of cryptocurrencies with clients as there could be a relatively high chance that they could lose everything,” he said. “I believe Bitcoin is more of a short-term fad than a long-term sustainable asset class.”

For some advisers, the legwork to incorporate digital assets isn’t worth the return on investment. For example, trading cryptocurrencies requires multiple account openings, which is tedious for advisers, according to Thomas Hlohinec, Founder & CEO of Philadelphia-based RIA Rise Financial Partners. “For a small percentage of a client’s portfolio, it isn’t always worth it,” he said.

Matt Bacon, an adviser with Carmichael Hill, also agrees that crypto assets are too volatile and speculative right now to be of much use to advisers. Long term there could be a place for it, but it’s going to take time for it to truly solidify its status as a unique asset class, according to Bacon.

“It could act as a hedge and store of value in a way that’s similar to gold, but it’s not there yet,” he said. “We don’t recommend crypto assets to clients but do purchase them upon request.”

Yet, there are advisers that believe digital assets are here to stay and, like any disruptive technology, it takes time for new innovations to take hold, according to Lexington, Kentucky-based adviser James Vermillion.

“We don’t see Bitcoin as a fad or trend, in fact, we see an acceleration of its adoption as both a financial instrument for transactions and an investment asset class for both institutional and retail investors,” Vermillion said.

More education for advisers to understand how digital assets could benefit a client’s portfolio could also promote more adoption among RIAs, according to Mike Casey, president and founder of American Executive Advisors.

“Cryptocurrencies should be considered for every investor’s portfolio,” Casey said. “Advisers who take the time to learn and understand the implications of blockchain technology and digital assets will be well positioned to advise their clients.”

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