The majority of private wealth managers don’t invest in anything other than stocks and bonds. Only 45% make allocations to alternative investments and few are investing in venture capital funds, works of art, fiat currencies, or the more obscure.
Historically, financial advisors haven’t seriously considered bitcoin and other cryptocurrencies as potential investments and that’s understandable. Created in 2009, bitcoin is the first cryptocurrency. Its history has been rife with debate over its legitimacy and value (cryptocurrencies have been stolen or lost and their prices have been volatile). It took the Internal Revenue Service five years to give guidance on them. There also wasn’t an easy way for advisors to buy, sell, and manage cryptocurrencies on behalf of clients.
But for advisors who believe alternative investments have a place in client portfolios, cryptocurrencies have recently gotten harder to ignore.
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Last week, the Wyoming Division of Banking sent a “no-action” relief letter to Two Ocean Trust, allowing it to provide custodial services for digital assets to high-net-worth individuals, family offices, and RIAs — a landmark decision breaking arguably the biggest barrier between financial advisors and the new asset class. Just like thousands of investment advisors use Charles Schwab to trade and custody stocks, bonds, or other alternative investments, they can use Two Ocean Trust, a “qualified custodian,” to do the same for cryptocurrencies.
The Wyoming Division of Banking also granted Avanti Bank & Trust a bank charter last week. It will also be a qualified custodian of cryptocurrencies, offer prime services for digital assets, and more. “Avanti’s mission is to provide a compliant bridge between the traditional and digital asset financial systems, with the strictest level of institutional custody standards,” Avanti founder and CEO Caitlin Long said in a statement about the approval.
In 2019, Fidelity Investments received a license for bitcoin trading and custody in the state of New York. According to its website, Fidelity Digital Assets is the “first step towards a long-term vision to create a full-service enterprise-grade platform for storing, trading, and supporting eligible digital assets.”
Thousands of wealth managers already use more than one custodian and if they are willing to add one more, they could advise clients on cryptocurrencies and charge a fee based on the value of those assets under their management.
Clients might not be bringing up cryptocurrencies with their advisor, but that doesn’t betray an interest in the asset class. Investor appetite for cryptocurrencies is growing. Bitwise Asset Management, which builds cryptocurrency indexes and manages funds based on them to professional investors, said last week it topped $100 million in assets under management.
"2020 is the year crypto crossed the chasm for professional investors. PayPal's decision to embrace crypto last week was groundbreaking. The challenges that historically kept professional investors on the sidelines — including regulatory concerns, custody, reputation, and understanding — are rapidly being swept aside,” Matt Hougan, chief investment officer at Bitwise, said in a statement about the milestone.
In October, PayPal said it would allow customers to hold bitcoin and other cryptocurrencies in its online wallet and shop using them at the 26 million merchants on its network. Cryptocurrencies have been a poor means of payment due to the costs and sparse number of merchants who would accept it, at least relative to fiat money or credit cards.
Regulators, investors and companies are embracing digital assets and more advisors might consider it now, too.
“The potential impact crypto can have on portfolios from a risk-adjusted basis, amid the current macro backdrop, is making it hard to ignore," Hougan said.
To be sure, advisors not investing in cryptocurrencies aren’t necessarily naysayers. The time required of most advisors to learn about, analyze, and determine an investment thesis in a young asset class is considerable, especially since most allocations in portfolios are small.
Although, some are allocating much more. MicroStrategy, the Tysons Corner, Va. software firm that helps other companies analyze internal and external data, has been piling up cash and recently invested $250 million of it in bitcoin — half of its total assets. The Wall Street Journal columnist Jason Zwieg seemed perplexed by the move.
“So is this a publicly traded company or is it a hedge fund?” he remarked last week.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.