Are advisors “in” on crypto? This is Crypto for Advisors, after all, so in today’s issue, Roxanna Islam from TMX VettaFi takes us through crypto demand and adoption since the launch of spot ETFs in the U.S.

In Ask an Expert, Bryan Courchesne, CEO of DAIM, looks at whether advisors are supporting their clients investments in crypto and, if not, where the risks lie.

– Sarah Morton

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Many of us thought that the launch of spot crypto ETFs would help bring crypto into the mainstream and encourage adoption – particularly by closing the gap between advisors and their clients. While the spot bitcoin ETF launch in January broke records, demand for spot Ethereum ETFs has been muted. And now with no near-term approval for Solana ETFs, this raises the question – does interest in crypto ETFs end with bitcoin? I believe there will be more to the crypto ETF story, but there are three big questions we need to answer about demand.

1. Are clients ACTUALLY interested in crypto?

Seasoned crypto investors see the benefit of investing directly in cryptocurrencies – not just bitcoin. However, crypto ETFs brought access to other groups of investors, including retail investors who are newer to crypto and more comfortable with a traditional vehicle like an ETF.

And unlike the old-school crypto investor, newer investors may be satisfied with a simpler approach to cryptocurrency investing (i.e., investing in just bitcoin ETFs). Despite the fact that bitcoin and ether (symbol ETH, the native cryptocurrency of the Ethereum blockchain) have two very different use cases, it is very easy to use bitcoin as a “just for fun” investment without fully diversifying their crypto allocation.

This has been reflected in net flows for crypto launches. Excluding the Grayscale Bitcoin Trust (GBTC), spot bitcoin ETFs have seen $37.3 billion in net inflows since their launch in January, with net inflows for the iShares Bitcoin Trust (IBIT) bringing in $20.9 billion of those flows. Since their launch in July, spot ether ETFs have seen net inflows of only $2.1 billion (excluding the flagship Grayscale product). The highest inflows were seen in the iShares Ethereum Trust (ETHA), which had only $1.0 billion net inflows – a significant gap from its spot bitcoin counterpart. While I believe interest in spot Ether will grow over time, these trends indicate that mainstream investors still haven’t fully embraced crypto.

2. Are advisors WILLING to allocate to crypto?

Given a niche portion of clients interested in crypto ETFs, the next step is making sure advisors are also open to conversation. The survey results shown below are important because 64% of advisors surveyed—that’s almost two-thirds of advisors—are neutral to negative on cryptocurrencies. Additionally, Bloomberg Terminal data show that the majority of investors who own spot crypto products are self-directed investors—not those who invest through an advisor. According to this data, 80% of shares held of iShares’ (IBIT) and 75% of shares held of the Fidelity Wise Origin Bitcoin Fund (FBTC) are by investors who do not file 13Fs (i.e., self-directed clients).

Unfortunately, there is no clear-cut answer to getting advisors more interested in this asset class. Education – not just for investors, but also focused on advisors – will be the primary solution. Education takes time but should become easier as time passes and ease acceptance among both clients and advisors.

3. CAN advisors allocate to crypto?

Assuming both clients and advisors are interested, there are still some barriers to investing. Many large brokerage firms and asset managers do not allow investment in crypto including crypto ETFs. Vanguard, one of the world’s largest asset managers, has stated on their website that they do not allow crypto ETFs on their platform because they “do not currently believe that there is an appropriate role for them to play in long-term portfolios.” Similarly, Edward Jones released guidance stating that “cryptocurrencies are highly speculative and [they] don’t offer a way to purchase or hold cryptocurrencies” including crypto funds. While Morgan Stanley recently started allowing their financial advisors to offer bitcoin ETFs, there is a significant caveat. They can only offer the two largest funds – Blackrock’s IBIT and Fidelity’s FBTC – and these can only be offered to clients with a net worth of at least $1.5 million with aggressive risk tolerance.

These are likely the most difficult barriers to overcome because they can’t simply be solved by education, but persistent investor and advisor demand should reduce these barriers over time.

Bottom Line: Crypto ETFs have come a long way, and I still believe the industry has room to move forward. But we need to address education to encourage adoption and bridge the gap between advisors and their clients.

– Roxanna Islam, CFA, CAIA, Head of Sector & Industry Research, TMX VettaFi

Q. Can advisors help their clients with crypto investments?

It can be challenging for financial advisors to meet the needs of clients when it comes to investing in digital assets. The landscape of cryptocurrencies and blockchain technology is rapidly evolving, and the learning curve for traditional advisors is steep. From understanding the complexities of the crypto market to managing the risks associated with digital assets, the journey can be overwhelming. Many advisors may not even have the capability to invest in a bitcoin ETF, let alone feel comfortable discussing it with clients. As a result, clients often find themselves navigating the crypto market alone, without the guidance of their trusted financial advisor.

Q. How does it impact clients who don’t have advisors help?

This disconnect can lead to significant problems for investors. Without proper guidance, clients may invest in the wrong asset at the wrong time, resulting in substantial losses. Improper portfolio weighting toward cryptocurrencies can also expose investors to unnecessary risk, while the potential for fraud in the crypto space remains a constant threat. These pitfalls can create a sense of distrust and uncertainty around digital assets, causing many to wonder whether they should avoid the space altogether.

Q. What’s the risk to not learning about crypto?

So, as it stands, advisors are not meeting client needs. This will leave clients under-allocated at a time when the asset is still experiencing outperformance relative to traditional assets. The opportunity cost of forgoing significant alpha could significantly impair client performance over the long run. It is crucial for advisors to realize the time is now to position their clients for future success. It’s time for advisors to educate themselves on this asset class and pass on what they learn to clients. Remember, as an advisor, a diversified portfolio does not need a significant allocation to crypto. A 5-10% allocation to bitcoin can go a long way. We are not there yet, but hopefully, the tide is turning.

– Bryan Courchesne, CEO, DAIM