A growing number of people are interested in crypto investment, which means financial advisors need to understand the various ways to invest into cryptocurrency and crypto related strategies.
While the asset class is still new, especially when compared to the rest of traditional finance, there are a few different ways to invest into crypto and crypto companies.
Some of these investment strategies involve direct investment in cryptocurrency and require advisors and clients to undertake a series of new steps.
Other strategies are available at traditional financial custodians and are more similar to ordinary investments.
1. Cryptocurrencies and tokens
Clients may express a desire to own cryptocurrency directly.
Building a portfolio of cryptocurrencies and tokens is relatively straightforward but must be done through a cryptocurrency platform or exchange. Companies such as Coinbase, Gemini and FTX are crypto exchange platforms that anyone is able to use to purchase and trade crypto assets.
Much like creating a self-directed investment portfolio on a traditional custodian, any investor can open their own account on a crypto platform and begin investing in whatever crypto asset they wish. From there, investors may choose to move their currency off the crypto exchange into self-custody with a hardware wallet. However, they are still owners of the cryptocurrency or token if they hold it on the exchange and they may decide to do so.
After creating an account on an exchange and purchasing any number of cryptocurrencies available there, advisors will need to set up a process that allows them to routinely view the accounts their clients have on these crypto platforms. This will allow them to help the client best navigate financial decisions.
Some clients may prefer this method of direct investment into cryptocurrencies but want their advisor to do it for them. The advisor may hire an SMA manager to accomplish this. SMA crypto strategies are still a growing part of the market although some firms have built these strategies and are offering it to other RIAs/Advisors.
2. Hedge funds
Cryptocurrency hedge funds are growing in popularity and there are quite a few of them available.
These hedge funds allow affluent investors to allocate to crypto in an outsourced method. These clients allow the hedge fund to be the asset manager rather than buying cryptocurrencies directly and managing a crypto portfolio themselves.
Crypto hedge funds may invest in a specific part of the crypto industry, such as decentralized finance (DeFi), stablecoins, crypto mining and crypto trading firms.
However, hedge funds are for accredited investors and carry a high amount of risk for investors. Hedge funds also typically have less liquidity than other strategies and usually have higher fees, which both are things advisors must ensure their clients understand before making an allocation.
3. Publicly traded vehicles
Clients who wish to invest in the crypto asset class but do not wish to buy cryptocurrencies directly or use a new custodian or fund can consider publicly traded vehicles.
There are a few different publicly traded vehicles that advisors may consider in order to accomplish this goal.
Bitcoin futures ETFs: There are a few different bitcoin (BTC) futures exchange-traded funds available on the market. These allow investors to gain exposure to the price movement of bitcoin, without owning bitcoin directly. An advisor may decide that this is appropriate because the client wants price exposure but does not want to open an account on a crypto exchange. However, there are certain things that the advisor must be aware of – and disclose to their client – when using a futures-based product, including expense ratios, contango and backwardation, among others.
Bitcoin trusts: The most popular crypto trust is the Grayscale Bitcoin Trust (GBTC). Grayscale Bitcoin Trust has over $12B assets under management and is a convenient way for advisors and investors to gain access to bitcoin through a traditional custodian. Shareholders of GBTC own equity in a trust and that trust owns bitcoin, but shareholders of GBTC do not own bitcoin directly. There are fees to own the various products offered by Grayscale and advisors must understand what these fees are. It’s important to note that GBTC currently trades at a -33% discount to net asset value. Grayscale has filed with the SEC to convert GBTC to an ETF, yet the conversion has been denied multiple times. There is currently no spot Bitcoin ETF available in the U.S. public markets. [Grayscale, like CoinDesk, is owned by Digital Currency Group.]
Crypto and blockchain companies: There are quite a few publicly traded companies that specialize in cryptocurrency or blockchain related services. A) Square, PayPal and Coinbase are all publicly traded companies that are integrated with the crypto industry. B) Several crypto mining companies are also available for trading on traditional exchanges. Investors can buy shares of publicly traded crypto mining companies such as Riot or Marathon Digital. C) Technology companies such as MicroStrategy also fall into the broad crypto category. MicroStrategy is a software company that also owns a tremendous amount of bitcoin. Because of its bitcoin ownership, its stock price is closely correlated with the price movement of BTC.
Crypto and blockchain company funds: Investors may wish to buy a diversified basket of these crypto-related companies instead of owning individual equities. There are quite a few exchange traded funds available that focus on crypto-related companies. The largest ETF (by AUM) is the Amplify Transformational Data Sharing ETF (symbol: BLOX), which has over $600,000,000 in assets. These ETFs are considered “thematic” strategies. They are designed to invest into a specific theme – in this case blockchain and cryptocurrency. Advisors may use these funds as a part of their strategy for clients.
Weigh the pros and cons
While the crypto asset class is still developing, there are quite a few strategies currently available to investors.
Advisors must understand the pros and cons of each method, the potential benefits and risks associated with the different strategies, and must be able to communicate them to their clients.
Advisors must understand how cryptocurrency exposure could help their clients and then help their client decide on the best method to invest in the asset class.