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As of August 2024, Morgan Stanley became the first wirehouse to allow its advisors to recommend Bitcoin ETFs to clients, marking a significant milestone in the integration of digital assets into traditional wealth management. With the recent approval of spot Bitcoin ETFs and the subsequent launch of Ethereum ETFs, a basic understanding of digital assets is now imperative for all financial advisors.
When I speak to RIAs about this asset class, they often tell me they know they need to invest time in understanding how to make recommendations to their clients, but they are unsure how large the opportunity is (and therefore where this falls in their priorities). 67 million Americans own crypto today, and 38% of millennials own cryptocurrency.
Given the wealth transfer that will happen from boomers to millennials, it is in the interest of forward-thinking advisers to understand the breadth of crypto products and ways to get exposure to this asset class.
For advisors with mass-affluent clientele, Bitcoin ETFs can be a suitable entry point into cryptocurrency exposure, especially for 401Ks and IRAs. This is particularly true if clients are looking to invest less than $15,000 in Bitcoin. However, for investments exceeding $15,000, purchasing the underlying assets – such as bitcoin, ethereum, or solana – becomes more advantageous. Owning these assets directly unlocks a suite of wealth management solutions that ETFs simply do not offer.
It’s important to note, however, that while direct ownership can provide these additional opportunities, it also comes with increased responsibilities and risks, such as the need for secure custody solutions and a higher degree of market understanding. For some clients, particularly those with lower risk tolerance, ETFs might still be preferable despite the investment size due to the regulatory oversight, ease of access, and simplicity they offer.
First, consider the trading flexibility. While ETFs only trade during stock market hours, spot cryptocurrencies trade 24/7. This continuous market access is crucial when significant market-moving events occur outside of traditional trading hours, allowing advisors to execute trades in real time.
Second, holding a significant amount of cryptocurrency rather than the ETF allows for the generation of staking yields, providing a diversified income stream. This is increasingly attractive in an environment where the Federal Reserve is expected to cut interest rates.
Ethereum ETFs, for example, do not allow staking, thereby missing out on one of ethereum’s primary benefits—the ability to earn a yield from its proof-of-stake mechanism. Bitcoin staking yields, though requiring DeFi expertise, can be achieved through on-chain credit markets that mitigate counterparty risk. Partnering with a trusted provider can facilitate this process and enhance the overall client experience given that bitcoin itself doesn’t support traditional staking as it operates on a proof-of-work mechanism.
Third, holding bitcoin directly enables clients to utilize it as collateral for bitcoin-backed loans, offering a means to unlock liquidity without triggering a taxable event through the sale of the asset. Such loans are increasingly popular among HNWIs for purchasing real estate, offering an efficient way to manage wealth without incurring immediate capital gains taxes. Given bitcoin’s volatility these loans are always overcollateralized, meaning the borrower must pledge more bitcoin than the loan amount to account for the asset's volatility. This ensures lenders have a buffer against price fluctuations, reducing the risk of loan defaults during market downturns.
Advisors with clients interested in cryptocurrency have a fiduciary duty to understand the full spectrum of solutions available, beyond the most straightforward options like spot ETFs. This knowledge is particularly valuable for independent RIAs seeking to differentiate their practice from larger wirehouses.
Just as advisors in recent years have had to deepen their understanding of alternative investments due to their democratization, so too must they now become well-versed in digital assets. This expertise can set independent RIAs apart, providing a competitive edge in a rapidly evolving market.
Working with trusted third parties, especially those offering separately managed accounts where clients retain full ownership and title to their assets, is advisable. These accounts act like virtual bank vaults, avoiding the pitfalls of pooled asset solutions or being a liability on another firm’s balance sheet.
Digital assets are emerging as a crucial subset of alternative investments, and their integration into wealth management portfolios is inevitable. While ETFs represent the initial wave of mass adoption, they are not the optimal solution for HNWIs who can leverage their crypto holdings to access liquidity and generate new income streams through yield strategies. Advisors who take the initiative to educate themselves on the full range of crypto-based wealth solutions may find themselves attracting a new and growing client base, positioning themselves as leaders in the next frontier of financial advisory solutions.
Marissa Kim is the head of asset management at Abra Capital Management.
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