01.05.21

Advisors Should Brace for Coming Wave of Retail Crypto Funds

by: Rich Blake

Bitcoin the cryptocurrency has had a very shiny year.

Over the past 12 months, the price of the digital asset has shot up 150%. You could even say it soared.

At one point, fleetingly, as of Dec. 1, BTC, as it is listed on digital currency exchanges (e.g. Binance, Kraken, and Coinbase), notched a new record high – just below $20,000.

Now the question, naturally, becomes whether crypto has any place in a retail investor’s asset allocation – and let’s stipulate it may not.

Overcoming a Troubled Past

The last time the 20K milestone came into view, three years ago, BTC nosedived over the course of the next three months, falling all the way back down to $6,000 as of early 2018.

And then the talk of crypto died down. Until it came back, right after the start of the pandemic, as the world’s central banks began pumping the system with liquidity, raising fears about inflation and the prospect for devalued fiat money.

Now that Bitcoin is once again flirting with record-level territory, trading in spot markets at about $18,300 as of Dec. 9, will this time be different?

That's one question being bandied about. Another question, one that advisors can expect to get more frequently, particularly from younger clients: should I be investing in crypto?

Crypto Products Are Here

More banks and money managers are making that case, arguing for at least a small (up to 5%) allocation. Meanwhile, there has been a parade of hedge fund luminaries taking to the CNBC airwaves to declare that they now own Bitcoin, making it seem safe for institutional investors – who are accessing Bitcoin via CME-traded derivatives – pushing up the price of the asset some call “digital gold.”

For some advisors, the time has arrived to at least be conversant in the various crypto investment products that are gaining in popularity, and to prepare for new ones in the pipeline.

The best-known and fastest growing fund is the Grayscale Bitcoin Trust. It’s a security offering, set up solely to passively hold BTC. Structured like the share of a stock offering, the trust is incorporated in the state of Delaware and registered with the U.S. Securities and Exchange Commission.

Grayscale, which now advertises in a rock ‘n roll infused cable television commercials, recently saw its assets surpass $10 billion. Most of that is in the Grayscale BTC product.

The Grayscale BTC product is a closed-end fund; it changes hands in over-the-counter, or OTC, markets, as opposed to on an exchange. Its ticker is GBTC. While GBTC issues new shares periodically, there’s no option to redeem shares.

Because many investors find it easier to trade Bitcoin via GBTC, the product has been in demand even relative to its red-hot underlying asset, i.e. BTC itself, meaning that if you were to invest in BTC directly you could gain the same $100 worth of exposure for 30% less than what it would cost via GBTC, which right now is $23 per share.

ETFs Loom on Horizon

There’s a growing chance that Grayscale’s first-mover advantage isn’t going to last long and that the industry may be on the precipice of a proliferation of publicly traded exchange-traded funds, or ETFs, that invest in crypto. The SEC has in the past year shut, and then propped-open, the door to such products.

Now swaddled in a cradle on the SEC’s doorstep is a fairly large crypto index product newly available in the U.S.

Launched Dec. 9 in OTC venues (although not registered with the SEC), the Bitwise 10 Crypto Index Fund (ticker: BITW) is tailored to wealth advisors.

The fund will seek to replicate the performance of a cap-weighted index of the ten largest digital assets.

BTC, of course, has the largest weighting in the fund, comprising roughly three-fourths of total holdings. The next two largest holdings are Ethereum (ETH) and Ripple’s XRP (XRP); the rest of the allocation is in a slew of lesser known cryptocurrencies accounting for only roughly a combined 5% of the fund. It’s a pricey product with a 2.5% fee.

Bitwise is marketing the fund into high-net-worth channels but is still trying to launch a publicly traded crypto ETF, provided it can get SEC approval. “There’s more to crypto than just Bitcoin,” Bitwise CIO Matt Hougan said recently, pointing out that that in its ten-crypto index BTC is only the sixth-best performer.

Bitwise, a San Francisco-based manager, along with sponsor NYSE Arca, earlier this year filed ETF-launch papers with the SEC which initially rejected the proposal. The SEC had said it would reconsider (although Bitwise withdrew the filing).

Meanwhile, outgoing chairman Jay Clayton said in public remarks that the agency should be open to crypto ETFs and that it should, working with other regulators, lead the way forward. Former CFTC chief Gary Gensler, rumored to be Biden’s pick to head the agency, is viewed as crypto friendly.

Fidelity and BlackRock seem eager to help move that ball up the field. Each money management behemoth has said in recent weeks that digital assets are squarely in their sights.

The PayPal Effect

PayPal sparked a crypto rally in November by announcing it would facilitate transactions and transfers in BTC and other crypto currencies. It was a watershed moment that sparked a newly exuberant phase of the 2020 crypto rally. Behind the scenes was a warm embrace from the likes of Linda Lacewell, the Superintendent of the New York Department of Financial Services.

An influential crypto news outlet, CoinDesk, just named Lacewell to its list of the 12 most influential crypto industry members. Lacewell was recognized for ramping up the state license approval that proved to be PayPal's passport into the crypto space.

On a federal level, the Office of the Comptroller of the Currency (OCC) has clarified that national banks and federal savings associations can provide cryptocurrency custody services for customers.

State regulators in Wyoming have tweaked laws so that they are welcoming to crypto platforms, such as Kraken, which has registered for a bank charter in the Cowboy State.