The Rise of Bitcoin ETFs: Unlocking Access to Crypto for Money Managers

Now that bitcoin ETFs are trading across U.S. public markets, many large money managers that have been effectively locked out of the cryptocurrency market finally have a way to access the primary digital currency. This development is expected to open the floodgates for the $30 trillion advised wealth management industry. According to analysts at Standard Chartered, fund inflows in the range of $50 billion to $100 billion are anticipated in 2024.

“Bitcoin is beginning to become a benchmark asset for the younger generation,” said Anthony Pompliano, founder of Pomp Investments. As the younger generation increasingly views bitcoin as a benchmark asset, it is becoming clear that most investors cannot beat these benchmarks. Therefore, adding bitcoin to their asset allocation is seen as the only way to try to keep up.

Bitcoin experienced a significant rise, reaching as high as $49,000 on Thursday, levels not seen since December 2021. However, it dropped on Friday to around $43,000. Nevertheless, the cryptocurrency saw a remarkable surge of 150% in 2023 following a brutal selloff in 2022. Unfortunately, wide swaths of the investment world missed out on this rally, as many fiduciaries, financial advisors, and banks were explicitly told in the past “not to touch crypto” due to its unregulated nature.

The game changed on Wednesday when the Securities and Exchange Commission (SEC) cleared the sales of spot bitcoin ETFs, allowing investors to access bitcoin in the same way they purchase stock and bond index funds. Despite stern warnings from SEC Chair Gary Gensler, activity in the crypto market shows no sign of slowing down. This newfound access to bitcoin has prompted passive funds to actively seek ways to increase performance.

Bitwise Asset Management, one of the 11 issuers initially approved for a bitcoin product, is targeting financial advisors and family offices with its Bitwise Bitcoin ETF. With the lowest fee at 0.2% of holdings, this ETF aims to attract financial advisors and family offices who are increasingly carving out an allocation of 1% to 5% for bitcoin. Understanding the growing interest in cryptocurrency from advisors, many funds are waiting for the approval of a spot bitcoin ETF before making investments.

According to a survey conducted by Bitwise with financial advisors, 88% of those interested in purchasing bitcoin were waiting for the approval of a spot bitcoin ETF. For the majority of investors, a low-cost bitcoin ETF is viewed as the easiest way to gain exposure to the cryptocurrency market. Data from Robinhood also indicates that the trading volume of bitcoin ETFs in the first week primarily came from individual accounts, with only a small portion from retirement accounts.

Even before the SEC’s announcement, a significant number of state and local pension plans already had some exposure to cryptocurrencies, according to the 2022 CFA Institute Investor Trust Study. The introduction of bitcoin ETFs potentially offers more legitimacy and lower costs for retirement plans looking to increase their allocation to crypto. Financial firms are offering differing advice on how best to enter the space, with some asserting that even a one percent allocation to bitcoin can improve the risk-return profile of a portfolio.

Adding bitcoin to a portfolio that traditionally includes 60% equities and 40% bonds can improve its risk-return profile, as noted by WisdomTree in 2019. The firm found that even a one percent bitcoin allocation led to an 8.3% outperformance over the base portfolio from 2014 to 2019. Fidelity also analyzed performance and acknowledged that bitcoin has boosted portfolio returns during specific periods in the past, although it comes with substantial volatility. However, its ability to act as a hedge against inflation remains a subject of debate.

As the market for bitcoin ETFs unfolds, funds with a focus on high-growth tech stocks are expected to be the quickest to embrace this new investment opportunity. However, the appeal of bitcoin as a digital gold is also becoming evident, with commodity-based portfolios like gold-based funds exploring the potential of bitcoin as a diversification tool.

The introduction of bitcoin ETFs has unlocked access to the cryptocurrency market for many money managers and advisors. With anticipation of significant fund inflows into bitcoin in the coming years, it is clear that the wealth management industry is ready to embrace this new asset class. As investors look for ways to keep up with benchmark assets, a low-cost bitcoin ETF offers a convenient and attractive option. The market is set for exciting developments as more financial firms and investors enter the space and explore the potential of bitcoin as a diversification tool and performance booster.


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