Bitwise Asset Management recently made its cryptocurrency index fund, the HOLD 10 Private Index Fund, available in self-directed individual retirement accounts. The fund is only available to accredited investors—those who earn more than $200,000 a year ($300,000 for couples) or have more than $1 million in investable assets, and Bitwise recommends just a small allocation. But some are skeptical of putting retirement investors into cryptocurrencies, so advisors should use caution.
“In an IRA account, it’s dangerous because you have people who are going to leverage their future on something they don’t understand,” said Tyrone Ross Jr., an advisor with NobleBridge Wealth Partners in Montclair, N.J., who has experience advising clients on crypto assets. “I wouldn’t allow people to do that—not right now. Under the influence of an advisor who’s truly shown some aptitude in the space, sure.”
“Is cryptocurrency appropriate for an IRA? Not for any conservative IRA investor,” said Mark Miller, a journalist and author who writes about trends in retirement and aging. “But there are people who enjoy gambling a bit with their retirement portfolios almost as a hobby—if that’s what you’re looking for, this certainly offers that opportunity.”
Matt Hougan, the former CEO of Inside ETFs and a well-known face in the exchange traded fund industry, recently joined Bitwise as global head of research. Hougan acknowledged the skepticism, but said the asset manager is trying to provide a smarter investment vehicle that is more reasonably priced than what is already offered in the crypto IRA space.
“I come from an ETF, low-fee background,” Hougan said. “This space is expensive to operate in; custody costs are high, etc., but investors shouldn’t be paying 10 or 15 or 20 percent of their assets up front, just to open an IRA. It’s ridiculous.”
The minimum investment for the Bitwise fund is $25,000. There is no performance fee, but there is a 2.5 percent management fee. The company is currently working with two self-directed IRA custodians—Kingdom Trust and Entrust.
It’s not for everyone, Hougan says; it’s not even for most people. And it should only be a small sliver of an investor’s portfolio.
“We emphatically tell people, ‘You’re talking about allocations in the low single digits of your portfolio and also that you need to rebalance those regularly.’ If crypto appreciates significantly, it can go from a 2 percent allocation to a 20 percent allocation or more.”
“In small allocations, just like commodities or any other non-correlated asset, it can actually have a powerful impact because it zigs when the rest of the market zags,” Hougan added. “It should have a negative correlation to inflation; it has potentially higher returns—idiosyncratic return patterns.”
But that’s not to say investors couldn’t allocate more. And with the space still being so young, the asset class is unproven, and many just don’t understand how cryptos work.
“We don’t know very much about how they’re going to perform going forward other than the fact that they’ve already shown that they’re incredibly volatile,” Miller said.
An investment is a claim on future revenue. But is that anywhere to be found in the crypto space?
“If I buy Amazon, I know I’m buying future earnings and growth and so on and so forth,” Ross said. “With bitcoin, what does that look like? I have no idea.”
What makes a cryptocurrency work is the team of developers that are running that coin, something most folks don’t understand, Ross says.
“You’re buying the assumption that the development team is going to find a way to create some utility around that coin,” he said. “The layman doesn’t know these things; they’re just buying it because ‘okay, I can go get it on Coinbase.’”
While Ross believes the space is too risky at the moment for retail investors, that is the direction the space is going.
“The everyday retail investor doesn’t have access to that now, but I definitely think it’s coming,” he said. “And I don’t think it’s going to be a good thing until the masses fully understand what this whole space is about, and advisors giving advice around it understand the space and how to properly buy it, properly store it, and then properly sell it on behalf of a client. It’s just too convoluted at the moment.”