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Wealth Management EDGE 2024

Wealth Management EDGE: Bitcoin ETFs Are Winning Over Skeptics to Crypto

About a quarter of Americans are already investing in crypto, according to one source. Advisors will be well-served to get comfortable with the asset class.

Spot Bitcoin ETFs are getting some investors and financial advisors more comfortable with putting their money in digital assets, according to the panelists at the “Bull or Bear: Why Investors Should Care About Digital Assets” panel at the Wealth Management Edge 2024 conference on Monday.

Don Friedman, president of the Digital Assets Council of Financial Professionals, Mike Reed, senior vice president and head of digital asset strategic partnerships at Franklin Templeton, and Kyle DaCruz, director of digital assets product with Van Eck, also talked about how the blockchain could eventually change how many financial transactions are completed because of its transparency and utility as a digital ledger.

“We are going from a trust economy to an authentication economy,” said Friedman. “Think about when you go to buy a house. You’ve got all kinds of paperwork. There are auditors, there are bank people, there are mortgage brokers. All that, once you go to the blockchain, will go away.”

However, today, only a minority of investors have a grasp of the blockchain, making many investors hesitant to make investments that way. The panelists conceded that trading crypto assets directly on an exchange like Coinbase also comes with counter-party and operational risks. In addition, it’s expensive. For example, retail investors pay a fee of about 2% per transaction when they buy Bitcoin directly through these exchanges, according to Coinbase public filings.

That’s one reason why Bitcoin ETFs have taken off. For most spot Bitcoin ETFs, transaction fees currently range in the 20 basis points range, and many fund operators have temporarily waived those fees altogether. Since these ETFs launched in January, investors who have participated now have allocations to Bitcoin assets that range between 1% and 3% of their portfolios, said Friedman. Reed mentioned that he had relatives who were reluctant to invest in Bitcoin through Coinbase but are now buying shares of spot Bitcoin ETFs. The ETF launches also made other departments within Franklin Templeton view Bitcoin with less skepticism, he noted.

“The thing that gets us really excited about Bitcoin and allocations to Bitcoin, in particular, is that Bitcoin is a great proxy for the overall space. And there are so many really interesting and cool things happening outside of Bitcoin. But Bitcoin is still the largest asset and captures a lot of market data, so an initial kind of tiptoe into the space, getting a small allocation is an interesting way to play it,” said Reed.

The Digital Assets Council surveyed financial advisors, finding that most believe clients would be happy with an average annualized return on investment of 7%. With an average annualized return of 7% and portfolio balance scenarios set at 60/40, 59/41, 58/42 and 57/43, small allocations to Bitcoin did not negatively alter the outcomes. “If the Bitcoin goes to zero, the negative impact on the portfolio is so tiny that no client will be upset,” Friedman noted.

In Friedman’s vision, advisors could use the fact that they can invest in crypto as a marketing opportunity to get new clients. “Even if you don’t want to recommend it, 22% of Americans already own it, and that’s going up since the spot Bitcoin ETFs,” he said. Advisors can also take advantage of starting off with Bitcoin ETFs to get clients comfortable with moving on to other types of digital assets.

For those advisors who want to know more about crypto and digital assets generally, the panelists recommended taking advantage of industry groups that offer courses on these products, talking to asset managers who are not “crypto zealots,” and investing small amounts of money in crypto themselves.

Franklin Templeton, for example, offers a library of materials on crypto assets, but “I’d actually be an advocate, if you are confused about what’s going on here, do it, engage, open a Coinbase account,” said Reed.

“You don’t need a lot of money to do it; I think my first account was $1,000 or something like that. And then I bought some assets and transferred them over to a different wallet outside of Coinbase and for about 10 minutes, my money was gone," he added. "And then it appeared in the new wallet because a new block of data had to be written. It helped me understand that. It helped me understand the pain points also for dealing with the space. It helped me understand the potential of it.”

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