Bitcoin ETF hype has Wall Street eyeing crypto potential

It’s touted as crypto’s big breakthrough on Wall Street: The imminent arrival of bitcoin exchange-traded funds that will kick open investing in digital currency to the institutional and retail masses. 

That’s driving the latest hype cycle in the world’s largest token on bets that the likes of wealth managers and financial advisers will finally start to lavish a small portion of their trillion-dollar portfolios on the crypto promise. 

Thank an oncoming swing in the regulatory pendulum. The Securities and Exchange Commission is expected, possibly by mid-January or sooner, to green-light exchange-traded funds that will buy and sell bitcoin in the famously tax-efficient and cost-effective ETF wrapper — after a decade of rejecting such applications. 

At first blush, it offers a path to redemption for proponents of digital assets a year after the FTX implosion sparked the industry’s biggest existential crisis and emboldened crypto naysayers who’ve long dominated traditional finance. 

Now with the likely involvement of respectable heavyweights like BlackRock, Fidelity and Invesco, the spot-bitcoin ETF market has the potential to grow into a $100 billion juggernaut in time, according to Bloomberg Intelligence estimates. Galaxy Digital Holdings Ltd., which is working with Invesco Ltd. on an application, held a call earlier this month with roughly 300 investment professionals about allocating to bitcoin as an ETF debut nears, according to a person familiar with the matter. 

Jeff Janson is one of the people gearing up for the debut. The advisor at Naples, Florida-based Summit Wealth has already received calls from investors, young and old. 

“I feel like we are now staring down the gun barrel of the SEC finally delivering approval,” Janson, whose firm manages about $550 million, said in an interview. “And my belief is that once you have access to it in that type of a wrapper, I think you’re going to have a significant amount of institutional-level interest.” 

That’s the bull case, at least. For many, the post-FTX shockwaves continue to reverberate across the investing world, cooling interest in all things crypto relative to the days of speculative euphoria. After the epic collapse of Sam Bankman-Fried’s empire, everyday investors have largely been absent from the market. And despite the recent rally, bitcoin remains nowhere near its 2021 high.

Meanwhile, hedge fund managers like Paul Tudor Jones, who previously touted the virtues of digital assets, have stayed quiet of late. Big asset managers have largely declined to spell out the crypto opportunity as they see it. A string of scam incidents, including false claims that bitcoin ETFs had already been approved and that BlackRock had filed for a fund holding the XRP token — both of which initially pushed prices higher — have put a further dent on the industry’s claims that it’s moving past its sham-laced past. 

Yet one big reason for the newfound optimism has as much to do with incentives built into the money management industry as it does about the disruptive appeal of digital currencies in the financial system. Right now, only futures-based bitcoin ETFs are available to investors, and those can come with additional costs that eat into returns. Investors who want pure bitcoin are getting access via platforms like Coinbase or apps like Robinhood — meaning those who oversee their clients’ portfolio relinquish the ability to directly supervise the flow of crypto investments.

An ETF is, therefore, a game-changer, according to Chuck Cumello, who’s receiving inquiries from millennial investors and high-net-worth individuals about the disruptive potential of a bitcoin ETF. 

“It would just be simple and easy to place a trade — to have it long in a client’s investment advisory account,” said Cumello, president and chief executive of Essex Financial Services in Essex, Connecticut. 

Here’s another piece of evidence that institutions might be who ETF issuers are looking to target: Sober-sounding tickers like IBTC and BTCO suggest the products will be aimed at the advisory market.

“When tickers are more fun, that generally shows their aim is younger retail investors, who in this case aren’t likely to be a big audience for these funds,” Bloomberg Intelligence’s Eric Balchunas and James Seyffart wrote in a note. 

Case in point: Over at Compass Financial Advisors in Fort Wayne, Indiana, Chris Swanson and James Weber build model portfolios, a type of bespoke investment strategy. They often advise their clients on how to allocate a certain percentage toward alternative assets like cryptocurrencies. 

For instance, a portfolio might have 55% geared toward equities, another 25% toward bonds and 20% in cash, alternatives and digital assets. After the spot funds launch, the firm’s existing crypto bets — via Bitwise’s Crypto Industry Innovators ETF (BITQ), for example — would likely flow into the bitcoin ETFs once available. 

“We want to make sure that we perform well for our clients, and we think that this is going to be a differentiator in how we perform versus other advisers,” Swanson said of crypto exposure. 

The word of caution comes from Laila Pence, founder of $2 billion registered investment adviser Pence Wealth Management. Interest in digital assets among younger clients has eased dramatically since the heady pandemic days when all manner of coins were skyrocketing, Pence said. Plus the stock market is doing well this year too, she reminds them. 

“Why take a risk when the S&P and the Nasdaq have done so well this year, and that’s safer and more reliable?” Pence said from Newport Beach, California.

Yet to crypto bulls, there’s a bigger point to make: The ETF will normalize a discredited asset class. Its transparency and liquidity offer a compliance-friendly opportunity for institutional counterparties, potentially unleashing fresh lending and derivatives trades, argues Coinbase.

“Thus, what an ETF represents for bitcoin adoption extends beyond the immediate inflows into these products, potentially reshaping the market in entirely unprecedented ways,” it said in a report. “Nevertheless, we think this will take time to unfold.”

[More: The curious case of FTX and bitcoin’s surge]