Volatile or not, it's hard to ignore that Bitcoin is gaining traction. The largest and oldest cryptocurrency rose again on Wednesday, topping $51,000 for the first time after experiencing a fivefold surge in the past year.
For advisers, the Bitcoin rally is a sign to stop avoiding cryptocurrencies and, instead, educate themselves to provide effective financial advice on the digital asset, said Ric Edelman, founder of the RIA Digital Assets Council.
“Investment advisers are grudgingly acknowledging that they can no longer dismiss this,” Edelman said. “They need to acknowledge that [Bitcoin] isn't going away and they need to get themselves educated so that they can do their job.”
Advisers have historically shied away from the digital asset because of its volatile performance records, but demand from both retail and institutional investors is set to propel Bitcoin toward further gains, said Ria Bhutoria, director of research for Fidelity Digital Assets.
“In 2020, we saw a significant shift in the macroeconomic environment in response to the pandemic that led to a lot of interest from institutional investors that hadn’t really looked at or thought about what type of role Bitcoin can play,” Bhutoria said.
A number of traditional investment firms launched passive Bitcoin funds in 2020, including NYDIG, a subsidiary of Stone Ridge, a $10 billion alternatives asset manager. Others include SkyBridge Capital, which manages $7.7 billion in assets, and Osprey Bitcoin Trust, which began trading publicly via the OTC market. Bitwise Asset Management, with $800 million in managed assets, announced on Wednesday the launch of the Bitwise Defi Crypto Index Fund.
These fund launches are likely a direct response to institutional demand for vehicles providing access to Bitcoin that are offered by traditional institutions who have an opportunity to establish a new revenue stream, Bhutoria said.
It’s important for advisers to understand Bitcoin is a scarce asset -- there are only 21 million Bitcoins manufactured.
What that means is demand for Bitcoin displays itself in price action, Bhutoria said, which explains why Bitcoin exhibits elevated levels of volatility despite improvements in infrastructure, growth in regulated derivatives, and growing institutional activity, according to research from Fidelity Digital Assets.
“The question then becomes: ‘When will the demand grow?’” Edelman said. “That’s what we’re beginning to see right now.”
There are about 100 million people in the world who own Bitcoin, Edelman said. Institutional adoption is slowly increasing from companies like MicroStrategy, Square, MassMutual and Tesla as billionaires like Paul Tudor Jones, Michael Saylor and Elon Musk have also expressed interest in Bitcoin.
Yet, it’s harder for advisers to adopt when they don’t see any mutual fund companies making a big splash in Bitcoin, Edelman said.
That narrative could change. BlackRock Inc. announced in January it is adding Bitcoin futures as an eligible investment to two funds, the first time the money manager is offering its clients exposure to cryptocurrency.
Bank of New York Mellon announced its entry into Bitcoin last Thursday with the formation of a new digital assets unit, led by Mike Demissie, head of Advanced Solutions at BNY Mellon, meant to develop a secure infrastructure for transferring, safekeeping and issuing digital assets.
Fidelity, too, launched Fidelity Digital Assets in 2018, which is a major custody platform for institutional investors to custody their Bitcoin holdings.
These are just some of the very serious players engaging in the Bitcoin marketplace, Edelman said. “I believe that the Securities and Exchange Commission will -- in the not too distant future -- agree that properly managed, supervised and regulated custody has been resolved.”
In the meantime, there are tools for advisers to get involved and educated in digital assets. Part of the reason Edelman created the RIA Digital Assets Council (RIADAC), he said, was to help tech companies build products that service the advisory community.
Enter Blockchange -- the cloud-based investing platform that gives advisers discretionary investment management over digital assets including Bitcoin, Ethereum, Bitcoin Cash and Litecoin, among others, purchased through a qualified custodian and exchange.
Most recently, in partnership with Arbor Digital, Blockchange launched the True Digital Asset SMA, according to an announcement Feb. 2. The new SMA tool enables RIAs to outsource the management of their client’s digital portfolios to Arbor Digital, which actively constructs digital asset portfolios by using a framework to account for protocol maturation, ecosystem adoption rate, and project governance.
“Most advisors don't want to study the asset class or dedicate 20% of their time to manage a 5% allocation of their client assets,” said Dan Eyre, CEO of Blockchange. “They want someone who's going to put in the fundamental research and have strong opinions that are based on fact and data, and be able to manage those investments for them.”
A part of Bitcoin’s appeal and rising demand is the technology behind it, Edelman said. “Back in 2009 when Satoshi Nakamoto invented Bitcoin, Satoshi basically said: ‘We need a digital currency that is not created by a government, one that is not subject to inflation,’” he said.
“That's why it's a fixed number of 21 million,” Edelman said. “With the government, they print more money, devaluing the currency, creating inflation. What folks in the beginning didn't really pay attention to was the technology that Satoshi had to invent to allow Bitcoin to work.”
That technology is now known as the blockchain, which is going to revolutionize commerce on a global scale, Edelman said.
A technology with that significant of an impact is bound to get attention from lawmakers. Bitcoin has been tied to shady activity, most recently alt-right extremist groups linked to the insurrection of the U.S. Capitol building on Jan. 6 received a Bitcoin donation worth about $522,000 one month before the D.C. siege, according to crypto tracing firm Chainalysis.
U.S. Treasury Secretary Janet Yellen has expressed concern that the misuse of cryptocurrencies and virtual assets is a growing problem, too.
“I see the promise of these new technologies, but I also see the reality: cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism,” Yellen said.
There’s no question that Bitcoin allows the facilitation of the movement of money cross-border away from the purview of regulators, government, and law enforcement agencies.
But let’s face it -- criminals use all types of currency for their illicit activities.
“[Yellen] is right,” Edelman said. “Bitcoin definitely is used for nefarious purposes ... and so is the U.S. dollar, and so are diamonds, and so is gold, and so is oil. Nobody's talking about shutting down the U.S. dollar because it's used by criminals, and yet we have these silly conversations about Bitcoin.
"We've had crime in the financial markets for as long as we've had financial markets. So that's not a reason to get rid of Bitcoin,” he said.
Former Chairman of the Commodity Futures Trading Commission and President Joe Biden’s pick to lead the SEC Gary Gensler could be a promising sign for a Bitcoin ETF, Bhutoria said.
“He was a professor at MIT and taught a course on Bitcoin and digital assets,” she said. “Having officials in these agencies that have a really strong grasp of the underlying asset class is really positive for the future of different products.”
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