Offering Crypto to Clients: Part 3 – Crypto Exposure

Direct Exposure is One Way to Go but You and Your Clients Have Multiple Options

This is part three of a four-part series designed to walk financial advisors through the process of adding value to their clients by offering exposure to cryptocurrency. Be sure to check out Part One and Part Two before reading this installment.

In this article, we’re going to discuss some of the ways your clients can get exposure to Bitcoin, Ethereum, and other digital assets they may be interested in. We’ll share information on:

  • Self-Directed
  • ETFs
  • Derivatives
  • SMAs
  • Funds for Accredited Investors

Before offering guidance on crypto exposure it’s important to gain fundamental knowledge and develop a stance. Once you are educated and have a stance the next step is to plan out how you will integrate into client conversations and the planning process. After these steps are done you can dig into the all-important question of how your clients should be investing in crypto.

Option #1: Self-Directed

The most straightforward way for your clients to get exposure to crypto is to buy it themselves through a centralized exchange like Gemini or Coinbase, which they probably already have. In July 2021 Coinbase hit 56 Million active users, which is more than TD Ameritrade, Charles Schwab, and E-Trade combined. (Source: ThinkAdvisor) Another option for self-directed clients is to move directly onto the blockchain by establishing a hot wallet or cold storage. This offers the most control for an investor since they take full ownership of their holdings. We call these types of clients ‘crypto-natives’. It’s important to note that direct crypto ownership also carries specific risks. Investors are the only ones with access to the private keys to their accounts and, if lost, there is no recourse. In 2020, crypto data firms Chainalysis and Glassnode both estimated roughly 3 million Bitcoin to be lost forever, that’s about 15% of Bitcoin’s current supply.

How can you serve the self-directed client? For clients on centralized exchanges like Coinbase or Gemini, there are services like Onramp Invest which integrate into existing tech stacks where clients can share account details so the advisor can see held away assets and incorporate them into a client’s broader wealth plan. For the crypto-native, the most you can do at this point is open the conversation, gain trust, and hope the client will share their holding with you.

Option #2: Crypto ETF’s & Blockchain ETF’s

It’s important to understand the difference. Crypto ETF’s invest either directly or indirectly into crypto assets like Bitcoin, Ethereum, or others. Blockchain ETF’s invest in traditional companies that may have exposure to crypto in some way, or are developing blockchain/crypto infrastructure, like Microstrategy (MSTR) or Coinbase (COIN). Currently, the US has approved three different futures-based crypto ETF’s but no spot crypto ETFs. Canada, Brazil, and Australia all have approved spot Bitcoin ETF’s for investors with Brazil recently announcing a DeFi (Decentralized Finance) crypto spot ETF. At the end of this article will be a link to a list of available ETFs for investment.

Which ETFs are for you? This will depend on many factors. Each option comes with its own risks and rewards. For example, a futures-based crypto ETF like BITO could trade at a premium during a bull market or at a discount during a bear market. Todd Rosenbluth, director of ETF and mutual fund research at CFRA, suggests BITO, “is likely better for short-term exposure than for buy and hold long term investing.”

Option 3: Derivatives

The crypto market is continuing to evolve and mature, and financial institutions are finding new ways to package these currencies. These derivative, or synthetic, products change in price based on the price of the underlying asset. Derivatives remain in the control of the company that issued them, rather than with individual investors. So, a big difference between direct exposure and derivatives is that the autonomy from legacy financial institutions is lost. Additionally, since derivatives are not real currency, they cannot be spent or transferred the way an actual cryptocurrency, like Bitcoin, can be.

Option 4: Separately Managed Accounts (SMAs)

If you’re reading this article and educating yourself about how you can offer your clients exposure to crypto, you’ve probably already come to the understanding that the digital asset ecosystem is both complex and evolving. Partnering with an SMA can give both you and your clients the peace of mind that comes with outsourcing digital asset management to financial professionals with depth of experience in crypto and specific expertise that can complement your own knowledge and experience. You can check out the benefits of Arbor Digital’s True Digital Asset SMA™ here.

Option 5: Funds for Accredited Investors

These include private funds, publicly-traded trusts, hedge funds, and venture capital funds. Some funds are actively managed; others are based on an index composition and can be either single or multi-asset.  There are options to invest through a private fund rather than purchasing the digital assets directly. This allows for exposure to the economics of the underlying digital assets while avoiding the certain complexities and costs of buying, storing, and safekeeping the underlying digital assets. These funds are typically structured as limited partnerships or LLCs and are offered to investors through an offering memorandum or private placement memorandum.

Taken from the yellow pages of the Digital Assets Council for Financial Professionals, “In some cases, the funds may be structured as trust vehicles allowing investors to directly purchase shares of the trust from the trust. Trusts approved for trading in the secondary market provide liquidity to those who have held their shares for a required 6- or 12-months period. Following that lock-up period, trust shares can be transferred to a brokerage account for trading on the OTC market, where retail and institutional investors can purchase them with little to no account minimum. However, these shares have an accompanying premium or discount. Shares of these trusts are eligible for IRAs and Roth IRAs. Potential investors should ask about the fund’s subscription frequency, redemption availability/frequency, the notice period for redemptions, management fees, placement fees, incentive fees and tax reporting.”

Examples include: Grayscale, Osprey Funds, Bitwise Asset Management, and Galaxy Digital

So, How Much Should Your Clients Be Investing in Crypto?

If you have a client struggling with this question, the best advice is to apply fundamental investment principles and refer to their financial plan. They certainly shouldn’t invest more than they can afford to lose in a market that is prone to dramatic price fluctuations, and crypto investments shouldn’t be viewed as a get-rich-quick scheme.

Crypto assets are an emerging asset class with user adoption of blockchain technology growing exponentially. At Arbor Digital, we believe they offer an opportunity for portfolio diversification and access to early-stage investing usually reserved for privileged investors. It only takes a 1-3% allocation to drastically improve the risk/return profile of a traditional portfolio since historically the correlation between crypto-assets and traditional assets has been low with a coefficient of 0.24. It’s important to note however that during short-term periods crypto-assets can become heavily correlated to other risk assets, which has happened to start off 2022 with Bitcoin having a 0.94 rolling 30-day correlation to the S&P500 as of January 31st.

Final Thoughts

So, which is right for you and your firm? It depends on many factors: How educated are you on both crypto assets and blockchain technology? What is your stance on crypto vs. blockchain technology? Which investment vehicle better fits within your firm’s overall investment strategy? Which investment vehicle fits your firm’s current infrastructure? To name a few. The beauty is that there are options for investment regardless of your stance on crypto or where you are on the education spectrum. For a comprehensive list of investment options into crypto assets or blockchain please refer to the Digital Assets Council for Financial Professionals Yellow Pages.

We hope this article is a helpful place to start as you’re considering how best to offer your clients exposure to crypto and other digital assets. By understanding the current investment landscape, you can position yourself as the go-to resource for your clients who are looking to invest safely and securely.

In the final installment of this four-part series, we’ll discuss integrating crypto into your practice. We’ll talk about compliance, taxes, and getting paid.

In the meantime, you can always reach out to us to ask a question or book a demo. At Arbor Digital, our mission is to be your connection to the Digital Asset (r)Evolution

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