A growing number of people are interested in crypto investing, which means financial advisors need to understand the different ways to invest in cryptocurrency and crypto-related strategies.
Although the asset class is still new, especially compared to the rest of traditional finance, there are several ways to invest in crypto and crypto companies.
Some of these investment strategies involve direct investment in cryptocurrency and require advisors and clients to undertake a series of new steps.
Other strategies are available from traditional financial depositories and are more akin to ordinary investments.
1. Cryptocurrencies and tokens
Customers can express a desire to directly own the cryptocurrency.
Building a cryptocurrency and token wallet is relatively simple but must be done through a cryptocurrency platform or exchange. Companies such as Coinbase, Gemini, and FTX are crypto exchange platforms that anyone can use to buy and trade crypto assets.
Much like creating a self-managed investment portfolio on a traditional custodian, any investor can open their own account on a crypto platform and start investing in the crypto asset of their choice. From there, investors can choose to move their currency off the crypto exchange in self-custody with a hardware wallet. However, they still own the cryptocurrency or token if they hold it on an exchange and they can decide to do so.
After creating an account on an exchange and purchasing an unlimited number of available cryptocurrencies, advisors will need to put in place a process to allow them to regularly check their clients’ accounts on those crypto platforms. This will allow them to help the client better manage their financial decisions.
Some clients may prefer this method of investing directly in cryptocurrencies, but want their advisor to do it for them. The advisor can hire an SMA manager to accomplish this. SMA crypto strategies still represent a growing share of the market, although some firms have developed these strategies and are offering them to other RIAs/advisors.
Read more: Swan Bitcoin enters TradFi with a platform for financial advisors
2. Hedge Funds
Cryptocurrency hedge funds are growing in popularity and there are a number of them.
These hedge funds allow wealthy investors to allocate to crypto in an outsourced way. These clients allow the hedge fund to be the asset manager rather than directly buying cryptocurrencies and managing a crypto portfolio themselves.
Crypto hedge funds can invest in a specific part of the crypto industry, such as decentralized finance (DeFi), stablecoins, crypto mining, and crypto trading companies.
However, hedge funds are intended for qualified investors and carry a high risk for investors. Hedge funds also generally have less liquidity than other strategies and generally have higher fees, which advisers should ensure their clients understand before making an allocation.
Read more: Two Sigma Ventures Raises $400M for Two Funds, Plans Crypto Investments
3. Publicly Listed Vehicles
Clients who want to invest in the crypto asset class but do not want to buy cryptocurrencies directly or use a new custodian or fund can consider exchange-listed vehicles.
There are a few different publicly traded vehicles that advisors can consider to achieve this goal.
Bitcoin Futures ETF: There are various bitcoin (BTC) futures exchange-traded funds available in the market. These allow investors to gain exposure to bitcoin price movement, without directly owning bitcoin. An advisor may decide this is appropriate because the client wants exposure to the price but does not want to open an account on a crypto exchange. However, there are some things the advisor should know – and disclose to their client – when using a futures-based product, including expense ratios, spread and offset, among others.
Bitcoin Trust: The most popular crypto trust is the Grayscale Bitcoin Trust (GBTC). Grayscale Bitcoin Trust has over $12 billion in assets under management and is a convenient way for advisors and investors to access bitcoin through a traditional custodian. GBTC shareholders hold shares in a trust and that trust owns bitcoins, but GBTC shareholders do not directly own bitcoins. There are fees for owning the various products offered by Grayscale and advisors should understand what those fees are. Importantly, GBTC is currently trading at a -33% discount to NAV. Grayscale has filed with the SEC to convert GBTC to an ETF, but the conversion has been repeatedly denied. There are currently no spot Bitcoin ETFs available in the US public markets. [Grayscale, like CoinDesk, is owned by Digital Currency Group.]
Read more: A Bitcoin ETF is long overdue, say crypto lobbyists in new report
Crypto and blockchain companies: There are many publicly traded companies that specialize in cryptocurrency or blockchain related services. A) Square, PayPal, and Coinbase are all publicly traded companies that are embedded in the crypto industry. B) Several crypto mining companies are also available for trading on traditional exchanges. Investors can buy shares of publicly traded crypto mining companies such as Riot or Marathon Digital. C) Tech companies like MicroStrategy also fall into the broad crypto category. MicroStrategy is a software company that also owns a huge amount of bitcoins. Due to its bitcoin ownership, its stock price is closely correlated to the price movement of BTC.
Crypto and Blockchain Enterprise Fund: Investors may wish to buy a diversified basket of these crypto-related companies instead of holding individual stocks. There are a number of exchange-traded funds available that focus on crypto-related companies. The largest ETF (by AUM) is the Amplify Transformational Data Sharing ETF (ticker: BLOX), which has over $600,000,000 in assets. These ETFs are considered “thematic” strategies. They are designed to invest in a specific theme – in this case, blockchain and cryptocurrency. Advisors can use these funds as part of their strategy for clients.
To weigh the pros and cons
While the crypto asset class is still in development, there are currently many strategies available to investors.
Advisors must understand the pros and cons of each method, the potential benefits and risks associated with different strategies, and must be able to communicate these to their clients.
Advisors need to understand how exposure to cryptocurrency can help their clients and then help their client choose the best method to invest in the asset class.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.