Some 11% of advisors are now adding bitcoin to their clients’ portfolio, which could have improved risk-adjusted and absolute returns in 100% of the three-years periods over the past decade, according to new research from Bitwise.
Investing as little as 2.5% of a traditional 60/40 portfolio in bitcoin (when quarterly rebalancing is taken into account), the cryptocurrency would have contributed positively to a diversified portfolio’s returns in 70% of one-year periods, 94% of two-year periods and 100% of three-year periods since 2014, according to the new white paper, “Bitcoin’s Role in a Traditional Portfolio.”
The study also highlights bitcoin’s counterintuitive influence on portfolio risk metrics and addresses three key questions investors should ask when considering a bitcoin allocation.
The Securities and Exchange Commission approved of 11 ETFs in February. This highly regulated and audited ETF wrapper gives advisors easy entry and management into bitcoin, said Katherine Dowling, general counsel and CCO of Bitwise Asset Management, in a presentation at Financial Advisor magazine’s Invest in Women conference in West Palm Beach, Fla., in March
Previously, advisors who wanted to buy bitcoin had no easy entry point, except buying individual coins and keeping them in a private wallet or cold storage.
“Now it’s in your brokerage account and adds to accessibility, as opposed to having the asset be outside your advisor relationship,” Dowling said. “That provides liquidity. It’s very easy to get in and out of ETFs. ETFs are making it so much better for you and your clients to get that together.”
Dowling spoke to 350 wealth managers, asset managers and firm executives at the conference. Bitwise’s Bitcoin ETF (whose ticker symbol is “BITB”) was trading at $37.39 by mid-March, with a year-to-date return of 39.37%.
With bitcoin trading at $68,400 on March 15, the leading digital asset had racked up an impressive 180% return over the past year, after a volatile spate in 2022 and 2023 that saw the price dip below $16,000.
Besides the attractive performance, ETFs offer investors other key characteristics, including diversification and liquidity, said another conference speaker, Sandy Kaul, the senior vice president and head of digital asset and industry advisory services at Franklin Templeton.
“Bitcoin has been the best performing asset class in seven of the last 10 years,” Kaul said. “It’s very liquid. That’s a benefit that none of the other alternatives can provide right now.
“We have talked for many years about the need to diversify away from stocks and bonds, and we’ve seen a lot of work in developing alternatives, but most are not liquid investments, in terms of getting money out,” she said.
In contrast, bitcoin ETFs “are an alternative investment that helps to diversify better and produce better risk-adjusted returns for just a smaller amount of risk,” she said.
And while it can be volatile, so can the major indexes. For comparison, the S&P 500 tumbled 74% peak to trough during the financial crisis, while bitcoin fell 73% in 2022.
The approval of the spot bitcoin ETFs has also led to significant inflows of almost $24 billion for the year so far (as of mid-March), beating every other category of ETFs in 2024, according to Eric Balchunas, an ETF analyst at Bloomberg, writing on X on March 15.
How much of those flows are coming from advisors?
“All of it,” said Jenny Johnson, CEO of Franklin Templeton, at the Invest In Women conference. Franklin Templeton’s bitcoin ETF (whose ticker is “EZBC”) was trading at $39.80 in mid-March for a year-to-date return of 38.05%.
Under Johnson’s leadership, the firm is operating five blockchains right now and it has moved one of its money markets to blockchain.
Blockchain technology results in tremendous cost savings, because of efficiency, Kaul said.
“We often use ETFs to capture the beta of the bond and stock market,” said Krista Lynch, the vice president of ETF capital markets at asset manager Grayscale Investments. “Well, bitcoin ETFs allow you to capture the beta of digital currencies, because of bitcoin’s dominance. It represents more than 50% of the entire crypto domain.”
In January, Grayscale received approval to convert its bitcoin trust to a spot ETF. That fund, whose ticker is “GBTC,” was trading at $61.08 in mid-March, a 64% increase for the year.
“We’ve run numerous model portfolios and find that you can add as little as 1% exposure to add beta, diversity and performance to the client portfolio. For clients who are a little behind on reaching goals, it could be important allocation,” Lynch said.
By investing in bitcoin, “you are an owner of the entire network. Buying it in ETF form is an easy but also low-cost way to start investing. The way we think about the future of bitcoin and other blockchain technologies is they’ll become the ledgers of the whole world,” Lynch added.
“It gives users the ability to take money and move it over the internet instantaneously,” Dowling said. “I was moving money from Janus to Schwab the other day, and it’s going to take 15 days to move that money. If this were done on blockchain, it would have been done already.”
“Everyone will put their trades on these public blockchains. They’re more efficient and offer safer settlement right away,” Kaul added.
ETFs also allow for more efficient tax reporting, according to these executives. “From the tax side, we issue 1099s from our broker. They’re easier to handle and deal with,” Dowling said.
For added efficiency, “You can also put the ETFs in tax-advantaged accounts,” Lynch said.
Executives are expecting that the transparency of the ETF structure will attract institutional clients, as well as the wealthy and uber-wealthy. “Traditionally, it’s been difficult to look at returns on alternatives, but with an ETF, it’s out in the open,” Lynch noted.
That makes ETFs attractive to high-net-worth investors and their heirs. “The next generation of wealthy families and your most successful clients are very interested in this. It’s a good time to sit down with them and have a conversation around this,” Lynch said.
It will become ever more important for advisors to have ETFs in their tool kit if they’re interested in retaining next-generation clients, said Antoinette Rodriguez, the chair of Invest in Women. Right now, some 80% of next-gen clients who inherit wealth change advisors.
While most institutions will want to see a three-to-six-month track record, “we expect we’ll see wirehouses and institutions moving into the ETFs at that time,” Dowling said.
“When the wirehouses jump in, this will be an even bigger beast. Let’s make a motion. We are here before money in motion occurs,” added Rodriquez, a former Merrill Lynch wealth manager and founder of MarFi Million Dollar Academy.
Correction: Eric Balchunas was misidentified as ETF analyst at another news service in a previous version of this story.