Interest in Bitcoin, Ethereum and other cryptocurrencies is surging once again. Should financial advisors care?
These digital assets have been embraced by the likes of famous hedge fund billionaires Paul Tudor Jones and Stanley Druckenmiller, and by fintech companies including PayPal and Square. That said, cryptocurrencies lack widespread adoption in advisor-built portfolios.
One of the arguments in favor of cryptos is their low correlation with traditional asset classes like stocks, bonds, commodities and real estate, and thus their offer of diversification. Moreover, the market for established cryptos like Bitcoin and Ethereum is highly liquid, with a global marketplace that never shuts down.
And worries about both rising global government debt and the stability of fiat currencies have supported higher cryptocurrency prices. Indeed, Bitcoin’s 2009 launch in the midst of the financial crisis appealed to people seeking a decentralized currency, something outside the grasp of the governments and financiers blamed for mangling the economy and manipulating the money supply. Cryptocurrencies would likely benefit from a future financial crisis as well.
Another benefit of cryptos is their finite supply. Bitcoin, for example, has a maximum supply capped at 21 million coins. Once all of them are mined, the global supply will be exhausted. Unlike fiat currencies, which can be increased in size with printers, cryptos can’t be printed.
Despite their advantages, digital currencies have some major shortcomings. Their volatility can make the price swings in other assets seem sleepy by comparison. For instance, a brutal bear market took Bitcoin prices from a 2017 peak of $18,984 per coin to a nadir of $3,713 in 2018. Other cryptos crashed, too. In 2020, Bitcoin experienced a year-to-date bottom at $5,884 per coin on March 22 before it took off and zoomed to $29,000 by year’s end. These wild moves are not for the faint of heart.
Another major hurdle is the dearth of exchange-traded products that transparently, efficiently and cost-effectively track Bitcoin. Up until now, the Securities and Exchange Commission has flatly rejected all submitted Bitcoin ETF proposals. But that hasn’t stopped Wall Street from trying.
Grayscale, a New York-based asset manager focused on the crypto market, offers a suite of single and diversified cryptocurrency products. The Grayscale Bitcoin Trust (GBTC), which launched in 2014, is the firm’s oldest and largest product, with $24.2 billion in assets through January 8. Over the past five years, the product has racked up an impressive average annual return of 128.4%. By comparison, the Invesco Nasdaq-100 Trust (QQQ) saw an average annual gain of 26.2% during that period (through January 8). But that upside has come with a good deal of volatility. For example, the Grayscale Bitcoin Trust gained an astounding 1,557% in 2017, but lost 82% the following year.
Impressive overall performance aside, GBTC—like other Grayscale crypto exchange-traded products—has steep fees. It charges annual expenses of 2%. Moreover, it regularly trades at significant premiums and discounts to the trust’s underlying assets. And premiums often skyrocket when cryptocurrency prices boom.
Ultimately, it’s up to each advisor to figure out whether the current generation of crypto-linked ETPs are worth the risk. Despite their high fees and operational inefficiencies, the opportunity they offer for future dazzling performance with diversified risk away from traditional asset classes could be worth the gamble.