Ever since Bitcoin rallied to all-time highs this month, the big question advisers are asking themselves is when will it be suitable to use the cryptocurrency in client portfolios.
Unfortunately, the likely answer is not anytime soon.
What cryptocurrencies desperately need is oversight, but new regulations are notoriously slow to come for financial services. Instead of only allowing Bitcoin to be bought and sold on unregulated exchanges, financial products should also be explored — and if appropriate for investors — should be sanctioned by the Securities and Exchange Commission.
Give investors what they want: a regulated Bitcoin exchange-traded fund.
Yes, there are concerns about volatility, and UBS analysts just warned the price of crypto could potentially plummet to zero. Bitcoin just rebounded from a steep sell-off, which saw prices plunge more than 12% to below $30,000 to trade around $34,000 on Monday. Despite the extreme swings in price, analysts from top Wall Street firms like J.P. Morgan still project the cryptocurrency to skyrocket to upwards of $146,000, making a Bitcoin ETF highly attractive.
“Bitcoin, and the underlying technology blockchain, is the most significant technological innovation since the invention of the internet itself,” said Ric Edelman, co-founder of Edelman Financial Engines and co-founder of the RIA Digital Assets Council, an organization dedicated to adviser education in cryptocurrencies and blockchain.
Advisers are generally warming up to the idea of digital assets as part of an allocation, including a Bitcoin ETF. Recent survey results show the percentage of advisers who report allocating cryptocurrency in client accounts rose nearly 50% last year. More notably, client interest in crypto rose in the past year, with 81% of surveyed advisers reporting that they had received a question from a client sometime in the past 12 months.
The problem is a lack of regulation has given investors pause; they’re right to be wary. There are serious questions about whether clients should be exposed to the extreme volatility associated with digital assets. There are also concerns about the lack of transparency around crypto wallets and the potential for criminal activity — like an illegal scheme the Justice Department unearthed in August to fund terrorist groups online.
One of the most daunting critics is the Treasury Secretary nominee herself. Janet Yellen has been notoriously skeptical of crypto, and doubled down in a written response to the Senate Finance Committee: “We know they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems.”
While regulators remain leery, big institutions are coming on board — usually an early indicator that a technology is maturing. BlackRock Inc. dipped its toe into crypto in January by permitting two funds to buy cash-settled Bitcoin futures. Grayscale Investments, which is behind a popular Bitcoin trust, reported total inflows of more than $3 billion in the fourth quarter.
But, keeping bitcoin in regulatory limbo just exacerbates the problem.
“I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities,” Yellen wrote. “If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.”
If cryptocurrency is here to stay, as many proponents argue, then allow investors to gain exposure and profit from the upside through indexed products like a Bitcoin ETF. Give investors the confidence that watchdogs are keeping an eye on it, so clients can participate in a historic rally that could be even more influential than the internet itself — if you believe the hype.
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.