Omer Taha Cetin | Anadolu |
An important thesis about Bitcoin The reason ETFs were introduced was because financial advisors needed regulated funds like these to entice their wealthy clients to invest in Bitcoin.
Nearly six months after the launch of these ETFs, there is little sign of advisors clamoring for the funds. Many are just as averse to Bitcoin as they were before. But that is not to say the ETFs were a failed experiment. Bitcoin ETFs, for example, have been hailed as the most successful ETF launches in history. BlackRock's iShares Bitcoin Trust (IBIT) hit $20 billion in assets under management this week, despite advisors not investing.
“I'm researching it because I think I'll recommend it at some point, but I'm not there yet,” Lee Baker, founder and president of Apex Financial Services in Atlanta, said in an interview. “As we learn more about the track record, it will make it more likely for me and other advisors to put it in client portfolios.”
CNBC spoke to a dozen members of CNBC's advisory board, which includes Baker, to find out why so many financial planners are still dismissive of Bitcoin and Bitcoin ETFs, and what might make them change their minds. It boils down to two main factors: time in the market and regulatory compliance.
“When [bitcoin] “If it's more regulated, there will be more adoption,” said Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. “Except that even without regulation, if this proves to be as stable an asset as a technology company over time – because I look at it more as early technology than money – there will be more adoption.”
Most advisors said they would not engage in discussions about the ETFs or respond to client inquiries – and most had no more than one client who had invested in the funds. Some of these advisors are actively educating themselves about bitcoin investing, while others – often those with an older, more traditional and conservative client base – were more dismissive.
Some of these advisors work with younger clients who are more risk-averse and have longer investment horizons. They say their clients were already interested in and educated about cryptocurrencies before this year and that the launch of ETFs has not motivated them to get involved.
performance evaluation
At 15 years old, Bitcoin is in a maturity stage comparable to that of a teenager – it has great potential but still comes with a lot of volatility. Bitcoin is up more than 59% this year and about 230% since its 2022 low, which deepened during the FTX collapse. Over the past three, five and 10 years, the cryptocurrency has gained 85%, 704% and 10,854%, respectively. Over the years, it has also suffered several 70% drops that not all investors could stomach.
Many hope that consistent inflows into Bitcoin ETFs over the years can reduce this volatility, but for now it still deters some.
“Financial advisors now have the opportunity to offer their clients access to [to bitcoin] that's safe, reliable and regulated,” said Bradley Klontz, managing partner of YMW Advisors in Boulder, Colorado. “I think it's great that it's a tool in our toolbox for clients who want it. I just don't see most firms recommending it right now because they don't recommend an asset class or particular investment that has that much volatility.”
Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, said that most of her clients prioritize stability and long-term growth over high-risk opportunities and that the “relatively early stage of Bitcoin ETFs in the financial landscape and the ongoing volatility associated with Bitcoin” are the main factors keeping Bitcoin ETFs out of their investment strategies.
Cathy Curtis, founder of Curtis Financial Planning in Oakland, California, said she doesn't know if bitcoin will ever be a stable asset class, but she would consider adding it to her clients' portfolios if it shows stable returns over at least 15 years.
“If it proved to be a true diversifier alongside stocks, maybe,” she said. “The history of this asset has not shown me that.”
Apex Financial's Baker pointed out that investors have decades of software and tools that show them how a certain percentage of a particular bond, ETF or other asset in a portfolio can increase returns, increase volatility, etc.
“As a group, we are quite conservative and somewhat risk averse,” Baker said. “We are used to looking at charts and [asking] How this thing has developed and in which markets – that’s almost how we’re wired.”
Since the funds are still on the market for a few years, investors could create similar models with bitcoins, he added. That will help advisors get excited about the funds. He also said that it's just a matter of when, not if, advisors will adopt them.
“At this point … everyone should be convinced that [bitcoin’s] here to stay, [they’re] We just don't understand some of the metrics in a similar way to how we can look at and value stocks or bonds,” he said. “We just don't have that foundation, and that's another reason why adoption is so slow.”
“I guess adoption will be slow,” he added. “I firmly believe that we will see an uptick or increase in the use of advisors in the next two to three years.”
Not sufficiently regulated
Although Bitcoin ETFs are now a regulated investment vehicle in the U.S., it is still unclear if and when advisors will be able to recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York City.
“A lot of this still has to do with compliance departments and what broker-dealers will allow their advisors and ETF providers to do,” he said. “Just because the ETF came out doesn't mean the floodgates were open or that it's easy for them to invest in it.”
Jenkin said that some broker-dealers have approved the purchase of Bitcoin ETFs but limited the amount that can be purchased, and that other firms do not allow their advisors to sell Bitcoin ETFs at all.
Some say this is due to cryptocurrencies' notorious reputation for fraud, scandals and crime – a situation that gets cleaned up a little better each year but has undoubtedly left scars on the industry. Others point to the industry's lack of regulation, which increases the likelihood of consumer complaints, possible lawsuits against broker-dealers and possibly fines from the Financial Industry Regulatory Authority (FINRA).
“One reason this is still not popular is the massive compliance issues within the industry,” Jenkin said. “Many firms are very nervous about the communications that financial advisors have with their clients about digital assets, and none of them want to run afoul of FINRA.”
“Most broker-dealers are risk mitigators,” he added. “They want to enable advisors to do things for their clients, but they certainly don't want the spotlight thrown on them for taking on even more risk. That's why the acceptance of this approach is so low.”
build up trust
Bitcoin and its ETFs need more time in the market to gain the trust and acceptance of major players like Vanguard. Vanguard stated earlier this year that it had no plans to offer them and would not change its stance until the asset became less speculative.
“That's coming,” Boneparth said of customer confidence. It will come with time — “from the early days to the more mature days. We're coming from years of exchanges failing — that's not a failure of Bitcoin, but it muddies the waters.” [and] the trust of the people.”
Until then, the best position for consultants is to educate their clients, he added.
“Even though Bitcoin ETFs fundamentally represent a less risky and more regulated way to invest in digital assets… the association with Bitcoin is still a deterrent. [clients]” said Dorsainvil.
Given the added complexity of the use cases and functionality of this cryptocurrency, advisors may be even more put off by Ether ETFs. Last week, the Securities and Exchange Commission gave U.S. exchanges the green light to list spot Ether ETFs, which many investors also expect to be successful, but perhaps only a fraction of the success of Bitcoin ETFs.
“ETFs have made it very easy for institutions, from pension funds to large funds,” Boneparth said. “That's really where we're seeing the majority of funds flow into these Bitcoin ETFs. … At the retail advisor level, it's still pretty cumbersome.”