Bitcoin ETFs could open floodgates to $30 trillion wealth management market

Now that bitcoin ETFs are trading across U.S. public markets, many large money managers that have been effectively locked out of crypto finally have a way to access the primary digital currency.

For the $30 trillion advised wealth management industry, the floodgates could be about to open. Analysts at Standard Chartered anticipate fund inflows in the range of $50 billion to $100 billion in 2024.

“Bitcoin is beginning to become a benchmark asset for the younger generation,” said Anthony Pompliano, founder of Pomp Investments. “We know most investors can’t beat benchmarks, so adding the new benchmark to your asset allocation is the only way to try to keep up.”

Bitcoin rose as high as $49,000 on Thursday, reaching levels not seen since December 2021, before dropping Friday to around $43,000. It soared 150% last year following a brutal selloff in 2022.

Wide swaths of the investment world missed out on the 2023 rally. According to VanEck CEO Jan van Eck, many fiduciaries, financial advisors and banks had been explicitly told in the past “not to touch crypto,” due largely to its unregulated nature.

That changed on Wednesday after the Securities and Exchange Commission cleared the sales of spot bitcoin ETFs, allowing investors to access bitcoin the same way they purchase stock and bond index funds. SEC Chair Gary Gensler continues to issue stern warnings when it comes to crypto investments, but that’s not holding back activity.

For its Hundredfold Select Alternatives Fund, mutual fund manager Advisors Preferred Trust is investing up to 15% of total assets for indirect bitcoin exposure through funds and futures contracts, according to a recent prospectus.

Pompliano says “most passive funds are looking for ways to increase performance.”

Bitwise Asset Management is one of the 11 issuers that were granted initial approval for a bitcoin product. Chief Investment Officer Matt Hougan said the Bitwise Bitcoin ETF, which is offering the lowest fee at 0.2% of holdings, is primarily targeting financial advisors and family offices.

“That includes RIAs [registered investment advisors] and includes, eventually, wirehouses — that is a many trillion dollar market,” said Hougan, adding that advisors are “increasingly carving out” an allocation of 1% to 5%. “We know that they’re interested in crypto, and we know that they’ve been waiting for an ETF.”

In a survey of financial advisors recently conducted in conjunction with VettaFi, a data-driven ETF platform, Bitwise found that 88% of advisors interested in purchasing bitcoin were waiting until after a spot bitcoin ETF was approved. Among advisors who already invest in crypto, large allocations (more than 3% of a portfolio) more than doubled to 47% in 2023 from the prior year.

“For the vast majority of people, a low-cost bitcoin ETF is going to be the easiest way to do that,” Hougan said.

According to data from Robinhood, 81% of bitcoin ETF trading volume in the first week was in individual accounts, with the rest in retirement accounts.

Even before the SEC’s announcement Wednesday, the 2022 CFA Institute Investor Trust Study found that 94% of state and local pension plans had some crypto exposure. The new products potentially offer more legitimacy and lower costs for retirement plans that want to increase allocation.

Financial firms are offering differing advice on how best to enter the space.

In a report on its website in October, Galaxy Digital said the “strongest marginal improvement” occurred when portfolios moved from a 0% to 1% bitcoin allocation. As far back as 2019, WisdomTree said that adding bitcoin to a portfolio that’s traditionally 60% equities and 40% bonds “can improve the risk-return profile” and that from 2014 to 2019 “even a one percent allocation led to an 8.3% outperformance versus the base portfolio.” 

Fidelity analyzed performance through mid-2022 and noted that “bitcoin boosted a portfolio’s returns during specific periods in the past, though it also came with substantial volatility.” To date, the firm said, bitcoin has not held up well as a hedge against inflation, but it acknowledged that “assessing this was challenging, given that inflation has been low throughout most of bitcoin’s history.”

Castle Island Ventures founder Matt Walsh, who previously led a number of Fidelity Investments’ blockchain and cryptoasset initiatives, said the types of funds quickest to jump into the market are likely to be those with a focus on high-growth tech stocks. But he also sees broader appeal.

“I think you could also see it in commodity-based portfolios, like gold-based funds that see this as a sort of digital gold,” said Walsh.

WATCH: SEC approves bitcoin ETFs