A bitcoin ETF seems to be just around the corner. How will financial advisors react?

Published Thu, Nov 9 20232:24 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

The looming decision by federal regulators about whether to allow a bitcoin ETF in the United States could unleash new demand from financial advisors across the country — even if some of those professionals are still skeptical about crypto. At least nine asset management firms are vying to create a spot bitcoin ETF, including industry leader BlackRock, and those funds could check a lot of boxes that advisors have been waiting for to jump into crypto. A Nasdaq survey of 500 financial advisors in 2022 found that 72% of advisors would be more likely to invest in crypto if spot ETFs were launched in the U.S. "You can easily add these to your diversified portfolio, you can easily rebalance, you can do dollar cost averaging, you can engage in tax loss harvesting. All of the services that advisors like to provide to their clients are easily done with these ETFs," said Ric Edelman, the founder of crypto education company Digital Assets Council for Financial Professionals. Edelman also founded Edelman Financial, a large firm of registered investment advisors. The demand for the ETFs could come from investors who are switching from other crypto investments, while also bringing in people and their advisors who have so far stayed away, Edelman said. The Securities and Exchange Commission has long opposed such a fund, but the regulator recently saw a court toss out its decision to block Grayscale from converting its bitcoin trust ( GBTC ) to a more liquid ETF. The SEC declined to appeal the court's ruling, but could still decide to block the GBTC conversion under a different reasoning. However, many industry experts expect that the regulator will allow the conversion and the launch of multiple other funds, perhaps in the first quarter of 2024. The potential of a bitcoin ETF has appeared to help fuel a recent rally in the cryptocurrency. Bitcoin has jumped more than 40% since Blackrock filed for its ETF in June, and bitcoin hit a six-month high on Thursday morning. BTC.CM= YTD mountain Bitcoin has rallied sharply since June. Concerns from advisors Crypto's dramatic rise has largely come without the embrace of the traditional financial system, such as financial advisors and major banks. While total performance has made early bitcoin investors wealthy, the asset class has also seen significant volatility and major scandals, such as the collapse of Sam Bankman-Fried's FTX . Those issues and some of the nuances of crypto have largely kept advisors out of the space, said Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research. "The RIA community has been relatively slow to adapt to cryptos, with good reason. Custody is a huge issue," Frederick said. Having crypto in a familiar ETF wrapper, and with well known issuers like BlackRock and Fidelity, could ease those concerns. "They essentially then own the risk of the asset, if you buy an ETF where they invest it. It's an indirect investment. I think it would make it a lot easier [for advisors], certainly," Frederick said. But not all financial advisors seem ready to embrace crypto just because investing in it is simpler. "We're CPAs by nature. So we have a valuation business, those sorts of things. So we like to stick to things we think we can sort of value. And so crypto is very, very difficult to value," said Andrew Morgan, the CIO at financial firm Taylor & Morgan in Michigan. Client demand Even if advisors are skeptical of crypto, the arrival of bitcoin ETFs is sure to generate more questions from clients. "That is one of the biggest ones. When I read through what we call our copy talk notes, or our meeting notes, that's one of the questions they always ask. They're asking about bitcoin and the ETFs that are going to coincide with that," said Amy Hescht, senior client service specialist at Presper Financial Architects in Akron, Ohio. Crypto trading volumes have declined as bitcoin and other coins fell into a bear market. But given the number of funds poised to launch, interest from clients could increase again as fund issuers spend on marketing, Edelman said. "Advisors need to engage. Even if they don't want to, even if they hate bitcoin. They're not going to be able to remain on the sidelines, because they'll look foolish in the eyes of their clients if they attempt that," Edelman said. Even if the funds are approved, many advisors won't start using them overnight, due to either their own misgivings or existing rules about using new products. Some financial advisory firms and platforms have rules about fund's reaching a certain size or track record threshold before allowing their use. "It might be possible that due to client demand that firms will have no choice but to accelerate their approval process and accelerate their due diligence activities, but they will still be slow to adopt," Edelman said.