Broker-dealers and bitcoin ETFs: To sell or not to sell?

'Financial advisors don’t understand bitcoin,' one senior executive notes. 'It's a disaster waiting to happen.'

Now that buying and selling bitcoin has evolved to encompass exchange-traded funds that invest in the digital asset, broker-dealers will inevitably ponder the Shakespearian question about a bitcoin ETF: to sell or not to sell?

On Wednesday, the Securities and Exchange Commission at long last approved spot-price bitcoin ETFs, although as InvestmentNews noted, it did not do so entirely willingly and will all but certainly be watching product providers very closely.

Will broker-dealers, which are the gatekeepers for hundreds of thousands of financial advisors with millions of retail clients, allow their brokers to sell or recommend a notoriously volatile, speculative financial instrument?

Broker-dealers typically have tight restrictions on trading volatile products such as futures and options contracts, which require special training at many firms. Volatile alternative asset classes, including currencies and metals, also face strict limitations in client portfolios.

It’s far too early to tell what the eventual use of bitcoin ETFs will be at most firms, as due diligence and compliance staff are just now taking a look at the dozen or so products that broker-dealers could sell. Regardless, the spot bitcoin ETF is coming to broker-dealers, one executive noted.

“It’s probably inevitable, maybe in a few weeks, we’ll have to approve one or two of these bitcoin ETFs due to a small but vocal minority of financial advisors within the salesforce who are devoted to it,” said the senior brokerage executive, who asked to speak confidentially. “It’s like a gold allocation in a portfolio for those advisors: 2% to 3% of a client’s assets and it’s not correlated.”

“But not everyone has done the due diligence on these funds,” the executive added. “They have to answer the questions: What is the expense structure for each fund, or does it have other digital assets in it other than bitcoin?”

Financial advisors trading a bitcoin ETF comes with concerns, said another senior brokerage executive.

“Financial advisors don’t understand bitcoin, and I don’t think crypto is an asset class,” said the executive, who also asked not to be named. “Ask half these advisors to explain it and they don’t know what it is. But it’s a disaster waiting to happen. I was shocked the SEC approved this.”

“Like most products, if there is a demand for it, firms will find a way to sell it,” said Sandy Ressler, managing director at Essential Edge Compliance Outsourcing Services. “But after the 2022 debacle in cryptocurrency, I don’t know if there’s any real demand for it anymore.”

On Wednesday afternoon, the SEC issued a statement indicating that it had indeed approved a host of exchange-traded products, a development that came a day after its Twitter account was compromised and posted a false announcement that the regulator had done so.