Crypto collapse sheds new light on loyalty to digital assets

The much-celebrated launch of a few cryptocurrency funds and platforms late last year has turned into a test of wills, as digital currencies have been falling in stride with the financial markets so far this year.

“We have a lot of clients who already own and want to own cryptocurrencies, and we’ve been opening a lot of accounts because of the crash,” said Blair duQuesnay, investment adviser representative at Ritholtz Wealth Management.

In early December, Ritholtz launched a platform along with WisdomTree to offer access to a diversified cryptocurrency index in the form of a separately managed account on the Onramp Invest platform. But with the price of Bitcoin down more than 24% in January, duQuesnay no longer has to remind clients that the cryptocurrency is “four to five times as volatile as the equity markets.”

“We’ve told clients, as soon as you invest in something like this, imagine a 50% pullback is the norm,” she said. “That is the expectation you should have when investing in something this volatile. We’ve said, ‘Take the investment you have, divide it in half and add the second half when the price drops by 50%.'”

Bitcoin, which is still up 14% over the past 12 months, is clearly volatile. But the current pullback can be traced, coincidentally, to the timing of the first exchange-traded fund offering exposure to Bitcoin futures contracts.

The ProShares Bitcoin Strategy ETF (BITO) gave U.S. investors their first taste of a liquid crypto strategy in the form of an ETF.

BITO, like the other ETFs that launched in its wake, doesn’t offer direct access to the cryptocurrency; as futures-based products, they are considered more of a trading vehicle than a long-term investment.

But as the first to market, BITO set the bar high and continues to gain appeal among some investors. Following its Oct. 18 launch, BITO set a record by attracting $1 billion in just two days. And even though the fund is down 44% from its October launch and down nearly 20% so far this year, it's still seeing daily trading volume of more than $100 million.

“This ETF is a legit player simply because of that volume,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.

Since the end of October, BITO has taken in more than $400 million, but the negative performance has dragged the fund's total assets down to $943 million.

Balchunas decribes it as “ironic” that the arrival of the first Bitcoin ETF coincided with the digital currency's recent market top, but added that crypto's recent performance also illustrates that it's not proving to be the market hedge it has often been promoted to be.

“Turns out that the BITO launch was a ‘sell the news’ moment for Bitcoin,” he said. “Bitcoin has always been pitched as the new gold, but it’s behaved like a high-beta stock.”

Despite the extreme recent volatility in the crypto space, financial advisers continue to migrate toward the asset class, albeit cautiously, according to a recent report by Bitwise and ETF Trends.

The report, based on responses from nearly 1,000 advisers in December, found that 82% of advisers would prefer a spot-price Bitcoin ETF over the currently available futures-based products.

The Securities and Exchange Commission has yet to approve an ETF that invests directly in digital currencies, and Nate Geraci, president of The ETF Store, doesn’t see that happening anytime soon.

“The SEC wants to see a much more robust regulatory framework in place around crypto,” he said. “I think the SEC will continue to delay a decision on spot-price filings until they eventually deny them.”

In terms of the continued migration toward crypto investing by financial advisers, Geraci said the volatility is only a minor deterrent. “I don’t think advisers go into Bitcoin expecting it to be a smooth ride, so I don’t think the volatility will dissuade them.”

According to the Bitwise/ETF Trends survey results, regulatory concerns rank as the top reason advisers aren't allocating more to crypto assets.

In terms of client allocations, the survey showed 59% of advisers say less than 5% of their clients are invested in crypto, while 5% of advisers say more than half their clients own crypto.

In terms of the portion of client portfolios allocated to crypto, 30% of advisers say less than 1% of client portfolios are allocated to crypto, according to the survey, while 7% of advisers say client allocations to crypto are as high as 25%.

While access points to crypto range from direct investing to a host of funds offering various forms of exposure and proxies for the digital asset, at least one platform is promoting a means of dodging volatility, which makes a case for sitting on the sidelines.

In July, Thor Financial Technologies and Eaglebrook Advisors launched a separately managed account platform that promises 70% of crypto’s upside performance and 40% of the downside risk.

So far, so good.

According to Brad Roth, Thor’s founder and chief investment officer, the model portfolio sold Bitcoin at $62,000, or about $26,000 above where it's currently trading, and sold Ethereum at $4,200, or about $1,800 above where it's currently trading.

As a result, Roth said, the strategy is flat since the start of the year.

“The crux of the strategy is looking at the large cycle of what Bitcoin is doing in real time,” he said. “If there’s changes in the cycle, we want to protect those assets by moving into dollars. When the cycle changes, we’ll take the other side.”