Robos roll out crypto offerings ahead of potential Bitcoin ETF

Robo-advisers have been exploding in popularity for traditional investment options, but few have rolled out offerings to address the increased investor appetite for crypto investing. 

Robo-advisers could be an entryway for new market participants to gain access to Bitcoin, especially since crypto advocates will have to wait until at least June for the U.S. Securities and Exchange Commission to make a decision on a Bitcoin exchange-traded fund.

Wealthfront is ready to surf the crypto wave as the digital advisor explores options to offer the more than 440,000 investors on its platform direct exposure to cryptocurrencies like Bitcoin and Ethereum.  

The robo-adviser, which manages $25 billion in client assets, announced its interest in providing crypto investment options for users as part of a slate of new features that enable clients to build their own portfolios, edit existing portfolios and access a wider range of socially responsible investing options. 

Wealthfront’s decision to explore a crypto offering for clients comes after the platform experienced an increased appetite from users for different investment vehicles, particularly among millennials and Gen Z, said a Wealthfront spokesperson. 

Naturally, digitally native generations typically express openness toward digital assets like Bitcoin. For example, a survey by deVere Group found about two-thirds of more than 700 millennial respondents said Bitcoin is a better safe-haven asset than gold. 

Wealthfront acknowledges that one way to help its largely millennial and Gen Z investors navigate digital assets could be limiting crypto exposure in their portfolios, said the company spokesperson. The platform has allowed users to link their Coinbase accounts since 2018. 

Competing robo-adviser Betterment doesn’t include cryptocurrency in its recommended investment portfolios, but does break down in a recent blogpost tips to guide users through crypto investing. 

“If you do decide to invest in cryptocurrency, it should be in moderation,” wrote Nick Holeman, head of financial planning at Betterment. “Betterment doesn’t recommend it exceeding a maximum of 10% of your portfolio. We also recommend diversifying across multiple cryptocurrencies.” 

While large robos like Betterment have not jumped on the Bitcoin bandwagon, Wealthfront now joins a growing list of fintechs that have been offering mainstream investors crypto access. 

There already are cryptocurrency exchange platforms, like Coinbase, and a handful of fintechs that offer access to digital assets including Square’s Cash App, Robinhood, Sofi and PayPal. Robinhood, for one, reported 9.5 million customers traded crypto in the first quarter of 2021. 

Commission-free trading and social networking app eToro, which announced plans in March to go public via a merger with a blank-check firm set to value the combined company at about $10.4 billion, launched crypto and social trading in the U.S. in 2019.

Like many players in the investing space, Wealthfront is focusing on ways to attract younger clients and with the popularity of cryptocurrencies skyrocketing, Wealthfront is trying to adapt to cater to those interested, said David Goldstone, head of research at Backend Benchmarking.

“Offering cryptocurrency trading is also part of a larger strategy to become a one-stop shop for personal finance needs,” Goldstone said. “Similar to adding checking and savings accounts, cryptocurrency trading eliminates a need for a Wealthfront client to also be a client of another financial institution for products not available at Wealthfront."

Makara, a Seattle-based SEC registered investment adviser, is gearing up to offer automated services for users to invest in crypto through passive exposure to digital assets via seven “thematic baskets,” said Makara co-founder Jesse Proudman. 

“Wealthfront has these thematic ETFs that give investors exposure to the market, and the thesis there is that [Wealthfront] has done the research and the homework for you, and they can help direct or steer you into what you’re supposed to own,” Proudman said. “That’s what we’re trying to bring to crypto.” 

Makara provides an “index-like” experience and the appropriate cryptos based on the basket’s parameters are bought and stored in the investors segregated account. Makara also handles the appropriate transaction reporting for clients’ tax preparations. Gemini is Makara's exchange and custody partner.

With robo-advisers able to provide novice investors an automated way to invest in crypto, Proudman said he questions if a Bitcoin ETF is the best thing for investors. “The entire point of Bitcoin at its origin is that it was to build from new technology — the blockchain — that is outside the bounds of the traditional financial system,” he said.

"To package it up and stick it in a wrapper that is the traditional financial system wrapper, it just doesn't feel like the most efficient way to do it."

To be fair, there's certain scenarios where a Bitcoin ETF is a logical way to approach the market, but as a general way for new market participants to gain access to Bitcoin, there are better alternatives today, he said. 

The fundamental question investors should ask themselves, Proudman said, is whether or not they want to participate in this innovative technology bound by all the constraints that Wall Street presents, or do they want to own a piece of this technological revolution directly. 

“If you're going to participate and be part of this technology revolution, that is crypto, that is Bitcoin, like participate and be part of it, hold the actual asset that meets your level of safety,” he said. “There are a whole multitude of ways to do that, based on what your comfort level is, but doing it in the construct of Wall Street just feels backwards.”