Crypto Is Back: Crypto’s Evolution And Investment Vehicles

Crypto’s Evolution Since Its 2021 Peak, The Pros And Cons Of Crypto SMAs And ETFs, And The Need To Consider Client Risk Tolerance

For most cryptocurrencies including bitcoin and ethereum, the last peak before this year’s comeback occurred near the end of 2021. At that time, the nascent asset class receded from the spotlight, developing as regulators and institutions grappled with it. The recent cryptocurrency upswing brought attention back, and advisors must be ready with answers for inquisitive clients.

To explore what the crypto-asset landscape looks like for advisors in 2024, we spoke with Christopher King, Founder and CEO of Eaglebrook, a cryptocurrency investment solutions provider, which has 700 advisors and 70 RIAs currently using its platform.

We asked King about methods advisors can use for clients’ crypto-asset investments, how crypto-assets have changed since their last peak and which clients crypto-assets are suitable for.

WSR: What methods exist for advisors to place clients in crypto-asset investments? Give a brief description of the current state of each of these.

King: Advisors’ main methods for allocating to crypto-assets for their clients are crypto SMAs and the bitcoin ETF.

The bitcoin ETF, a significant development in the cryptocurrency investment landscape, was approved in January 2024 and has seen inflows that have surpassed even the most optimistic expectations. The ethereum ETF was surprisingly approved at the end of May and is yet to be officially launched.

Crypto SMAs provide direct ownership of bitcoin and ethereum.

Christopher King, Founder and CEO, Eaglebrook

Crypto SMA platforms have been at the forefront of crypto-asset investment vehicles since 2021. Crypto SMAs provide direct ownership of bitcoin and ethereum. Additionally, they allow access to strategies managed by third-party investment managers and diversified exposure to compelling digital assets besides bitcoin and ethereum.

Advisors also leverage crypto SMAs to move clients’ held-away assets under their discretion with in-kind transfers, a process that does not trigger a tax event.

WSR: What are the pros and cons of each of these investment methods?

King: Crypto SMAs’ pros include direct ownership, the ability to automate tax-loss harvesting and access to other crypto-assets besides bitcoin and ethereum.

The ability to efficiently and automatically harvesting tax losses can only be achieved when the client owns bitcoin directly. Automated tax loss harvesting with a crypto SMA allows investors to maintain long-term allocation to bitcoin or other crypto-assets while creating capital losses during downside volatility.

On the negative side, crypto SMAs require additional setup compared to ETFs.

The bitcoin and ethereum ETFs provide clients exposure to the underlying asset’s price movement within a traditional investment vehicle and in a standard brokerage account. No additional steps are required to purchase the ETFs.

The ETFs don’t allow for direct ownership, limiting the opportunity to harvest tax losses.

Christopher King, Founder and CEO, Eaglebrook

On the downside, the ETFs don’t allow for direct ownership, limiting the opportunity to harvest tax losses. Additionally, the ETF doesn’t allow in-kind transfers for clients’ held-away crypto-assets.

WSR: What types of clients are crypto-assets right for? Which clients should advisors steer away from crypto-assets?

King: Crypto-assets should be considered for clients comfortable with volatility who have a long-term investment strategy. Cryptocurrency is an emerging asset class that still experiences high levels of volatility and goes through significant cycles. Advisors should explain these dynamics to clients upfront.

In our client conversations, investors are increasingly raising concerns about the level of U.S. debt and the acceleration of new debt. Some investors utilize bitcoin as a store of value to hedge against higher debt levels and continued increases in the global money supply.

Finally, crypto adds a layer of diversification to a portfolio that might be valuable for certain clients.

Clients with a short-term investment horizon who don’t want to take on a high-volatility asset class should avoid allocating to cryptocurrency.

WSR: How have crypto-assets evolved as an asset class since the last peak in 2021?

King: The crypto-asset class is like night and day across many metrics compared to the peak in 2021.

First, the legitimacy of cryptocurrency is at an all-time high, with sophisticated traditional investors now taking the time to understand the investment case. This was not happening in 2021. The bitcoin ETF has provided another layer of access to cryptocurrency that was not available in 2021, allowing for participation from a broader set of investors. Cryptocurrency has grown from a niche investment held mainly by retail investors to an asset held by institutional investors.

The crypto-asset class is like night and day across many metrics compared to the peak in 2021.

Christopher King, Founder and CEO, Eaglebrook

The regulatory and political landscape is also vastly different today compared to 2021. A couple of weeks ago, the first pro-crypto regulation passed in the U.S. Congress, and the political rhetoric turned from a headwind to a tailwind, with presidential candidates even announcing their support for crypto-assets in the U.S.

Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com.

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