Report Suggests Financial Advisors Moving into Crypto

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According to a report released last week by Bitwise, financial advisors are increasingly exploring allocations in crypto. The findings suggest it might be time to buy before the masses arrive.

Bitwise Report Shows Growing Interest in Crypto

Bitwise’s 2020 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets revealed that financial advisors are demonstrating a growing interest in allocating client assets in virtual currencies.

The survey, conducted in December last year, asked independent registered investment advisors (RIAs), broker-dealer representatives, financial planners, and wirehouse representatives for their views on making crypto investments on behalf of their clients.

415 responses were gathered, an almost threefold increase in the response rate from a year ago.

The average respondent held between $50 to $99.99 million in assets under management. Only 6% of advisors currently allocate client capital to cryptocurrencies. More than two-thirds of those advisors were RIAs, who face lower regulatory and reporting burdens. Another 62% of them had investments in crypto assets themselves.

Bitwise found that the number of crypto-centric advisors is expected to more than double to roughly 13% in 2020. There are four primary drivers behind the rapidly growing interest in digital assets.

Four Drivers of Crypto-as-Investment 

Crypto’s low or uncorrelated returns with other assets are the key motivating factors attracting advisor interest, according to Bitwise:

“[Financial] advisors reported the most attractive motivation for allocating cryptoassets to client portfolios was the low or uncorrelated nature of crypto returns when compared with traditional asset classes. 54% of all surveyed advisors highlighted this merit. That number was up significantly from last year, when 42% of respondents identified crypto’s low or uncorrelated returns as attractive.”

Approximately one-third of financial advisors surveyed also cited the potential for high returns from investing in crypto. Bitcoin, for instance, is up more than 30% year-to-date. Altcoins have also enjoyed a stellar start to 2020, with BTC dominance falling from around 70% in September last year to 63%. That comes despite its own surging price.

Client interest has risen, too, with 26% of respondents reporting “clients are asking for it” as another reason driving advisor interest. Over three-quarters of financial advisors surveyed said they had received a question from a client over the past year, a similar result to 2018.

Furthermore, 23% of advisors cited a desire to win new business as a driver of interest. RIAs especially were found to have been considering ways to differentiate their services from competitors.

Interest Remains Nascent, For Now

While the Bitwise survey suggests interest levels are growing, allocations remain small.

Only 6% of financial advisors currently have crypto allocations for their clients and client-driven interest remained low, at around 10%. Only 9% of advisors listed “inflation hedging” as a driver of interest, suggesting investors still perceive digital as speculative risks.

The survey was also designed to measure intentions rather than actions. Advisors with current crypto allocations expressed no intention to either increase or decrease the sizes of those allocations. Among advisors without crypto allocations, only 1% said they would “definitely” add one and 6% said they “probably” would. 38% said they were “unsure,” and over half said they would “probably not” or “definitely not” invest in crypto assets.

The size of crypto allocations remains tiny and the changes, while substantial, would still amount to a little over 10% of total assets under management if implemented over the course of the year. 

Significantly, however, more than half of the advisors who responded to the survey said their increases in crypto allocations would come from alternative investment vehicles. Alternative investments are typically unregulated and can range from private equity or venture capital, hedge funds, managed futures, art and antiques, real estate, to derivatives contracts. 

Cash infusions represented 15% of intended new crypto allocations for 2020, with a swap from equities and commodities into crypto being at 12% each.

Those findings suggest that crypto assets remain exotic and these still intentions need to play out before it can be said definitively that an allocation in digital currencies plays some role in an average family’s managed wealth portfolio.

The Significance of the Findings

The perception of virtual currencies as exotic and speculative investment vehicles aside, the findings do have some significance.

Institutional interest and inflows into crypto have been a slowly growing trend. As has been widely reported, Grayscale raised $607 million in inflows in 2019, besting cumulative inflows from 2013 to 2018 combined. Grayscale has become somewhat of a bellwether for the health of institutional interest.

Interest among advisors represents a different class of investor interest. Financial advisors in the U.S. manage most of the family wealth in the country, currently directing around $22 trillion in assets. While self-directed investors have been the primary individual or household-level investor class in crypto assets, they supervise only one-fifth of that amount.

With financial advisors becoming more interested in crypto allocations in their clients’ portfolios, the level of interest in digital currencies could climb. Even if they remain driven by speculative investment demand, crypto assets are likely to witness some significant price pressure in 2020.

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