Crypto for Advisors: Is Bitcoin for You?

It’s
been
an
active
week
in
the
U.S.
regulatory
space
for
such
a
short
week.
The
CEO
of

Binance
steps
down
as
CEO
along
with
a
$4
billion
settlement
with
the
Department
of
Justice,
the

SEC
is
suing
Kraken
for
operating
as
an
unregistered
exchange,
and

Bittrex
Global
announced
they
are
shutting
down.

The
battle
for
regulatory
clarity
seems
well
underway.
As
bitcoin
reached
status
as
the

11th
largest
market
cap
for
a
global
financial
asset,

Zach
Pandl
from

Grayscale
takes
us
through
bitcoin
in
your
portfolio.

Happy
reading.

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●
Bitcoin
is
a
high-risk
and
high-return-potential
asset
with
a
low
correlation
to
stocks.
Therefore,
Grayscale
Research
believes
an
optimal
portfolio
for
many
investors
should
include
a
moderate
allocation
to
Bitcoin.

Bitcoin
is
both
a
technological
marvel
and
a
large,
liquid
investable
asset.
And
while
public
blockchain
technology
can
be
difficult
to
understand
due
to
its
highly
technical
nature,
the
role
that
bitcoin
and
other
crypto
assets
can
play
in
a
portfolio
is
fairly
straightforward.
Crypto
markets
offer
high-risk/high-return-potential
assets
that
haven’t
been
tightly
correlated
with
stocks
over
a
five-year
time
horizon.,
and
can
therefore
be
useful
ingredients
for
risk-tolerant
investors
when
constructing
an
optimal
portfolio.

Building
a
diversified
portfolio
with
compelling
returns
has
gotten
harder.
The
classic
60/40
portfolio
of
stocks
and
bonds
will
struggle
to
produce
returns
comparable
to
the
last
40
years.
We
believe
there
is
simply
no
room
for
valuations
to
expand:
equity
multiples
are
already
high
and
the
secular
bull
market
in
bonds
is
over
(attributable
to
a
bottoming
in
consumer
price
inflation).
Stocks
and
bonds
are
also
now
more
correlated,
so
investors
get
fewer
diversification
benefits
from
pairing
them
together.
Opportunities
in
public
markets
are
shrinking,
too:
compared
to
the
1990s,
there
are
fewer
IPOs
and
the
number
of
listed
firms
has
declined
by
around
30%.

To
address
these
challenges,
investors
face
a
standard
menu
of
options
(Exhibit
1).
To
improve
the
tradeoff
between
risk
and
return
in
portfolios,
they
can
reallocate
to
asset
classes
providing
better
risk-adjusted
returns,
lower
correlations,
or
a
bit
of
both.
In
recent
years,
for
example,
certain
investors
have
increased
their
allocations
to
alternatives,
including
illiquid
private
assets
like
private
equity
and
real
estate.
Although
this
has
been
a
successful
approach,
these
types
of
vehicles
are
not
available
to
many
individual
investors.

Exhibit
1:
Traditional
assets
offer
a
standard
risk/return
tradeoff
…

Exhibit
2:
….
And
crypto
greatly
expands
the
available
options

Crypto
assets
provide
something
truly
differentiated.
From
an
asset
allocation
perspective,
bitcoin
and
other
digital
assets
greatly
expand
the
risk/return
profile
available
to
public
market
investors
(Exhibit
2).
Bitcoin
and
other
crypto
assets
like
Ethereum
have
high
volatilities
and
should
be
considered
high
risk.
However,
they
have
produced
returns
over
time
commensurate
with
their
risk
profile.
In
other
words,
while
bitcoin
has
a
high
volatility;
the
ratio
of
its
returns
to
its
volatility
is
broadly
similar
to
other
asset
classes.
Adding
crypto
assets
to
a
portfolio
can
therefore
be
thought
of
as
taking
additional
investment
risk
in
exchange
for
higher
potential
returns.
Investors
can
consider
substituting
crypto
assets
for
other
high
risk/high
return
assets
like
technology
shares,
non-U.S.
equities,
and/or
certain
illiquid
private
investments,
in
order
to
improve
portfolio
performance.

Although
the
crypto
asset
class
has
produced
high
historical
returns,
it
has
not
been
very
correlated
with
other
risky
assets.
For
example,
over
the
last
five
years
the
correlation
between
bitcoin
and
the
S&P
500
has
been
just
40%,
compared
to
a
90%
correlation
between
for
the
Nasdaq
100
and
the
S&P
500.
A
lower
correlation
to
stocks
means
that
crypto
allocations
in
a
portfolio
should
provide
greater
diversification
benefits
than
certain
other
pro-risk
assets.

Crypto
is
a
nascent
young
asset
class
and
should
be
considered
relatively
high
risk.
Bitcoin
and
other
crypto
assets
may
not
be
suitable
for
investors
with
defined
capital
needs
in
the
relatively
near
future
(e.g.,
within
the
next
three
to
five
years).
Savings
allocated
for
upcoming
expenses
related
to
college
tuition
or
home
purchases,
for
example,
should
probably
not
include
crypto
allocations.
Lastly,
investors
prioritizing
asset
income
should
consider
alternative
options.

However,
for
investors
with
relatively
high
risk
tolerance,
crypto
greatly
expands
the
risk/return
opportunities
available
in
public
markets.
Because
of
these
assets’
high
return
potential
and
low
correlation
with
other
risky
assets,
an
optimal
portfolio
for
many
investors
should
include
a
moderate
allocation
to
crypto.

–


Zach
Pandl,
Managing
Director,
Research,
Grayscale

Q:
What
Impact
will
a
Spot
BTC
ETF
have
on
the
price
of
Bitcoin?

Bitcoin
is
one
of
the
few
assets
that
could
directly
impact
the
price
of
an
ETF.
Since
we
know
there
is
a
limited
supply
of
bitcoin
–
21
million
total
available
ever
with
19.5
million
mined
–
the
demand
for
a
spot
ETF
will
take
up
some
of
that
supply
and
have
to
hold
it
as
long
as
there
is
still
interest
in
the
ETF.
Its
a
supply
and
demand
situation.

Q:
The
demand
for
the
ETF
might
go
down,
so
will
the
overall
price
of
bitcoin
drop?

There
could
be
follow-on
effects
from
a
spot
BTC
ETF
approval
as
it
could
symbolize
a
thawing
of
the
regulatory
resistance
to
bitcoin,
and
possibly
to
crypto
overall.
Approval
by
the
SEC
for
the
spot
ETF
would
make
investments
in
bitcoin
more
palatable
for
institutions.
We
may
also
see
more
401k
providers
allowing
bitcoin
as
an
investment
option.
Overall,
the
demand
for
bitcoin
could
be
exponentially
larger
than
the
demand
for
the
spot
ETF
after
approval.

Q:
I
can’t
put
my
clients
into
bitcoin
right
now.
How
can
I
get
them
some
exposure
before
the
spot
ETFapprovals?

There
are
ways
to
get
exposure
to
bitcoin
before
an
approval,
and
still
keep
the
clients
in
regulated
investments
within
your
custodian
and
AUM.
Remember,
we’re
not
giving
investment
advice,
so
DYOR.

Some
examples
include:

GBTC
–
The
Grayscale
Bitcoin
Trust
is
trading
at
a
small
discount,
and
will
likely
be
converted
to
an
ETF
with
the
approval
of
other
ETFs.
This
means
clients
invested
in
this
trust
will
get
the
discount
taken
up,
in
addition
to
any
price
appreciation
in
bitcoin.

Bitcoin
mining
stocks
such
as
–
Riot
Blockchain
and
Marathon
Digital
are
publicly
traded
companies
that
do
nothing
but
mine
bitcoin.
If
the
value
of
their
product
increases
significantly,
logic
tells
us
their
stock
prices
should
appreciate
as
well.

Coinbase
–
COIN
is
the
publicly
traded
company
that
is
an
exchange
and
a
custodian,
and
stands
to
benefit
from
more
interest
in
crypto
overall.
They
have
a
diversified
revenue
model,
and
the
thawing
of
regulatory
stance
helps
them
tremendously.

–


Adam
Blumberg,
Interaxis

South
Korea’s
National
Pension
Fund

invested
close
to
$20
million
in
Coinbase.

Inflows
Into
Digital
Asset
Investment
Products
Cross
the
$1
Billion
Mark
—
Study

This
week

Coindesk
was
acquired
by
Bullish
and
the
message
is
“business
as
usual.