What should advisors do or say when clients ask about Bitcoin, whose prices have surged over 1,000% this year but lost $2,000 within a few hours on one day in November?
Interest in the cryptocurrency is soaring. In Japan, the financial services regulator has approved 15 virtual currency exchanges. In the U.S., Coinbase, the biggest Bitcoin brokerage, added 300,000 customers in a week, and the Commodity Futures Trading Commission last week gave approval for the CME and CBOE Global Markets to trade Bitcoin futures contracts. The CBOE expects to launch its contract Dec. 10 followed eight days later by the CME, and Nasdaq is planning to introduce its own Bitcoin futures contract early next year.
“Digital assets are here to stay,” says Gabor Gurbacs, director of digital asset strategy at VanEck, a global money manager. He views the CFTC approvals in the U.S. and interest in Asia as signs that Bitcoin is maturing as an emerging asset class.
Bitcoin has a place in portfolios, says Gurbacs, albeit a small one, with a 0.5-1% of assets in allocation strategy and 1% to 3% in a more aggressive growth strategy.
(Related: With Future Uncertain, Bitcoin Is a Gamble)
VanEck will be monitoring the CME and CBOE Bitcoin futures contracts in the hopes of re-filing its own Bitcoin ETF strategy with the Securities and Exchange Commission. The registration filing was withdrawn after the after the SEC refused to review it because the underlying assets — Bitcoin futures contracts — weren’t yet available.
Jill Schlesinger, a senior ambassador of the Certified Financial Planner Board of Standards and a former options trader, agrees with Gurbacs that the CFTC green light on Bitcoin futures contracts is a sign of maturation but not of maturity. She recommends that advisors not include Bitcoin in clients’ portfolios until there is regulatory oversight from the SEC and consumer protections. “Bitcoin should be considered a trip to Vegas. You might win or you might lose but you’re going to be on a wild ride.”
The SEC on Monday charged a Canadian firm and its owner with fraud for marketing an initial cybersecurity coin offering claiming it would yield over 1,300% profit in 29 days and immediately froze their assets.
To date, interest in Bitcoin in the U.S. has come primarily from retail investors who can purchase the cryptocurrency via a Coinbase account or buy shares of the Bitcoin Investment Trust (GBTC). Institutional investors are mixed.
JPMorgan CEO Jamie Dimon calls Bitcoin a fraud worse than the tulip bulb mania of the 1600s. Vanguard founder John Bogle says to avoid it like the plague. BlackRock CEO Larry Fink calls Bitcoin “a very speculative instrument” that “people use for money laundering,” since it is anonymous, and Warren Buffett, UBS chairman Axel Weber and Credit Suisse Group AG CEO Tidjane Thiam all say Bitcoin is a bubble.
But not all financial executives are writing off Bitcoin.
James Gorman, CEO of Morgan Stanley, says Bitcoin and other cryptocurrencies are “more than just a fad.” Fidelity CEO Abigail Johnson is a fan of Bitcoin and other cryptocurrencies and reportedly told a conference in September that the firm has set up a small Bitcoin and Ethereum mining operation that is making money. Fidelity’s donor-advised fund as well as Schwab’s accept Bitcoin donations.
Michael Novogratz, the former macro hedge fund manager at Fortress Investment Group, has been buying Bitcoin, which he calls “a speculator’s dream” because of its limited supply, and says prices could climb to $40,000 by year-end. He’s is planning to launch a $500 million digital assets fund through his new firm, Galaxy Investment Partners, and expects mainstream institutional investors will be adopting Bitcoin in about six to eight months.
“There is something there but it’s early and the value is extremely uncertain,” says Jim Sinegal, a Morningstar analyst. “Bitcoin could be much bigger or it could be gone in five years. You could invest today and lose it all tomorrow.”
Robert Sinche, global strategist at Amherst Pierpont, expects the rally will end badly. He views Bitcoin as a phenomenon that’s caught everyone’s fancy because it’s one of the few investments that shines and moves in today’s unexciting, low-volatility environment. “Bitcoin is a figment of people’s imagination. Some say it’s a currency. It’s not. It goes up and down 20% against the dollar on a daily basis. Some say it’s a commodity. It’s not; I can’t do anything with Bitcoin. There’s nothing underlying it.”
— Related on ThinkAdvisor:
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- Authoritarian Cryptocurrencies Are Coming
- FINRA Warns Investors on Initial Coin Offering Risks, Fraud
- Will Bitcoin Ever Be a Fiduciary Asset?