Close Close
ThinkAdvisor
X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Cryptocurrency exchanges tend to have high transaction fees.
  • Individuals can invest in ETFs that own companies holding Bitcoin and in Bitcoin futures.
  • Venture capital crypto investing may be an option for high-net-worth clients.

Investors have shown growing interest in the cryptocurrency market and may find a few different ways to participate.

More than 90% of financial advisors reported that their clients asked about crypto last year — a significant increase over the previous year — according to the Bitwise/ETF Trends 2022 Benchmark Survey of Financial Advisor Attitudes Toward Crypto Assets.

Recent market turmoil undoubtedly has shaken the industry; leading crypto trading platform Coinbase announced on June 2 it was placing a pause on hiring “for the foreseeable future” and rescinding accepted job offers. Gemini, another crypto exchange, announced a 10% workforce reduction the same day, saying the crypto revolution is “well underway” but has entered a contraction phase, or “crypto winter.”

On the same day, however, Ric Edelman, founder of the Digital Assets Council of Financial Professionals, noted that crypto is projected to generate $5 billion in advisory fees in the next five years and cautioned financial advisors not to ignore what he called the first major new asset class in 150 years.

Here are a few ways individuals can own digital assets or invest indirectly in the cryptocurrency market.

Cryptocurrency Exchanges

As Morningstar noted in its 2022 Cryptocurrency Landscape report, several digital asset exchanges offer consumers the ability to directly trade cryptocurrencies. Purchasers can buy and sell cryptocurrencies on centralized exchanges dedicated to that purpose, like Coinbase, Gemini, Binance and crypto.com.

Other options, the firm noted, include retail brokerage platforms such as Robinhood and payment apps like PayPal, Venmo and Square. Newer, decentralized exchanges like Uniswap use “smart contracts” to algorithmically connect buyers and sellers, who must trade in cryptocurrencies rather than dollars or other fiat currencies.

“Despite their differences, cryptocurrency trading platforms all have one thing in common — high transaction fees,” according to Morningstar. “Unlike stocks or exchange-traded funds, which most brokerages will allow customers to buy and sell for free, cryptocurrencies still require a premium to trade.” 

(Robinhood is an exception, offering free transactions and listing seven available cryptocurrencies, the firm noted. That platform announced a 9% job cut in April.)

Morningstar analysts have urged extreme caution in investing in cryptocurrency, noting the market is new, risky, quickly evolving and heavily concentrated in two players, Bitcoin and Ethereum. One Morningstar analyst recently noted that “mind-boggling losses are a fact of life” for crypto investors and a portfolio strategist suggested investors keep exposure minimal, carving out allocations from stocks rather than bonds.

Crypto ETFs, Trusts and Funds

Investors looking to participate in the crypto market without directly trading cryptocurrencies have other choices. Morningstar Direct lists more than two dozen products in its digital assets category, which had nearly $28.5 billion in total net assets as of May 31, just over half the level reached at the end of October.

These vehicles include the Grayscale Bitcoin Trust, the largest and oldest on the list with more than $20 billion in assets under management and the ability to be held in brokerage and certain IRA accounts. The private-placement trust, which requires a minimum $50,000 investment, invests in Bitcoin; its own shares trade publicly on the over-the-counter stock market under the GBTC symbol.

Grayscale says the fund allows investors to gain exposure to Bitcoin in the form of a security without “the challenges of buying, storing, and safekeeping BTC directly.” 

Newer, Bitcoin-related ETFs also allow individuals to participate in the market without directly owning the currency. The Securities and Exchange Commission hasn’t yet allowed ETFs to directly own Bitcoin. The first Bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), launched in October, and several others soon followed.

Futures aren’t the only Bitcoin exposures in ETFs.

Earlier this year, Valkyrie, which already offered two ETFs investing in, respectively, Bitcoin futures contracts and stocks of companies holding Bitcoin, launched Valkyrie Capital Bitcoin Miners ETF, which invests in Bitcoin mining companies. Another ETF launched last year, Global X Blockchain & Bitcoin Strategy ETF (BITS), invests in Bitcoin futures and in stocks related to blockchain, the technology underlying cryptocurrency.

Madeline Hume, Morningstar senior research analyst, noted that while the SEC hasn’t approved direct exposure to Bitcoin in ETFs and open-ended mutual funds, the firm’s digital assets category also includes vehicles, such as private trusts and hedge funds, that can directly invest in the physical asset. “GBTC is the most notable example of this,” she said.

Crypto Venture Capital Funds

High-net-worth investors may be able to participate in venture capital and hedge funds that invest in the crypto market. Such vehicles, which typically allow only accredited investors, may invest directly in cryptocurrencies and in blockchain startups and other crypto technology.

(Crunchbase lists nearly 2,400 blockchain startups and cites venture capital, private equity firms and family investment offices among the top investor types.)

Financial advisors with clients interested in VC and other private crypto investing will need to explore the opportunities, get to know the fund managers and conduct due diligence on minimum investment levels and fund liquidity, among other details.

401(k) Plans?

Fidelity, which launched a private Bitcoin fund for accredited investors in 2020, gave a further vote of confidence to the cryptocurrency in April when it announced plans to allow investors to add it to their 401(k) portfolios later this year. 

“There is growing interest from plan sponsors for vehicles that enable them to provide their employees access to digital assets in defined contribution plans, and in turn from individuals with an appetite to incorporate cryptocurrencies into their long-term investment strategies.” Dave Gray, Fidelity’s head of workplace retirement offerings and platforms, said at the time.

Business intelligence firm MicroStrategy, which has become a significant Bitcoin investor itself, said it would become the first employer to offer Fidelity’s new workplace Digital Assets Account in its retirement plan.

The Department of Labor, however, has expressed deep concerns about the plan and Sens. Elizabeth Warren and Tina Smith asked Fidelity how it would address “the significant risks of fraud, theft and loss,” among other points. Earlier this year, the DOL voiced concerns about fiduciaries potentially deciding to expose employee retirement to cryptocurrency risks.

Morningstar’s Hume, answering questions about the idea during a recent conference, noted that plan sponsors generally are a “pretty skittish bunch” and doubted that many would sign up for something that could open them to litigation.

“We cannot share information on confidential conversations with clients but can relay at a high level that we are continuing to field inquiries from interested employers,” a Fidelity spokesperson said. Fidelity is offering the Digital Assets Account to clients today but “the first client won’t be live for a few months due to implementation timing as is the case with all new additions in the core line up.”

As for concerns from regulators and lawmakers, Fidelity has issued a statement saying it “always operates and makes decisions with the highest level of integrity and an unwavering commitment to our customers, including those saving for retirement. We are proud of our Digital Asset Account offering, which is a responsible solution that allows plan sponsors to decide how to meet the demands of mainstream interest in crypto and provide their employees with exposure to digital assets within their 401(k).”

The offering “features several institutional consumer safeguards including but not limited to, excessive trading oversight, investing limits, transparency, market-leading education, and cyber-security features,” the company said. “Fidelity looks forward to continuing the dialogue on this exciting offering with federal regulators and policymakers consistent with our approach to many new services we offer our customers.”

Ali Khawar, a Labor Department official, said in May that the department “had an interesting conversation where they [Fidelity] walked us through, in more detail, how they saw their offering working, what they viewed as their protections.”

“I think they understand the concerns that we have,” he said.