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Grayscale’s Michael Sonnenshein, Amber Group’s Jeffrey Wang, and Tyr Capital’s Edouard Hindi expect financial advisers will usher in a new age of crypto acceptance.
There were several arguments for financial advisors to reject Bitcoin (BTC) and other cryptocurrencies as viable investments in the past, but that is beginning to shift as more institutions become acquainted with the digital asset class. Between September 2020 and April 2021, Bitcoin experienced a face-melting surge, emphasising the need to move past the narrative that crypto currencies are just too speculative to have in investor portfolios.
Grayscale CEO Michael Sonnenshein presented six main trends that could form the cryptocurrency industry in the near future in a keynote address at the 2021 virtual CFC St. Moritz Conference in January. One of these themes was the possibility of increased acceptance by financial advisors.
‘Curiosity and demand’
In a follow-up interview with Cointelegraph, Sonnenshein explained that “curiosity and demand from clients are driving financial adviser interest in crypto.” His conclusion stems from a preliminary survey commissioned by Grayscale showing that “more than half of advisers are receiving questions from their clients about cryptocurrencies.”
While this may not drive immediate action, cryptocurrencies have certainly become a consideration for advisers, he explained. “Ultimately, financial advisers are responding to client demand,” he said, adding:
“Crypto generally and Bitcoin specifically has been well covered in the press, with major corporations and financial institutions making Bitcoin part of their balance sheets, and notable entrepreneurs and investors voicing their investments in Bitcoin. If you’re a knowledgeable investor, you’re going to want to know more about this asset class, and if you have a financial adviser, you’re going to ask them about it.”
Sonnenshein also noted that financial advisers are among the investors who invest in Grayscale’s family of funds, whose combined assets now exceed $46 billion. “Bitcoin remains the most popular digital currency, though we also see growing interest in Ethereum and other digital assets as well,” he said.
According to Edouard Hindi, co-founder and chief investment officer of Tyr Capital, a cryptocurrency hedge fund manager headquartered in the United Kingdom, financial advisors have increased their allocation of digital assets, especially Bitcoin, over the last six months. The transition has also been noticed at private banks, who have shifted from pursuing cryptocurrency education to trading directly with Tyr Capital Arbitrage.
“The bulk of the interest we are seeing remains concentrated on the directionless high risk/reward attributes of funds like Tyr Capital Arbitrage and directional exposure to Bitcoin,” he said.
Crypto exposure no longer ‘career-ending’
Bitcoin’s newfound institutional credibility has removed much of the so-called “career risk” associated with trading in the digital asset industry. As Hindi pointed out, investing in cryptocurrency was considered to be a “career-ending risk” a year ago.
It is now deemed career-ending to lack exposure to digital assets. Fiduciary norms, according to Hindi, may be the next domino to fall:
“Now that custody and regulatory barriers are slowly dropping, what could still be hindering a broader adoption of crypto by financial advisors is the perception that ‘fiduciary standards’ remain a challenge in openly advocating for the asset class to be included in customers’ portfolios.”
Jeffrey Wang, the head of Americas for Amber Group, a crypto-finance startup founded by former Morgan Stanley, Goldman Sachs, and Bloomberg executives, argues that independent advisors have much more flexibility to diversify into crypto than the big banks.
“I believe there will be a significant bottleneck for advisers working at firms owned by big banks to offer crypto that isn’t in the form of a listed ETF [or] security,” Wang predicted. “These banks are too slow to expand their wealth management offerings, particularly for non-listed crypto assets.”
“It is a huge undertaking for these firms/banks to be able to add offerings in crypto in terms of adopting their existing risk management systems, infrastructure, compliance, legal, front office trading systems so the decision won’t come without a lot of work and due diligence.”
A changing landscape
Although institutional use of crypto currency is still in its early stages, many large investors and companies have made significant purchases of Bitcoin. BTC is owned by legendary founders Paul Tudor Jones and Stanley Druckenmiller. MicroStrategy and Tesla, on the business side, have purchased billions of dollars in Bitcoin to protect against currency depreciation. In December 2020, MassMutual, a Massachusetts-based insurance company, purchased $100 million in BTC. Businesses are expected to own about 6.8 percent of the circulating Bitcoin supply.
Meanwhile, global institutions such as BlackRock, Morgan Stanley, Goldman Sachs, Citibank, and JPMorgan Chase are more bullish on cryptocurrencies. BlackRock’s leadership has gone so far as to compare Bitcoin to gold, with CIO Rick Rieder saying that in the long term, BTC will eat away at the precious metal’s market cap.
Jeffrey Wang predicts that institutional acceptance will be “very prevalent” in the next 12 to 18 months, also going so far as to predict that “the majority of firms will embrace blockchain in some way.”
So far, the recent Wall Street corporate earnings season hasn’t disclosed any new crypto entrants, although that may change soon as the bull market continues to expand. Meanwhile, Tesla revealed that it had sold a portion of its Bitcoin holdings for a substantial profit, a transaction that CEO Elon Musk described as demonstrating the asset’s liquidity. Musk later clarified that he had not sold any of his Bitcoin holdings.
There is also clear proof that the venture capital community is increasingly confident in cryptocurrency ventures. In addition to the scores of VC-led investment rounds covered by Cointelegraph in recent months, Andreessen Horowitz is currently considering launching a new crypto-focused investment fund worth up to $1 billion. This will be consistent with the venture capital firm’s recent crypto-focused acquisitions in companies such as Aleo and OpenSea, among others.