Financial advisers lead the institutional push toward crypto adoption

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As crypto marketplaces become more popular, institutional investors are entering the crypto exchange market.  Last month, Goldman Sachs-backed Circle acquired the Poloniex exchange, and now, a number of funds are moving to acquire crypto-related startups in order to gain a foothold in the space. Meanwhile, established institutions like the New York Stock Exchange are offering crypto trading services. While many of these new crypto exchange markets are still relatively small compared to the traditional financial markets, they are growing rapidly and will likely become increasingly lucrative.

A recent report from Circle suggested that one in four financial advisers in the United States held crypto holdings in their investment portfolios. (That’s not surprising, given that the crypto market is valued at more than $200 billion.) At present, the market is worth less than half of that, but experts predict it will continue to grow. The key to this expansion is the entry of financial services companies into the market.

In the past, financial advisors had plenty of reasons to reject bitcoin (BTC) and other cryptocurrencies as attractive investments, but that’s all starting to change as more and more institutions turn their attention to the digital asset class. The collapse of bitcoin between September 2020 and April 2021 has reinforced the need to move beyond the assertion that digital assets are simply too volatile to be included in client portfolios.

Speaking at the CFC 2021 virtual conference in St. Moritz in January, Grayscale CEO Michael Sonnenschein outlined six key themes that could shape the crypto-currency market in the near future. One of these topics was the potential for wider application by financial advisors.

Curiosity and question

In a later interview with Cointelegraph, Sonnenschein explained that curiosity and customer demand are fueling financial advisors’ interest in cryptocurrencies. The conclusion is based on a preliminary study commissioned by Grayscale. This showed that more than half of advisors receive questions from their clients about cryptocurrencies.

While this may not lead to immediate action, cryptocurrencies have certainly become a consideration for advisors, he explained. Ultimately, financial advisors respond to client demand, he said, adding:

Cryptocurrencies in general and bitcoin in particular have received a lot of attention in the press, major companies and financial institutions have added bitcoin to their balance sheets, and leading entrepreneurs and investors have announced their investments in bitcoin. If you are an experienced investor, you will want to know more about this asset class, and if you have a financial advisor, you will want to ask him about it.

Sonnenschein also noted that Financial Advisors is among the investors in the Grayscale family of funds, which now has combined assets of more than $46 billion. Bitcoin remains the most popular digital currency, but we are also seeing growing interest in Ethereum and other digital assets, he said.

Edward Hindy, co-founder and chief investment officer of Tyr Capital, a U.K.-based hedge fund manager of cryptocurrencies, said financial advisers have increased their allocation to digital assets, particularly bitcoin, in the past six months. Changes have also been seen in private banks, which have moved away from teaching cryptocurrencies and are investing directly in Tyr Capital Arbitrage.

He explained that the greatest interest continues to be in non-directed, high risk/return funds, such as Tyr Capital Arbitrage, as well as targeted exposure to bitcoin.

Exposure to cryptocurrencies is no longer an occupational risk

Bitcoin’s new legitimacy among institutional investors has removed much of the so-called career risk associated with investing in the digital asset market. As Hindi noted, a year ago financial professionals were thought to be taking an occupational risk by investing in cryptocurrencies.

It is estimated that failure to use digital resources can now lead to a career break. The last dominoes to fall, Hindi says, could be fiduciary standards:

As custody and regulatory hurdles slowly fade, which may still prevent wider adoption of cryptocurrencies by financial advisors, the perception that fiduciary standards remain an issue for open advocacy for including the asset class in client portfolios.

Jeffrey Wang, head of the U.S. arm of Amber Group, a cryptofinance startup founded by former specialists at Morgan Stanley, Goldman Sachs and Bloomberg, believes independent advisors have much more freedom to diversify into cryptocurrencies than big banks.

I think it will be a big hurdle for advisors working at firms owned by big banks to offer cryptocurrencies that are not in the form of ETFs [or] securities, Wang said. These banks are not agile enough to develop their asset management offerings, especially for unlisted crypto assets.

For these companies/banks, adding cryptocurrency offerings is a significant challenge in terms of taking on their existing risk management systems, infrastructure, compliance, legal department and front office systems for transactions, so the decision will not be made without a lot of work and due diligence.

A changing landscape

Although institutional adoption of digital assets is still in its infancy, several major investors and companies have made great strides in acquiring bitcoins. Legendary investors Paul Tudor Jones and Stanley Druckenmiller own BTC. On the corporate side, MicroStrategy and Tesla have bought billions of dollars worth of bitcoins to hedge against the currency’s devaluation. MassMutual, a Massachusetts-based insurance company, acquired BTC in December 2020 for $100 million. It is estimated that companies currently hold nearly 6.8% of the total bitcoin in circulation.

Meanwhile, major institutions like BlackRock, Morgan Stanley, Goldman Sachs, Citibank and JPMorgan Chase have taken a more positive stance on cryptocurrencies. Executives at BlackRock have even gone so far as to compare bitcoin to gold. CIO Rick Reeder said that in the long run, BTC will eat into the market value of the precious metal.

Jeffrey Wang thinks institutional adoption will be widespread over the next 12 to 18 months, to the point where most companies will adopt blockchain in some way.

So far, the recent corporate earnings season on Wall Street hasn’t brought in any new crypto investors, but that could change quickly if the bull market continues to climb. Meanwhile, Tesla announced the sale of some of its bitcoins at a significant profit, demonstrating the liquidity of the asset, according to CEO Elon Musk. Musk later confirmed that he had not sold any of his bitcoins.

There is also compelling evidence that the venture capital community is rallying behind cryptocurrency projects with increasing conviction. In addition to the dozens of venture capital-led investment rounds reported by Cointelegraph in recent months, Andreessen Horowitz is reportedly considering a new cryptocurrency-focused investment fund worth up to $1 billion. This follows the venture capital firm’s recent investments in cryptocurrencies, including Aleo and OpenSea.

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