Financial advisers lead the institutional push toward crypto adoption

In the past, there were plenty of reasons for financial advisers to dismiss Bitcoin (BTC) and other cryptocurrencies as a worthy investment, but all of that is starting to change as more institutions become attuned to the digital asset class. A face-melting rally for Bitcoin between September 2020 and April 2021 amplified the need to push beyond the narrative that digital assets are simply too volatile to include in client portfolios. 

In a keynote address at this year’s virtual Crypto Finance Conference St. Moritz in January, Grayscale CEO Michael Sonnenshein outlined six major themes that could shape the cryptocurrency market in the near future. One of those themes was the potential for greater adoption among financial advisers.

“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 those 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.

Edouard Hindi, co-founder and chief investment officer of Tyr Capital Arbitrage — a United Kingdom-based cryptocurrency hedge fund manager — said financial advisers have increased their allocation of digital assets, especially Bitcoin, over the last six months. The shift has also been observed at private banks, which have gone from seeking education on cryptocurrency to investing directly with Tyr Capital Arbitrage.

He explained that “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.”

Crypto exposure no longer “career-ending”

Bitcoin’s newfound legitimacy within the institutional ranks has eliminated much of the so-called “career risk” involved with investing in the digital asset market. As Hindi noted, finance professionals, one year ago, were thought to be taking a “career-ending risk” for investing in crypto.

Now, it’s considered career-ending not to have any exposure to digital assets. The final domino to fall, Hindi believes, could be fiduciary standards:

“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, head of Americas for Amber Group — a crypto-finance startup founded by former Morgan Stanley, Goldman Sachs and Bloomberg professionals — believes independent advisers have a lot more freedom to diversify into crypto than the major banks.

“I think there will be a large bottleneck for the advisers who work at the firms owned by big banks to offer crypto that isn't in the form of a listed ETF [or] security,” Wang said. “These banks aren’t nimble enough to expand their wealth management offerings, especially for non-listed crypto assets.” He continued:

“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

While institutional adoption of digital assets remains nascent, several major investors and corporations have made a big splash by acquiring Bitcoin. Legendary investors Paul Tudor Jones and Stanley Druckenmiller own BTC. On the corporate side, MicroStrategy and Tesla have acquired billions of dollars’ worth of Bitcoin to hedge against currency debasement. MassMutual, a Massachusetts-based insurance firm, purchased $100 million worth of BTC in December 2020. It’s estimated that businesses currently hold nearly 6.8% of the circulating Bitcoin supply.

Meanwhile, major institutions, including BlackRock, Morgan Stanley, Goldman Sachs, Citibank and JPMorgan Chase have adopted a more positive outlook on cryptocurrencies. BlackRock’s leadership has gone as far as comparing Bitcoin to gold, with chief investment officer Rick Rieder claiming that BTC will eat away at the precious metal’s market cap in the long run.

Wang believes institutional adoption will be “very prevalent” in the next 12 to 18 months, going as far as saying that “The majority of firms will embrace blockchain in some way.”

So far, the latest corporate earnings season on Wall Street hasn’t revealed any new crypto investors, but that could soon change as the bull market continues to grow. Tesla, meanwhile, announced that it sold a portion of its Bitcoin for a significant profit, a move that CEO Elon Musk said demonstrates the asset's liquidity. Musk later confirmed that he has not sold any of his Bitcoin.

There's also strong evidence that the venture capital world is backing cryptocurrency projects with ever-growing conviction. In addition to the dozens of VC-led investment rounds covered by Cointelegraph in recent months, Andreessen Horowitz is reportedly eyeing a new crypto-focused investment fund worth up to $1 billion. That would align with the venture capital firm's recent crypto-focused investments into Aleo and OpenSea, among others.