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Bitcoin ETFs Are Not Winning the Hearts and Minds of Financial Advisors
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An important thesis around Bitcoin ETFs were born out of the need for regulated funds like these for financial advisors to direct their wealthy clients to invest in bitcoin.
Nearly six months after those ETFs launched, there are few signs that advisors are clamoring for the funds. Many remain as averse to bitcoin now as they were before. That doesn’t mean ETFs have been a failed experiment, however. For one thing, bitcoin ETFs have been hailed as the most successful ETF launches in history, with BlackRock iShares Bitcoin Trust (IBIT) reaching $20 billion in assets under management this week, despite advisors staying out.
“It’s something I’m researching because I think I’ll eventually recommend it, but I’m not there yet,” Lee Baker, founder and president of Apex Financial Services in Atlanta, said in an interview. “For me and other advisors, if we get more track records, it increases the likelihood that it will end up in clients’ portfolios.”
CNBC spoke with a dozen members of CNBC Advisory Councilwhich includes Baker, to find out why so many financial planners are still against bitcoin and bitcoin ETFs, and what might change their minds. It boils down to two main things: time in the market and regulatory compliance.
“When [bitcoin] becomes more regulated, you’ll see more adoption,” said Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. “That said, even if there’s no regulation, if over time this can prove to be a stable asset like a technology company would be, because my view on this is that this is early technology rather than money, you’ll see more adoption.”
Most advisors said they don’t initiate conversations or respond to client inquiries about ETFs, and most have no more than one client who has allocated to the funds. Of those advisors, some are proactively educating themselves about bitcoin investing, while others, often those with older, more traditional, and conservative client bases, are more dismissive.
Some of these advisors work with younger clients who have a higher risk appetite and longer investment horizon. They say their clients were already interested and educated about cryptocurrency exposure before this year and that the arrival of ETFs hasn’t motivated them to jump in.
Performance evaluation
At 15 years old, bitcoin is in a stage of maturity comparable to that of a teenager: it has great potential but is still very volatile. Bitcoin is up over 59% this year and about 230% from the 2022 low that was exacerbated during the FTX crash. Over the past three, five and 10 years, the cryptocurrency has gained 85%, 704% and 10,854% respectively. It has also suffered several drawdowns of 70% over the years, which not all investors have been able to stomach.
Many hope that steady flows into Bitcoin ETFs over the years will reduce this volatility, but for now it still acts as a deterrent for some.
“Financial advisors now have a way to give clients access [to bitcoin] that is safe, reliable and regulated,” said Bradley Klontz, managing principal at YMW Advisors in Boulder, Colo. “I like … that it’s a tool in our toolbox for clients who want it. I just don’t see, right now, most firms recommending it because they’re not recommending any asset class, or any asset in particular, that has that much volatility.”
Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, said that most of her clients prioritize long-term stability and growth over high-risk opportunities, and that “the relatively early stage of Bitcoin ETFs in the financial landscape and the continued volatility associated with Bitcoin” are the primary factors keeping Bitcoin ETFs out of her investment strategies.
Cathy Curtis, founder of Curtis Financial Planning in Oakland, Calif., said she doesn’t know whether bitcoin will ever become a stable asset class, but she would consider adding it to clients’ portfolios if it showed stable returns for at least 15 years.
“If it proved to be a real diversifier alongside stocks, for example, maybe,” he said. “The history of that asset hasn’t shown me that.”
Apex Financial’s Baker noted that investors have decades of software and tools available to show them how a certain percentage of a given bond, ETF or other asset in a portfolio could increase returns or volatility and more.
“As a group, we’re pretty conservative and kind of risk-averse,” Baker said. “We’re so used to putting out charts and [asking] how this thing behaved and in what types of markets: that’s pretty much how we are.”
With a few more years in the market, investors may be able to do similar modeling with bitcoin, he added, which will help advisors appreciate the funds. He also said advisors’ embrace is a matter of when, not if.
“At this point… everyone should be convinced that [bitcoin’s] here to stay, [they’re] “We just don’t understand some of the metrics in terms of how we might look at and value stocks or bonds,” he said. “We just don’t have that foundation, and that’s another reason why uptake is slow.”
“My guess is it’s going to be a slow adoption,” he added. “I wholeheartedly believe we’re going to start seeing an increase or growth in the use of an advisor somewhere in the next two to three years.”
Not regulated enough
While Bitcoin ETFs now exist in the U.S. as a regulated investment vehicle, it’s not always clear whether and when advisors can recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York City.
“A lot of this still has to do with compliance and what the broker-dealer will allow when it comes to advisors and ETF offerings,” he said. “Just because the ETF is out doesn’t mean the floodgates are open or that it’s easy for them to allocate to it.”
Jenkin said some broker-dealers have approved the purchase of bitcoin ETFs, but have limited the amount that can be purchased, while other firms do not allow advisors to sell bitcoin ETFs at all.
Some argue that this is due to cryptocurrency’s notorious reputation for fraud, scandal, and crime, a situation that is being cleaned up a little more each year, but has undoubtedly left a scar on the industry. Others point to the lack of regulation in the industry, which increases the chances of consumer complaints, potential lawsuits against broker-dealers, and potentially fines from the Financial Industry Regulatory Authority, or FINRA.
“Part of the reason this isn’t popular yet is that there are huge compliance issues within the industry,” Jenkin said. “A lot of firms are very nervous about the communications that financial advisors have with their clients about digital assets, and none of them want to have a FINRA violation.”
“Most broker-dealers are risk mitigators,” he added. “They want to enable advisors to do things for clients, but they certainly don’t want the spotlight on them to take on more risk. That’s why you see such slow adoption of this.”
Building Trust
Bitcoin and its ETFs need more time on the market to gain trust and adoption from large players like Vanguard, which said earlier this year it had no plans to offer them and would not change its position unless the asset changes to become less speculative.
“It will come,” Boneparth said of customer confidence. It will come with “more time, coming out of the early days and into the mature days. We are coming out of years of exchanges failing, it’s not a failure of Bitcoin, but it muddies the waters [and] people’s trust.”
Until then, the best position a consultant can be in is to educate their clients, he added.
“While bitcoin ETFs may fundamentally represent a less risky and more regulated way to invest in digital assets… the association with bitcoin still tends to discourage [clients],” Dorsainvil said.
Advisors are likely to be even more put off by ether ETFs, given the added complexity of that cryptocurrency’s use cases and functionality. Last week, the Securities and Exchange Commission gave the green light to U.S. exchanges to list ETF spot etherwhich many investors predict will also be successful, but perhaps only a fraction of what Bitcoin ETFs have been.
“ETFs have made everything really easy for institutions, from pensions to large funds,” Boneparth said. “That’s where we’re seeing the majority of flows going into these bitcoin ETFs. … It’s still pretty cumbersome at the retail advisor client level.”