Rehashed #39 - Despite Drawdowns, Investor Appetite Remains Steady
2019: The professionalisation of crypto?
Bitwise is an asset manager focussed on crypto index and beta funds, largely catering to an institutional audience: pensions, endowments, foundations, multifamily offices, single-family offices, and financial advisors. The firm recently released results of a survey generated from more than 150 financial advisors (FAs), asking a series of questions on cryptoassets and their use in client portfolios.
The financial advisors surveyed are institutions ranging from independent Registered Investment Advisors (RIAs) to broker- dealer representatives, financial planners and wirehouse representatives. The results of the survey are important because they reflect prevailing sentiment in the market. Institutional sentiment is particularly influential because a very small portfolio allocation to cryptoassets from funds of significant size can create momentous inflows to the asset class. The institutions surveyed were no small fry; 30% of respondents reported more than $100 million in assets under management (AUM).
Despite 80-90% drawdowns across the asset class in 2018, client interest in cryptoassets was not dissuaded; 79% of financial advisors reported fielding questions about crypto from clients. Heightened inquisitiveness was for good reason; historical returns have shown that Bitcoin and the wider cryptoasset class offers diversification that can elevate a portfolio’s risk-reward profile. Cryptoassets have a low correlation to traditional asset classes and Bitcoin has demonstrated attractive risk-adjusted returns. Increasing pressure from clients coupled with institutional acceptance may just see 2019 as the year that crypto truly “professionalises.”
Valuation, volatility and regulation cited as concerns
The attribute that most attracted financial advisors to the idea of adding cryptoassets to client portfolios was the low or non-correlated nature of crypto returns compared with traditional asset classes. In total, 42% of all advisors surveyed highlighted this feature as an attractive benefit of investing in crypto. The next most positively cited attribute was the “high potential returns” of cryptoassets (28%), followed by “clients are asking for it” (21%) and “something new to offer clients” (21%). 22% of surveyed advisors could find nothing attractive about cryptoassets at all.
Advisors highlighted a wide variety of issues when asked, “What is preventing you from either increasing your investment in cryptoassets or making your first allocation?” The most popular response was "no idea how to value cryptocurrencies," (43%), followed by "regulatory concerns" (42%) and "too volatile" (38%). Misinformed concerns, including worries that “cryptoassets are associated with criminal activity,” elicited few responses, showing that the market is savvying up.
Institutional sentiment net positive
Although there was no lack of enquiry, only 9% of surveyed advisors currently manage an allocation to crypto in client portfolios. Of these advisors, there was a strong link with personal ownership of crypto. 62% of advisors with client assets invested in crypto also had personal investments in crypto. The majority of these FAs intended to continue to maintain/increase exposure over the next 12 months; only one advisor intended to decrease its clients’ allocation.
Of those advisors who didn’t have any exposure to crypto, 14% intend to increase their allocation in 2019, suggesting an intent to open up an allocation for clients this year. Combined with those FAs already exposed to crypto, overall, 22% of surveyed advisors plan to allocate to crypto in 2019.
“Advisors tell us that they are getting inbound questions from clients, that they need ways to connect with a younger generation of clients, and that clients are investing in crypto outside of their advisory relationship anyway" - Matt Hougan, Bitwise Head of Research
As for future price movement? The jury is split. 55% of surveyed advisors expect the price of bitcoin to appreciate over the next 5 years, with the mean price target for December 31, 2023, sitting at $17,571.
In the News
The SFOX Multi-Factor Market Index has swung from moderately bearish entering 2019 to moderately bullish entering February. The index is a proprietary model that looks at quantifiable market factors such as volatility, market sentiment/news coverage, adoption, etc. Looking into February, the broker sees CBOE and CME futures expiration dates (Feb. 13 and 22, respectively) and the Ethereum Constantinople hard fork around Feb. 27 as events that could drive volatility indices during the coming month.
The UK Financial Conduct Authority (FCA) has begun the process of defining which cryptoassets it will be regulating by opening a consultation on the "small but growing market,” which poses "substantial risks to consumers."
Researchers are scrambling to make sense of the QuadrigaCX story by analyzing blockchain data.
Asia markets overall will be relatively quiet going into February as many Asian countries and celebrate Lunar New Year, with the celebration lasting up to 3 to 4 weeks.
Republic Crypto just released a comprehensive overview of token distribution methods known as airdrops.
Google is developing tools that are supposed to make blockchain transaction data searchable, starting with Bitcoin, Ethereum, and XRP.
Ethereum Constantinople hard fork - Feb 27
As always, thanks for joining - see you next week for Rehashed.
View previous issue: Rehashed #38 - JP Morgan Crypto Report Recap: The Good, the Bad and the Ugly
About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.