SEC Approval of Bitcoin ETFs Could Come This Week

Wirehouses generally do not make ETFs available to their advisors until those ETFs have at least $100 million in assets, because the firms want confidence that the ETFs have sufficient liquidity to handle the massive trading flow that their tens of thousands of reps might generate. Thus, it could be a year before wirehouses allow their advisors to offer these new ETFs to their clients.

The IBDs — regional and independent broker-dealers, such as Raymond James, A.G. Edwards, Edward Jones, and LPL — are often faster to move than the wirehouses, but they too are unlikely to let their financial advisors use these new ETFs immediately.

The quickest to act are the independent RIAs. Although each is small — typically with one to 10 advisors — there are 300,000 advisors operating in this channel. Most act as their own compliance officer and few have a formal investment committee.

That translates into agility, and since these advisors process their trades through such custodians as Schwab, Fidelity, Pershing and others where the ETFs are immediately available, these advisors can act immediately as well.

But even they won't move instantaneously. Let's face it: Most advisors have not paid much attention to crypto. They don't understand blockchain, and they don't know how to explain bitcoin to clients.

Only after they get past that hurdle will advisors be ready to tackle the big tactical questions: Which of your clients should invest in these ETFs? What allocation is best for them? How will you communicate this recommendation, and how will you respond to questions and objections?

For all these reasons, it's going to take time for assets to flow into these new spot bitcoin ETFs. So, make sure you have realistic expectations. Otherwise, you and your clients will be disappointed.

And even though flows will occur, bitcoin's price might not rise as fast as you expect. While the new spot bitcoin ETFs will be buying bitcoin, other investors will be selling bitcoin. Some will be locking in their 2023 profits, and others will be rebalancing their portfolios.

And let's not forget the crypto bankruptcy trustees. The Mt. Gox Rehabilitation Trust and the trustees managing FTX's bankruptcy are under court orders to sell their bitcoin holdings, to return the proceeds to those frauds' victims.

The Mt. Gox Trust will be selling $5 billion worth of bitcoin this year; the FTX trustees will unload another $3.5 billion. This downside selling pressure will offset some of the upside buying frenzy.

In the long term, I fully expect bitcoin's price to be in the low to middle six figures. But it won't happen overnight. This makes bitcoin an outstanding addition right now to a long-term diversified portfolio, using all the traditional investment strategies you've mastered over the years, such as rebalancing, dollar cost averaging and tax-loss harvesting.

But triple-digit gains instantly? Help your clients temper their enthusiasm.

Ric Edelman is an author and founder of RIA Edelman Financial Engines (earlier Edelman Financial Services). He now leads the Digital Assets Council of Financial Professionals.

Pictured: Ric Edelman