Even after a historic launch for bitcoin exchange-traded funds, financial advisors have been skittish about investing in the new products, weighing the need for them in their portfolios and the potential risks associated with recommending them to clients.
The first funds got the regulatory green light in January and have been off to a record-shattering start. Investors sunk roughly $12 billion into cryptocurrency ETFs in the first four months with the bulk of trading coming in products from household names like BlackRock Inc. or Fidelity.
The far-and-away frontrunners, the iShares Bitcoin Trust (IBIT) and Fidelity Wise Origin Bitcoin Fund (FBTC), crossed the $1 billion asset threshold in under five days — a feat accomplished by just two other funds in history, according to a Bloomberg analysis.
The new products have certainly impressed Wall Street and softened cryptocurrency's bad-boy image in the industry. More than one in three financial advisors now say they are planning to recommend digital assets to clients in the next six months, according to recently released data from the Digital Assets Council of Financial Professionals.
That's up from just one in five financial advisors considering crypto in December.
After a quarter of trading, recent regulatory filings from wealth managers are now providing a better look at institutional investors' adoption.
According to an analysis by Bitwise, 563 professional investment firms reported owning $3.5 billion worth of bitcoin ETFs as of the first week in May. That includes top wealth management companies like Hightower Advisors, Brown Advisory and Sequoia Financial Advisors.
To be sure, some wealth management titans are standing pat on the idea that crypto is not a suitable investment to reach their clients' goals. The Vanguard Group said in a January blog post that while crypto has been classified as a commodity, it has "no inherent economic value" and "can create havoc within a portfolio."
The next major step for bitcoin ETFs will hinge on how the funds are adopted at the highest levels of the wealth management industry.
"Bitcoin assets put you out on a bit of a ledge," said Robert Pagliarini, founder of Pacifica Wealth Advisors in Irvine, California. "There are a lot of very smart and successful financial folks out there saying, basically, it's a joke."
Pacifica Wealth has prospective clients asking for help managing crypto investments, he said. But the unknown risks to Pagliarini's practice — including the potential costs of lawsuits or litigation that may come with handling those digital assets — are keeping him on the sidelines.
"Even if the advisor thinks it's going up, you're taking a bit of a gamble," he said. "Good financial advisors are not in the business of gambling with clients' money."
As the products mature in the marketplace, financial advisors are taking a wait-and-see approach and letting some of the largest U.S. wealth managers take the lead on how to handle the controversial new products.
While bitcoin ETFs have roughly $50 billion in assets, professional investors make up no more than 10% of that total, according to the filings cited by Bitwise.
Noah Damsky, principal of Marina Wealth Advisors in Los Angeles, said he helps clients invest in crypto ETFs because it's easier than owning bitcoin directly and can be safer than using an exchange.
His crypto-invested clients are all under the age of 40, high-earning and have a high appetite for risk, he said. The majority of his clients have no interest in crypto at all.
"We use it when a client insists on having exposure to bitcoin," Damsky said.
