Bitcoin started the week at $35,000, showing roughly 62% gains in 2023.
Our bitcoin ETF survey closed this week. Results are similar to the recently published NASDAQ survey that highlighted that over 70% of advisors hold crypto currently and would invest more for themselves upon approval of a bitcoin spot ETF; however, less than 10% feel comfortable advising their clients on this asset class. See the summary of results below.
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While access to a bitcoin investment might be easier with a spot bitcoin ETF, Advisors could miss a significant opportunity if they wait for approval. Advisors with access to investment vehicles right now (Crypto SMAs) have the unique ability to “front run” larger institutions for maybe the first time in history, positioning clients to benefit from bitcoin’s historical four-year price cycle in a tightening bitcoin supply environment.
Cyclical Price Action Within a Secular Growth Trajectory
Bitcoin has followed a four-year cycle, with price reflecting the waxing and waning sentiment of an emerging innovation/asset class. Significant drawdowns have been followed by parabolic years of growth. These cycles demonstrated similarities in sentiment, price action and regularity.
As seen below, historically bitcoin has followed a pattern of three years of impressive gains followed by a significant drawdown in price. This cycle is driven by the natural changing of sentiment of an emerging asset and solidified by the underlying mechanics of bitcoin’s known code.
Every four years, the new supply of bitcoin entering the market is cut in half in an event known as the Bitcoin Halving. All else equal, this incremental reduction in the pace of bitcoin supply growth puts upward pressure on the price of bitcoin from a demand/supply balance standpoint and builds the narrative around the four-year cycle with media attention highlighting the critical characteristic of bitcoin’s fixed monetary policy. Bitcoin was down 65% last year and is over 100% YTD in the first year of a potential new cycle, with the next halving slated for April 2024.
Strike Before the Iron is Hot
With bitcoin at a favorable price relative to its historical four-year cycle and looming positive catalysts, advisors who have access to bitcoin should take this time to strike before the iron is hot, to get out in front of the institutional inflows and before the barriers to a bitcoin investment are lowered.
A spot bitcoin ETF approval and progress toward broader regulatory clarity around crypto could propel the next bull market, allowing latent demand to enter the market. By utilizing today’s available tools, such as Crypto SMAs, advisors can take advantage of the disconnect in the market between underlying demand and actual investment flows.
Further, bitcoin’s supply on exchanges is low by historical standards as investors in bitcoin are holding their bitcoin for longer and longer (41% of bitcoin supply has been held over three years compared to 27% in 2017), limiting the actual supply available to trade and increasing the price impact of any surge in bitcoin demand.
With technical and fundamental catalysts lining up for the next bitcoin bull run, advisors waiting for a U.S. spot bitcoin ETF may miss the boat. While a spot bitcoin ETF might help legitimize an allocation to bitcoin in the eyes of the broader investing public, there are more efficient investment vehicles to own bitcoin.
Direct Ownership is The Way
Direct ownership is the best structure from an investment vehicle perspective and is available now. There is minimal tracking error compared to other products, such as an OTC public trust, which can have meaningful premiums and discounts and, thus, tracking error. Further, there is 24/7 liquidity for crypto SMAs, allowing investors and advisers to sell or buy anytime.
The second and arguably more important reason is that direct ownership is in the clients’ best interest in the long term. An advisor who takes the time to position their clients in a favorable investment vehicle for a given asset class, even though it requires extra effort, will build a reputation for putting clients’ needs first. Further, this will showcase domain expertise relative to advisors who are not knowledgeable about the crypto market. A new asset class requires innovative infrastructure and education. The client will value the upfront work of advisors who utilize a Crypto SMA, increasing the trust in the relationship.
Bitcoin will continue to take on the ups and downs of an emerging asset and deal with roadblocks in the form of bad actors, regulatory hurdles, misconceptions, and the volatility of an emerging innovation. To be sure, there will be more bumps ahead with volatile price movements and potential price drawdowns. Further, a bitcoin ETF approval could be a "buy the rumor, sell the news" event.
We view bitcoin as not a trade but a generational opportunity with the upside materializing over a long-term investment horizon for three, five or 10 years. But that doesn’t mean advisors have the luxury to wait for a spot bitcoin ETF. With arguably better investment vehicles available, a lining up of favorable tailwinds for bitcoin price, a potential deluge of new capital flowing to bitcoin, and a tightening supply of bitcoin, now is the time for advisors to make a prudently sized allocation to bitcoin, before the institutions for once.
– Christopher King, Founder & CEO, Eaglebrook Advisors
During the past two weeks we asked advisors to partake in a survey focused on their investment interests for bitcoin spot ETFs. The results are in.
Slightly more than 50% of respondents stated YES, they would invest in a bitcoin spot ETF when approved in the US. 15% said NO; the remainder of respondents were based outside the U.S. Interestingly 82% said they would personally invest in a bitcoin spot ETF with the other 18% saying they would not.
When asked, “What would be the reason you would not allocate clients into a bitcoin spot ETF? (check all that apply),” 32% of respondents selected “lack of understanding and education,” 28% selected “inappropriate risk profile for your clients,” 17% selected “availability at your firm's product shelf” and 28% selected “other” with write-in responses including “not suitable for clients aged over 65,” “prefer income-producing assets,” “inconsistent with investment mandate” and “BTC doesn't offer the commercial utility of other alt coins.”
As 32% of respondents selected, “lack of understanding and education,” please note there are several courses and designations designed to help you learn and use digital assets. The CDAA and DACFP are two such designations.
Thank you to everyone who responded to the survey. Since the goal of this newsletter is to formulate an advisor community and dialogue, while the survey has concluded, we encourage you to reply back to this email with additional thoughts and topics of interest.
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Edited by Bradley Keoun.