Should Clients Own Bitcoin? Our Authors Respond

Last week, the SEC approved the trading of spot bitcoin ETFs. Immediately thereafter, 11 funds, including ones from Fidelity and BlackRock, began trading. I asked our authors and guest contributors the following question:

Given the availability of spot bitcoin ETFs, would you recommend them (or any other cryptocurrency allocation) to your clients?

Below are the responses in alphabetical order:

Jon Adams, CFA senior vice president, chief investment officer at Calamos Wealth Management

The availability of spot bitcoin ETFs is an important development for investors. We are carefully assessing the space and considering adding capabilities to our roster of managers. As always, we recommend a well-diversified portfolio to our clients. Correlation with other asset classes is an important consideration when looking at any new investment and if we were to add cryptocurrency strategies to our platform, we would likely advise a relatively modest allocation given its limited track record in various economic scenarios.

David Blanchett managing director, portfolio manager and head of retirement research at PGIM

Generally, no. I have a hard time with the investment thesis behind owning cryptocurrencies, even bitcoin, especially the valuation component. To borrow from the title of a piece some PGIM colleagues put together recently, I think of cryptocurrencies more as “portfolio kryptonite” versus a “powerful diversifier.” But since not all investors are totally rational (FOMO can definitely be a thing with investing), I can see a behavioral argument towards allocating a small portion of a portfolio to speculative assets, including cryptocurrencies. To be clear, I don’t believe this is something investors should generally do. But for certain investors who are more speculative in nature who are especially drawn to assets with positive skewness, I can see small allocations to assets like cryptocurrencies to make the investor more likely to stick with a portfolio for the long run with only a minor decrease in efficiency. Having cryptocurrency ETFs available obviously makes it much easier to purchase bitcoin using traditional funds and therefore I’ll be curious how the financial advisory community, and investors more generally, respond to this development!

Scott Bondurant founder and CEO, Bondurant Investment Advisor

Bitcoin is a currency. Currencies do not generate any cash flow. Over time, this means they do not provide investors with a real return compared to stocks and bonds that do. In addition, bitcoin is speculative and volatile; two characteristics that are best avoided.

Nathan Dutzmann chief investment officer for Round Table Investment Strategies

Run-ons ahead! Let us take a moment and acknowledge the wonderful irony of “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution” - the first line of Satoshi Nakamoto’s original bitcoin whitepaper - being made available in a wrapper that involves (at least) an exchange, a market maker, an authorized participant, a fund sponsor, a TPA, a transfer agent, a clearinghouse, a trade desk, and a custodian as intermediaries (but hey, at least they’ve disintermediated the futures exchange!), because that’s just so much more convenient and easier for most investors to deal with! But to answer the actual question, while I’m intrigued by the possibility of crypto becoming a meaningful alternative investment vehicle for real-world projects, the only argument for investing in what has thus far proven to be an enduring but almost entirely self-referential and self-contained ecosystem, with minimal interaction with the real economy and no clear fundamental justification for any particular valuation, is the very reason the SEC called out as a poor investment rationale: fear of missing out. Namely, for those few who will lose more sleep by missing large gains than by absorbing large losses, buying some crypto with money you don’t need, and leaving it there, will likely ensure positive net utility, given the virtual certainty that violent swings in both directions will be experienced.