Even Advisors Who Like Bitcoin Got it Wrong
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Advisor Perspectives recently asked some folks if they are recommending the new spot bitcoin ETFs, and 27 financial advisors, CIOs, professors/economists, industry vendors and pundits replied.
Several had lots to say but didn’t get around to answering the question, and others gave qualifying responses. Only three bluntly said “yes” to the question, including only two of the 12 participating financial advisors. These low affirmative rates (11% overall and 16% among the advisors) are sharply different from every advisor survey conducted over the past couple of years, and as recently as the past few weeks.
Although Advisor Perspectives’ article effort wasn’t intended to represent an industry-wide sampling, casual readers might conclude that there’s little interest in the new spot bitcoin ETFs, or bitcoin and crypto generally. Worse, the readers might not realize that 37% of the respondents (10 of 27) made factually incorrect statements about bitcoin and crypto in their efforts to justify their opposition to bitcoin.
Scott Bondurant, founder and CEO of Bondurant Investment Advisor, wrote, “Bitcoin is a currency.” That notion is out of date by 10 years. While Bitcoin’s inventor, Satoshi Nakamoto, wanted it to replace fiat currencies worldwide, that experiment failed. Bitcoin is now viewed, and has been for a decade, as a store of value. Stablecoins achieve Satoshi’s currency goal: There’s $140 billion in stablecoins, and they represented 76% of all crypto trading volume in 2023. More than 100 governments worldwide are also creating or exploring their own stablecoins, called Central Bank Digital Currencies. Eleven countries have already launched one, and 21 more are conducting pilot programs (including China, Russia, India, Australia, Japan, South Korea, Sweden, South Africa, Saudia Arabia and Israel).
Calling bitcoin a currency or cryptocurrency reflects a gap in knowledge of more than 10 years.
It is incorrect to say volatility is a characteristic “best avoided.” Financial advisors build portfolios based on Markowitz’s Modern Portfolio Theory, and we all know that the benefits of diversification are only obtained by including volatile assets in the portfolio. And I’m sure Scott is aware that rebalancing, dollar-cost averaging and tax-loss harvesting all rely on assets that experience volatility. So, even he must agree that his assertion makes no sense. In fact, in every survey on the topic, advisors cite bitcoin’s noncorrelation as the #1 reason they like the idea of adding bitcoin to client portfolios.
Nathan Dutzmann, CIO of Round Table Investment Strategies, said bitcoin “has thus far proven to [have] … minimal interaction with the real economy.” Wrong. Bitcoin achieved a $1 trillion market cap in 2021, only 12 years after inception. It took Apple 42 years to reach that milestone, Microsoft 40 years and Amazon 24 years. Thousands of U.S. businesses accept bitcoin, according to Deloitte, not counting the tens of thousands of bitcoin ATMs found at retailers nationwide, including WalMart. At PayPal, you can use bitcoin to purchase goods and services from the 35 million merchants on its platform. You can buy Ferraris, and even real estate, with bitcoin, and 85% of surveyed merchants say bitcoin is a way to reach new customers. Three in four of the merchants that accept bitcoin say they do so because of its lower transaction fees.
Still, Nathan has a point: Most people do not yet own, or use, bitcoin. But to reject adding it to a portfolio for that reason is like saying you wouldn’t have purchased stock in RCA in 1920 because few people owned radios. It is precisely because adoption is still low that bitcoin enjoys such potential for outsized price appreciation.
Michael Edesess, adjunct professor and visiting faculty at the Hong Kong University of Science and Technology, said, “No, I would not recommend any allocation to any cryptocurrency because none of them have a means to generate earnings that accrue to their investors.” Apparently, Mike has never heard of staking. More than $71 billion is staked on the Ethereum blockchain, generating an average 3.7% income annually. Ethereum is also the #1 platform for NFTs, and these smart contracts routinely provide royalties for their creators; OpenSea, the largest NFT exchange, paid out more than $1 billion to creators last year. You can now do this on the Bitcoin blockchain, too, via ordinals. Mike needs to update his knowledge.
Michael Finke, professor of wealth management, WMCP® program director, and the Frank M. Engle Distinguished Chair in Economic Security Research at The American College of Financial Services, called bitcoin “a scheme that uses more energy than the country of Argentina” and that it “makes life worse by destroying energy for no reason, enabling crime and corruption, increasing wealth inequality, incentivizing political instability, and pulling wealth out of the economy that could otherwise be put to productive use.” Golly! This rant is nothing more than that of a crypto-hater, and the tirade is, if not merely misleading, then downright false. To wit:
1. Sure, bitcoin uses more energy than Argentina, but so do always-on devices in US homes. So before complaining about bitcoin burning energy for no reason, try unplugging your toaster.
2. Relatedly, it’s not “energy burned” that matters; what matters is the amount of CO2 emissions you produce. And bitcoin is far more eco-friendly than any other industry; more than half of its energy is green – water, solar, thermal or volcanic – thus using energy that would otherwise not be used.
3. Rather than enabling crime and corruption, law enforcement, the IRS and even the Defense Department all love bitcoin. That’s because digital money leaves a digital footprint, making it far easier to combat drug dealers, terrorist financers and tax evaders. (Hamas told its supporters to stop sending bitcoin because its wallets were easily traced by Israel and its allies. Try tracking cash.)
4. I’ve never seen anyone claim that bitcoin causes wealth inequality; everyone knowledgeable touts exactly the opposite. The United Nations says there are 1 billion unbanked people in the world – including 7% of the US population. They lack the money to open or maintain a bank account, which excludes them from safeguarding their money, renting a home, buying a car or even getting a job (as employers require that paychecks be direct-deposited). Bitcoin merely requires a cell phone – not even a smartphone – which 75% of unbanked people have, allowing them to engage in financial transactions for the first time. And because bitcoin is denominated to 8 decimal points (100 million Satoshis equal one bitcoin), it facilitates micropayments that cannot be affordable with dollars and pennies. Bitcoin is thus widely hailed as creating massive new levels of financial inclusion, not exclusion. It is demonetizing and democratizing money on a global scale.
5. How then does bitcoin create political instability as Mike claims? Perhaps by helping otherwise helpless citizens overthrow their dictators.
6. Rather than pulling money out of the economy, bitcoin brings it in. Bitcoin mining operations generate thousands of high-paying, green jobs – which is why dozens of states across the country are competing for miners to establish operations in their communities.
Bitcoin isn’t making life worse; it’s making it better for billions of people worldwide.
Mark Lebida, CFA, managing director, investments, for Journey Strategic Wealth, said, “The performance in bitcoin over the last eight years or so has peaked around the launch of a new product or influential company and the price of bitcoin has immediately retreated in the past.” This is not just blatantly false, it’s nonsensical. Bitcoin is not a product, and there is no company behind it. Bitcoin is the same today as it was when it debuted in 2009; there have been no subsequent product launches.
As for its price performance, search online for a chart of bitcoin’s price history and you’ll see that despite bitcoin’s volatility, it has been the best-performing asset class in history. And for fun, grab a chart of Amazon’s price history for its first 15 years – you’ll see that the two charts are nearly identical. In other words, the volatility you’ve seen with bitcoin is common among emerging technologies.
Harry Mamaysky, professor at Columbia Business School and a partner at QuantStreet Capital, wrote that “any individual or institutional investor who wanted exposure to bitcoin prior to the introduction of bitcoin ETFs was already able to achieve such exposure through multiple channels.” Dead wrong. The vast majority of financial advisors have been prohibited from recommending or investing in bitcoin by their compliance departments, precisely because there has not been an easy, familiar and regulatory-safe way to engage. The new spot bitcoin ETFs solve this problem – which is why 77% of advisors say they will buy these ETFs for their clients, with an average allocation of 2.5%. Considering that independent RIAs collectively manage $8 trillion in assets, that translates to asset flows of $150 billion into these ETFs over the next couple of years.
Harry also writes, “It remains a highly inefficient method of electronic transactions.” Utter nonsense. Four trillion dollars move cross-border annually, mostly via SWIFT or payment services such as Western Union. Wiring money overseas from your bank takes an average of five days (longer, if weekends or holidays are involved) at a cost of 6.5% (20% in sub-Sahara Africa). But with bitcoin, you can transfer the funds almost instantly 24/7/365 and virtually free. It’s the banks that are highly inefficient, not bitcoin.
William Reynolds, fiduciary wealth manager with G5 Financial Group, said, “The bitcoin ETF approval was met with little enthusiasm from the investing public.” Huh? Billions of dollars have poured into these ETFs already, collectively generating more AUM than any other ETF launch in history – even beating GLD’s famous launch. And you haven’t seen anything yet, because financial advisors and their firms are only now starting to ramp up their engagement. Advisors must first learn about these ETFs, choose the ones they want to use, decide which clients to recommend them to, identify the allocation, discuss everything with their clients, and then execute the trades. This will take months and years. It’s only been a couple of weeks! Yet William has declared “little enthusiasm.” As Joe Biden would say, “C’mon, dude.”
Scott Salaske CEO of Firstmetric wrote that, “It's just nothing. Just a rock.” No, bitcoin is not a pet rock. Nor it is a Beany Baby or a tulip bulb. But I get why Scott is confused. If all you look at is bitcoin’s price history, you might conclude that the performance is reminiscent of rocks, beanies and bulbs. But that’s where the similarities end. Those were fads, but the fun novelty gift, cuddly toy and pretty flower had no commercial application – so, the fads ended. But bitcoin is software, a ledger technology that is superior to the ledgers that businesses use today. Bitcoin’s ledger system is faster, safer and cheaper, and provides greater transparency and inclusion than existing technology. This is why so many find it so exciting. Scott should take that rock and give himself a V8 moment.
Helen Yang founder and CEO of Andes Wealth Technologies, wrote that she’s not recommending bitcoin ETFs “because bitcoin has no inherent value.” She’s been spending too much time with Jamie Dimon and Warren Buffett, who are notorious for this errant comment. Jamie and Warren (and presumably Helen) have enormous expertise and experience. That’s their problem: they’re trying to apply stock valuation models to crypto.
We all know how to value a stock: examine the company, the management, the product, the competition, the revenue and the profits to arrive at a valuation. Well, bitcoin is not a company, and there is no one managing it. There is no product, and bitcoin has no competition. There are no revenues or profits. Since all these questions are answered by “zero,” it’s easy to conclude that bitcoin’s value is zero.
But you could say that about artwork, baseball cards and comic books, too – yet no one questions their legitimacy as alternative investment opportunities. Bitcoin is a brand new asset class, and like other alternatives, has nothing in common with stocks, bonds or real estate. Alternative valuation methodologies must therefore be applied – I’ve got an entire chapter of them in my book, The Truth About Crypto. Here, I’ll just say this: perhaps bitcoin doesn’t have a value but it sure has a price. And as I write this, that price exceeds $42,000.
Finally, there’s Rick Wedell, CIO at RFG Advisory. “If you can’t appreciate the irony of the FTX fraud being driven by a currency that was supposed to be ‘manipulation proof,’ I don’t want to be your friend.’” But I don’t see anyone refusing to invest in stocks because of Bernie Madoff.
Madoff peddled stocks to promote his fraud; Sam Bankman-Fried peddled crypto. Throughout the FTX scandal, bitcoin hummed right along; its network was unaffected and the number of wallets (users) rose 20%. Hmmm…the stock market rose in the Madoff aftermath, too, now that I think about it. Conflating frauds with the real thing is a neophyte mistake, but I’d still like to be your friend.
These 10 financial professionals threw their bombs in short sound bites, but it took me 2,200 words to explain why each of their assertions is wrong. I’ve been involved in crypto since 2012, and I formed the Digital Assets Council of Financial Professionals in 2015 when I realized that most financial advisors didn’t understand crypto and had no reliable educational resource. Thousands of financial professionals from 37 countries turn to DACFP for content.
It’s up to you to decide if you want to allocate to the new spot bitcoin ETFs, but the only way you can make the right decision for your clients and your practice is by setting aside myths, inaccuracies, prejudices and biases, and avoiding hyperbole, exaggeration, falsehoods or outdated information. Instead, your challenge is to apply legitimate facts, genuine knowledge and authentic intellectual analysis. That’s what your clients are expecting from you, and that’s what they deserve.
Ric Edelman, founder of the Digital Assets Council of Financial Professionals, founded the largest RIA firm in the country.
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