Crypto for Advisors: The Growth of Bitcoin as Collateral

In the Ask an Expert segment, Kevin Tam, representative from Raymond James, provides insights on current crypto market movements, upcoming regulatory developments, and the concept of national governments owning digital currencies.

–Sarah Morton

As a researcher delving into the world of digital assets, I can’t help but recommend subscribing to CoinDesk’s weekly newsletter, aptly titled “Crypto for Advisors.” This insightful resource is specifically designed to demystify digital assets for financial advisors. By subscribing, you’ll receive this valuable content in your inbox every Thursday, ensuring you stay informed and up-to-date on the latest trends and developments in the crypto sphere. Don’t miss out – subscribe now!

Bitcoin Financing Rewrites the Rules for Asset Managers

In light of conventional investment products showing reduced returns, intelligent asset managers should explore burgeoning chances within the cryptocurrency sector to cater to increasing client interest. Bitcoin and Ether have transitioned from being considered speculative to becoming mainstream components in institutional portfolios. This shift is primarily due to the acceptance of spot bitcoin ETFs and an escalating hunger for returns in a market characterized by low-interest rates.

Are advisors meeting client interest in this asset class?

The recent regulatory approval of spot bitcoin ETFs has significantly expanded the accessibility of digital assets. We’ve seen new net inflows of $17 billion, meaning new buyers and a tailwind for bitcoin prices.

Major financial entities, such as Goldman Sachs among others, are increasingly investing heavily in Bitcoin ETFs, with reports stating that Goldman Sachs acquired $400 million worth of these ETFs this year alone. This action underscores not only the increasing acceptance of cryptocurrencies as a viable investment category but also demonstrates faith within the institutional community regarding its potential to serve as a portfolio diversifier. Experts at Standard Chartered anticipate that between $50 billion and $100 billion could flow into Bitcoin and crypto-related products by 2024, as wealth managers and financial advisors revise their strategies to cater to growing client interest.

The opportunity in Bitcoin financing

For wealth managers and institutional advisors seeking to keep pace with client demand while enhancing returns, Bitcoin financing presents an untapped opportunity. Bitcoin-backed loans and financing structures are emerging as competitive alternatives to traditional fixed-income products like bonds, which have struggled to deliver meaningful yields amid the global low-interest-rate environment. Bitcoin loans, which often come with high spreads and are over-collateralized, can offer superior yields with comparable risk to traditional fixed-income strategies.

In the present financial climate, the economics of lending with bitcoin as collateral are quite appealing. Since conventional fixed-income products are finding it hard to offer substantial returns, bitcoin-backed loans are offering notably higher interest rates, typically between 7.5% and 12.5%. This elevated return is due to the perceived risk associated with digital assets, but as more traditional financial institutions join this sector, this premium could potentially decrease in the future.

Bitcoin-supported loans minimize risk by requiring more assets as collateral compared to their loan value, and the distinctive characteristics of bitcoin, such as its constant 24/7/365 market activity and high liquidity, offer extra benefits for financial managers. Unlike bonds that are limited by market hours and liquidity restrictions, bitcoin-supported loans enable the swift sale of substantial holdings at any given moment, providing greater agility in handling portfolio risks.

Institutional adoption is on the rise

The transition into cryptocurrencies isn’t just about speculative buying; it has piqued the interest of institutional investors, such as pension funds. The actions taken by major pension funds like the Wisconsin Investment Board and the Fairfax County Employees’ Retirement System indicate a growing trend towards diversifying into cryptocurrency. These pension funds, along with many others worldwide, are reassessing their investments due to the declining effectiveness of traditional income strategies in the context of low yields and escalating inflation.

Historically, pension funds have primarily invested in stocks and bonds, employing strategies that match their long-term liabilities. But as the importance of portfolio diversification grows, more funds are shifting investments towards unconventional assets such as private equity, real estate, and now digital assets like Bitcoin. Financing backed by Bitcoin, known for its robust collateral demands and potential for elevated returns, presents an attractive opportunity for those seeking to protect against economic turbulence and inflation, while also boosting earnings.

Meeting client interest and fiduciary duty

Is it essential for financial advisors to consider if they’re adequately addressing their clients’ growing curiosity about cryptocurrencies? As per recent polls, around 39% of family offices are currently investing in digital currencies, and many more show interest in expanding into this domain. Yet, there seems to be a disparity between client enthusiasm and advisor action. By being forward-thinking and educating themselves about the potential benefits of crypto financing and related products, financial advisors not only cater to client needs but also establish themselves as progressive, cutting-edge partners in wealth management.

The rapid adoption of crypto-backed financing solutions offers a compelling case for advisors who are looking to meet client interest in alternative assets while delivering superior performance in a challenging market environment. By embracing bitcoin financing, wealth managers can provide their clients with access to a new avenue for yield enhancement, portfolio diversification, and inflation hedging.

In this rapidly changing global financial environment, advisors find themselves at the forefront, seizing a special chance to integrate bitcoin and other digital currencies into their investment strategies. By presenting forward-thinking solutions such as loans backed by bitcoin, they not only cater to client demands but also uphold their responsibility to exhaust all potential methods for boosting returns in this era of low yields, thus strengthening their role as trustworthy financial stewards.

– Adam Reeds, co-founder and CEO of Ledn

Ask an Expert

Q. What are the main trends shaping the crypto market?

Presently, we’re witnessing an increasing acceptance of Bitcoin as a digital financial asset and a means for storing value within institutions.

The process of institutional acceptance is progressing in multiple ways, such as the debut of exchange-traded funds (ETFs) for both bitcoin and ether, enabling investors to easily purchase and hold these cryptocurrencies directly. Furthermore, options markets are becoming more prevalent, and there have been discussions about incorporating bitcoin into mutual funds and ETF portfolios. Fidelity Canada has already allocated 1-3% of their assets in a Bitcoin fund, known as the Fidelity Advantage Bitcoin ETF Fund, which is a mix of different investment classes. These advancements are encouraging signs of institutional adoption and are predicted to drive further growth within the crypto market.

Investment entities are exploring non-traditional assets such as Bitcoin for the purpose of expanding their investment portfolios and shielding themselves from inflation. Notable hedge fund managers, including Stanley Druckenmiller and Paul Tudor Jones, have openly supported Bitcoin as a valuable addition to a diversified investment strategy.

Beyond this, it’s worth noting that BlackRock, the world’s largest asset management firm, overseeing approximately $10 trillion in assets on behalf of various institutional investors (which includes central banks), voices its perspective on bitcoin’s potential role as a portfolio diversifier in investment strategies.

Q. What are the existing regulatory frameworks governing crypto?

In Canada, the legal landscape for digital assets is transparent and favorable, as the Canadian Securities Administrators (CSA) mandate that cryptocurrency trading platforms must register and adhere to securities regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.

In the United States, the Securities Exchange Commission (SEC) primarily uses an enforcement approach to regulate the crypto market. This means they actively take legal action against significant players within the cryptocurrency sector, including unregistered broker-dealers, exchanges, and clearing houses. Often, these actions result in court rulings that serve as guidelines for future similar cases.

In contrast to Canada, which boasts a unified regulatory structure that fosters crypto market innovation, the U.S. faces hurdles because of its piecemeal strategy. Other nations are keenly observing these developments as they craft their regulations, aiming to promote growth while safeguarding investors.

Q. Which country owns the most bitcoin?

Starting from 2021, El Salvador has acquired a total of 5,748 Bitcoins through open-market purchases and recognized them as legal tender within its economy.

In simpler terms, Bhutan, a kingdom, has approximately 13,029 bitcoins valued over $780 million. They began mining these digital coins in the year 2019, utilizing their abundant hydropower resources for the process.

Various nations, like the United States (holding approximately 215,000 bitcoins), China (with around 190,000 bitcoins), the United Kingdom (61,000 bitcoins), and Germany (50,000 bitcoins), have taken control of bitcoin from businesses that violated their local securities laws. Typically, these governments then organize public auctions to dispose of the confiscated digital assets.

Kevin Tam, serving as both the Digital Asset Research Specialist and Senior Compliance Supervisor within the esteemed financial institution, Raymond James Ltd.

Keep Reading