Crypto for Advisors: Are Crypto SMAs Right for Institutions?

Next, Kim Greenberg Klemballa from CoinDesk Indices addresses queries on Shared Mining Arrangement (SMA) ownership and usage in a segment titled ‘Q&A with an Expert.’

– Sarah Morton

You’re currently perusing the “Crypto for Advisors” newsletter, a weekly digest from CoinDesk, which breaks down digital currencies specifically for financial consultants. To ensure you receive it every Thursday, consider signing up using this link.

The Advantages of Actively Managed SMAs over Crypto ETFs for Institutional Investors

Crypto Goes Mainstream

As a seasoned investor with over two decades of experience, I’ve witnessed numerous groundbreaking moments in the financial world. However, the U.S. Securities and Exchange Commission’s recent approval of trading U.S. exchange-traded funds (ETFs) that track spot bitcoin and ether is undeniably one of the most significant events I’ve seen in my lifetime.

For the very first time, investors were now able to trade Bitcoin and Ether spot-based instruments on U.S. exchanges that are regulated. This is significant because it signifies that these cryptocurrencies have been recognized by securities regulators, marking a shift away from their previous classification as unconventional, technology-centric investments bought primarily by enthusiasts.

Crypto SMAs vs ETFs

Consequently, millions of new crypto enthusiasts are experiencing digital currencies through the purchase of Bitcoin and Ether ETFs. However, when it comes to seasoned institutional investors, is investing in ETFs the most optimal strategy?

Individual Accounts (IAs) provide substantial benefits for institutional investors seeking to invest in cryptocurrencies through actively managed portfolios, as opposed to Exchange-Traded Funds (ETFs).

SMAs’ Benefits Over Crypto ETFs

What Are SMAs?

Crypto Strategic Management Accounts (SMAs) are collections of digital currencies that experts oversee on your behalf, a crucial aspect when dealing with the unpredictable world of cryptocurrency. Unlike traditional stocks, the trading dynamics and evaluation methods for crypto are different, making an experienced manager invaluable. In the crypto realm, fundamentals aren’t based on earnings or accounting figures; instead, they encompass metrics like usage statistics, associated blockchain performance, significant holder activities, and more. If you’re venturing into cryptocurrency investment, it would be advantageous to choose an active manager who has a deep understanding of this complex market.

Direct Ownership: More Control & Tailored Risk Management

Unlike ETFs, SMAs give you direct ownership of your assets, which enables greater portfolio customization to meet your specific risk/return needs goals. That is, SMAs can be custom-tailored by your investment manager to meet your unique requirements – risk tolerance, investment horizon, financial goals and more. Direct ownership also facilitates more transparent and straightforward tax management strategies, such as tax-loss harvesting. Finally, SMAs are custody-agnostic, allowing investors to choose from a wide variety of custodians and venues ranging from Anchorage, BitGo, Coinbase and Kraken.

Diversification

In addition to having a tailor-made fit, actively managed Strategic Managed Accounts (SMAs) also offer the opportunity for diversification. Unlike holding a Bitcoin Exchange Traded Fund (ETF), where your returns are essentially tied to that of Bitcoin, an actively managed SMA allows you to tap into the entire spectrum of cryptocurrencies, currently numbering 248 on Coinbase and over 200 on Kraken. This means you can create a diversified portfolio according to your own preferences.

Furthermore, active management offers the flexibility to adjust your asset distributions. Conversely, passive management might serve well in certain investment scenarios, but it could result in significant losses when dealing with cryptocurrencies. Cryptos tend to fluctuate rapidly, making them less suitable for passive investment approaches.

Outperformance

In Simple Management Accounts (SMAs), skilled managers have the ability to surpass the performance of individual cryptocurrencies or indexes. By utilizing market analysis, unique trading strategies, and precise timing, they can capitalize on various market fluctuations that are not typically available with an Exchange-Traded Fund (ETF). Furthermore, for investors focusing on specific coins, SMAs might offer a chance to generate extra returns (alpha) over the basic exposure to the cryptocurrency (beta).

24/7 Trading

ETFs follow regular trading hours on weekdays when major stock exchanges are operational, while cryptocurrency markets operate around the clock. This difference is crucial if you’re not a crypto investor. One of the main advantages is that it eliminates opening gap risk, which may have caught you off guard at least once if you’ve traded for some time. On the other hand, actively managed Smart Beta strategies allow their managers to quickly respond to market fluctuations and make necessary adjustments to portfolios at any time.

What is Right for You?

It appears that Crypto Exchange Traded Funds (ETFs) are drawing a lot of interest from new cryptocurrency investors. However, data suggests that established players like institutions, wealthy individuals, and registered financial advisors might lean more towards actively managed Separately Managed Accounts (SMAs) in the long run. The allure of SMAs lies in their customizable nature, flexibility, and potential for increased returns, making them a compelling choice for experienced investors.

– Leo Mindyuk, CEO, ML Tech

Ask an Expert

Can I tailor a crypto SMA?

As previously noted, Structured Management Accounts (SMA) allow for direct ownership of various cryptocurrencies. In simpler terms, this means you can customize your cryptocurrency SMAs according to specific needs. For instance, if a client desires that 50% of their portfolio be invested in bitcoin and the remaining 50% in ether, an SMA could be established to achieve this balance. Cryptocurrency SMAs offer access to numerous assets, not just bitcoin and ether. This multi-asset support provides a more extensive exposure to the crypto market, potentially allowing for a portfolio that includes the top 5, 10, or even 20 cryptocurrencies. This could lead to increased diversification and a broader understanding of the crypto asset class.

What are the potential tax benefits of an SMA?

A Self-Managed Account (SMA) could offer an investor the freedom for tax-saving strategies like tax-loss harvesting, personalized portfolio adjustments to address high investment concentrations, and potentially tax-efficient charitable donations. For more details on this subject matter, you might find J.P. Morgan Private Bank’s article insightful. Please note that this information should not be considered as tax advice – always consult a qualified tax advisor.

How has the SMA market grown over the past few years?

In a recent poll, it was found that there’s growing preference for Separately Managed Accounts (SMAs). Compared to model portfolios, fewer financial advisors anticipate boosting their investments in the coming year, instead opting to expand their allocations towards SMAs. By 2023, these SMA assets under management have surged to approximately $2.2 trillion.

– Kim Greenberg Klemballa, head of marketing, CoinDesk Indices