Financial Advisers Are Betting On Bitcoin As A Hedge
A new Bitwise survey highlights a more favorable attitude toward Bitcoin and cryptocurrencies. Financial Advisers Are Betting On Bitcoin As A Hedge
Cryptocurrencies like Bitcoin (BTC) are increasingly being used by financial advisers as a hedge against inflation, underscoring the dramatic shift in institutional sentiment toward digital assets.
The “Bitwise/ETF Trends 2021 Benchmark Survey” reveals that 9.4% of financial advisers were allocating to cryptocurrencies in 2020 — an increase of 49% from the previous year. Of the advisers not currently allocating to crypto, 17% said they will either “definitely” or “probably” gain exposure in 2021.
Advisers are buying crypto for many reasons, chief among them being its potential hedge against inflation. As Bitwise noted, 25% of advisers cited inflation-hedging as one of the most attractive features of the asset class. That’s up from just 9% the year before.
The Report Said:
“This year’s survey saw a sharp uptick in advisors highlighting crypto’s ‘high potential returns’ and its role in ‘inflation hedging’ as key attractive features of the asset class.”
A total of 994 advisers participated in the survey, up from 415 the year before. Independent registered investment advisers represented 45% of respondents, followed by independent broker-dealers (25%), financial planners (19%) and wirehouse reps (11%).
Bitcoin appears to be benefiting from the systemic devaluation of the dollar as more investors opt out of the traditional financial system. The dollar’s freefall is expected to continue this year as the incoming administration of Joe Biden preps a multitrillion-dollar stimulus plan, effectively picking up where Donald Trump left off.
Although institutions currently represent a small fraction of all Bitcoin holdings, their impact on the market is growing. Goldman Sachs executive Jeff Currie believes institutional uptake has put Bitcoin on the path to maturity but noted that more adoption is needed to stabilize the asset class.
Bitwise’s assets under management ballooned to $500 million in December 2020, a fivefold increase from just two months prior. The firm’s record inflows reflect new demand from investment professionals, including advisers, hedge funds and corporations.
Investment Icon Ric Edelman $230 Billion Assets Under Management Owns Bitcoin and Ethereum
Investment icon Ric Edelman, named the nation’s top independent financial advisor by Barron’s three times over, says he’s a believer and investor in cryptocurrency.
In a new interview with Real Vision, the founder of Edelman Financial Engines, which has more than $200 billion in assets under management, says he first began to tinker with crypto assets in 2014 as an experiment.
“I began with Bitcoin in 2014, and it was an academic exercise. I want to open up a Coinbase account, see how this works. I want to buy a Bitcoin and see and just learn. I did that for a bit of time and began to, as my research continued, my conversations with so many in the crypto space evolve, began to realize there really is a there there. This is not just a Beanie Baby.”
Since then, Edelman says he has grown his portfolio and invested in Ethereum.
“I increased our exposure with my wife, Jean, and expanded into Ethereum. I am as excited about that, frankly, as I am Bitcoin for totally different reasons, and this is something that – we are not talking about Coke and Pepsi. We are talking about two fundamentally different aspects of this technological revolution.
You can extend that to Ripple. The reason that a lot of these key coins exist is that they solve a problem that the others were facing. Bitcoin is not the end-all solution.”
Edelman cautions that many altcoins are destined for obscurity, and he has no plans to mine BTC due to the complexity involved.
“It has a huge head start. 70% market share on a brand that none of the others have, but there is a reason technologically for the existence of these other coins. A lot of them are nonsense, but some of them make sense. Recognizing the cumbersome element of buying coins themselves, I chose personally not to engage in mining, too time consuming. I am too busy in my day job with Edelman Financial Engines. I am not going to go there.”
Ric Edelman Says Bitcoin Now A Mainstream Institutional Investment
Ric Edelman, the investment icon who has been named the country’s top financial advisor by Barron’s three times over, says the conversations surrounding Bitcoin are doing a 180-degree turn as more institutions invest in the flagship cryptocurrency.
On an episode of SALT Talks, Edelman highlights that Bitcoin is beginning to attract financial advisors for two big reasons.
“The upside potential remains very very big for Bitcoin and it is the outsized potential of returns. The stock market makes 10% in a year. Bitcoin routinely moves up or down 10% in a day. And so it is the potential for outsized returns.
It is the number one performing asset class of the last one, three, five, and ten-year periods since inception and many people believe it’s still in its infancy. So there’s a tremendous opportunity for that…
The number one reason that advisors say they are interested in this is the fact that Bitcoin is uncorrelated. Its price movements have nothing to do with anything else, not with the stock market the bond market, interest rates, inflation rates, economic policy, Fed action, nothing. And if you truly believe in diversification, you want uncorrelated and even better non-correlated assets in your portfolio.”
The prominent investor says that as big institutions pile into Bitcoin, a massive legitimization of the leading cryptocurrency will take place.
“The conversation is shifting from ‘You’re conspicuous if you own it,’ to ‘You’re conspicuous if you don’t’ and I think that trend is going to continue even further.
Now that you can buy Bitcoin at PayPal and you have MicroStrategy for example investing over half a billion… We are clearly in an environment where Bitcoin is now mainstream, and this legitimizes the asset, and there’s going to be a continued snowball effect of this where people will begin to realize it’s routine, just as the gold ETF made gold a routine asset for portfolio diversification.
The first two weeks that ETF raised a billion dollars. So yes, I do believe we will continue to see broad diversification and greater mainstreaming by institutions, endowments, pension funds insurance companies and so on.”
Edelman isn’t looking through rose-colored glasses though. He still believes Bitcoin comes with significant risks, which is why he has limited his exposure to it.
“There still remain massive risks: technological risks, regulatory risks. Governments could get very upset with all of this. We don’t know where it’s going to go, so we want to keep our heads about us, not over invest, and not subject ourselves to portfolio risks that would harm our personal finances.”
Don’t Count On Bitcoin To Be A Sure-Thing Inflation Hedge
Cryptocurrency’s history is too short to judge whether it can provide protection against rising prices.
Hardcore Bitcoin enthusiasts say the digital coin is the world’s best hedge against rising consumer prices. The logic: Unlike U.S. dollars or any other normal currency, it’s designed to have a limited supply, so it can’t be devalued by a government or a central bank distributing too much of it.
Almost every bull case on Bitcoin has looked prescient lately—the cryptocurrency is trading at around $57,000 a coin, up from about $5,000 a year ago—so that’s added some buzz to this inflation story.
With the economic outlook perking up, Covid-19 cases falling, and greater amounts of fiscal stimulus on the horizon, investors in all kinds of assets seem to expect a bit of a rise in prices. But that’s coming from a very modest base. Over the past year, the inflation rate in the U.S. has been 1.7%.
And then there’s the question of whether the digital asset would really act as an effective hedge. It doesn’t have a long enough history to establish that, says Cam Harvey, senior adviser to Research Affiliates and a professor of finance at Duke University.
Theoretically, if investors come to regard it as similar to gold, Bitcoin might hold its value over a very long term—as in a century or more, Harvey says. In their research on gold, he and his colleagues have found that it has held its value well for millenniums. But they also found that it’s prone to manias and crashes over shorter periods. (Gold, notably, is down 9% this year despite all the inflation talk.)
Bitcoin too has swung wildly in its short life, for reasons barely connected to anyone’s view on inflation. “What’s going to happen to Bitcoin? It’s really unclear,” Harvey says. “The price is not just driven by the money-supply rule, it’s driven by other speculative forces. That’s why it’s multiple times more volatile than the stock market.”
It’s conceivable that a bout of inflation could have the opposite of the expected effect on Bitcoin. If inflation induced a recession, for example, investors might respond by stepping away from riskier assets such as cryptocurrencies.
In recent weeks, when investors concerned about inflation pushed the 10-year Treasury yield from 1.34% to as high as 1.62%, Bitcoin suffered its worst drop in months. Crypto proponents argue that Bitcoin traders long ago anticipated bond yields would rise—and a subsequent spike in yields did roughly track with a bump in crypto. Still, Bitcoin’s recent moves bear at least a passing resemblance to more straightforward speculative trades.
Bitcoin has received a stamp of approval from more than a handful of notable Wall Streeters, including veteran hedge fund manager Paul Tudor Jones, who say they like it as a store of wealth.
“That is certainly an element that has driven investment by institutions, particularly in the wake of the ways in which policymakers have worked to jump-start the economy” after the Covid slowdown, says Michael Sonnenshein, chief executive officer at Grayscale Investments, which runs a fund that holds Bitcoin. “Certainly we have no shortage of global macro investors for whom adding Bitcoin has acted for them as a hedge for inflation.”
Bitcoin’s strongest advocates see its rising price as an early-warning sign that the traditional financial system is vulnerable, and argue that the cryptocurrency could rise further as investors look for a haven. Such arguments hinge on the idea that inflation won’t just edge up with a growing economy, but could explode as a result of so-called money printing.
The Federal Reserve doesn’t change the money supply by literally printing bills. However, a measure of the amount of money in the financial system known as M2 has increased, thanks in part to accommodative policy.
Fed Chairman Jerome Powell said in recent congressional testimony that the growth of the money supply no longer has important implications for the economic outlook. “We’ve had big growth of monetary aggregates at various times without inflation,” he said. “So it’s something we have to unlearn.”
Jim Paulsen, chief investment strategist at the Leuthold Group, agrees. While there may be more money, its velocity—or the frequency with which money changes hands—has dropped off. That’s a crucial factor because it shows money is being saved rather than spent, which keeps price pressures muted.
But even if velocity turns higher, offsetting disinflationary forces could still come into play, including an aging population and digital technology’s propensity to push prices down. “Inflation is turning up a little bit, but I don’t think that means that crypto is going to go nuts,” Paulsen says.
Bitcoin is unlike most other inflation hedges. Its value is based entirely on other people’s willingness to hold it: The digital token isn’t tied to any other asset, such as oil or real estate or earnings from a business, that might naturally rise in value along with consumer prices.
It’s possible that inflation could go up and it’s possible that Bitcoin could too, but the two aren’t necessarily linked. One of Bitcoin’s best-known bulls, Ark Investment Management founder Cathie Wood, said in a recent webinar that she’s as concerned about the forces of deflation—or falling prices—as she is with inflation.
“The kindling wood for inflation exists,” says Marc Chandler, chief market strategist at Bannockburn Global Forex. “One has to make a judgment about whether there’s sufficient spark.” Instead of looking at Bitcoin prices as a weather vane of inflation, he prefers to look at signals such as oil prices, shipping costs, or the price of semiconductors.
They’re all rising as the economy gains steam, but that doesn’t mean the dollar’s being undercut by a flood of printed money. “The high priests of the cryptocurrency space look for any reason to help their case,” he says. “I’m still hesitant to think that Bitcoin tells us anything about high-frequency economic variables.”—With Katie Greifeld