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Three Reasons Financial Advisors Are Buying Crypto Ahead Of 2020

San Francisco
October 22, 2019

Three major catalysts could make 2020 a breakthrough year for crypto.

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Advisors often ask us: When is the right time?

I see progress with crypto, but maybe I should wait until X happens before I invest.

“X” could be anything. Some want to see crypto’s volatility settle down; others are waiting for a bitcoin ETF to launch.

The challenge is that crypto continues to move forward even as we wait for these advances. Despite the 2018 bear market, for instance, $100,000 invested in bitcoin three years ago would be worth $1.15 million today, a life-changing amount. (1)

As we head into year-end portfolio reviews, we believe now is a particularly important time for advisors to consider making their first allocation in client portfolios. There are three major catalysts on the horizon that we think could make 2020 a breakthrough year for crypto.

(1): Data as of 10/16/19. Historical performance of bitcoin (BTC) is not illustrative of the performance of the Bitwise Bitcoin Fund or any actual account. Past performance cannot predict future results. These historical returns do not include the fees and expenses that are charged by any Fund. Actual Fund returns may differ materially from the historical returns of bitcoin (BTC). The inception date of the Bitwise Bitcoin Fund is December 5, 2018.

Catalyst No. 1: The Bitcoin Halving

In May 2020, the amount of new bitcoin produced each day will drop in half. Like a supply shock in oil, this process has historically been accompanied by a strong bull market.

Like all real assets, the price of bitcoin is set by supply and demand. The media spends a huge amount of time talking about the demand side of the equation, but supply is equally important.

Right now, approximately 1,800 new bitcoin are created each day. At current prices, that means approximately $5.3 billion in new supply each year.

In May 2020, however, the amount of new supply will fall in half. This quadrennial “halving”—the Olympics of bitcoin—has historically had a major impact on prices.

How major? BayernLB, the seventh largest bank in Germany, released a report recently saying the upcoming halving could drive bitcoin’s price to $90,000. That is an aggressive target, but a 50% drop in supply is significant.

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Catalyst No. 2: Facebook’s 2020 Crypto Launch (And No, We Don’t Mean Libra)

Libra may not launch next year, but another major crypto initiative at Facebook will … and it could open up crypto to 2.7 billion users.

When Facebook announced its crypto ambitions in June 2019, it announced two projects: Libra and Calibra. All the media attention focused on Libra, the company’s controversial cryptoasset, but in many ways, Calibra is more important.

Calibra is a Facebook-designed tool that would allow the company’s 2.7 billion monthly active users to send, receive, and hold cryptocurrencies in WhatsApp, Messenger, and other Facebook platforms. With approximately 100 Facebook employees working on the project, we believe Calibra will launch next year regardless of the fate of the company’s embattled Libra coin.

Calibra could be a game-changer because of the scale it brings to crypto. Currently, the most popular app for sending, receiving, and holding cryptocurrencies is Blockchain.com, with around 40 million users. Adding 2.7 billion users (or even a fraction of that audience) would be a big deal.

Catalyst No. 3: The Rising Use of Alternatives By Financial Advisors

Advisors are turning to alternatives as they come to grips with low expectations for stock and bond returns. We believe a significant number will migrate into crypto in 2020.

Advisors face a unique portfolio challenge as we approach 2020.

We’re at the tail end of a 36-year bull market in bonds, and the current bull market in stocks is the longest in history. Valuations are stretched: Nobel-prize-winning economist Robert Shiller’s CAPE ratio currently predicts we’ll see negative U.S. stock returns over the next 10 years. Things are so challenging that Bank of America—the largest wealth manager in the world— recently published research calling for the end of the traditional 60/40 stock/bond portfolio.

Faced with these challenges, advisors are increasingly turning to alternatives as they search out strong returns that are not correlated with traditional markets. A recent Cerulli Associates survey found that 40% of financial advisors are embracing alternatives, and many expect that number to rise.

Crypto can be a powerful alternatives solution for advisor portfolios. Like the best hedge funds and private equity investments, crypto combines high potential returns with low correlations to stocks and bonds. But unlike traditional alts, crypto investments are liquid, with none of the lockups, access issues, or performance fees that make traditional alternative investments difficult for advisors to use.

Studies show that adding just a 1% allocation to crypto has historically had a significant impact on the risk/return profile of a traditional stock/bond portfolio.

Closing Thought: With Institutions Investing, Can You Afford To Stay On The Sidelines?

The crypto market has evolved significantly in the past two years.

In 2017, crypto was a nascent market. There were no regulated and insured third-party custodians, trading was difficult, regulatory views were unclear and institutional investors were on the sidelines.

Today that’s changed.

There are now 9 regulated custodians, many of which have insurance through firms like Lloyd’s of London.[2] Crypto trading is increasingly conducted through established, institutional market makers like Jane Street. Meanwhile, regulators have cleaned up the space and set up new divisions like the SEC’s FinHub to facilitate dialogue with the industry. As a result of these developments, institutional investors—including endowmentspensions, and hedge funds—are increasingly allocating.

This raises the stakes for financial advisors. Two years ago, advisors could credibly argue that the market was not ready to support crypto. But today—with thought leaders like Ric Edelman recommending advisors add crypto to client portfolios—times have changed.

Some advisors are using crypto today to win new business or deliver stronger total returns. Others are playing defense, knowing clients will remember if they miss out on the next opportunity to turn $100,000 into $1.15 million.

Either way, with multiple significant catalysts on the horizon and a huge leap forward in market maturity, we think the time is right for advisors to consider their first allocation to crypto today.

Bitwise exists to serve as a partner to financial advisors looking for professional access to crypto. To learn more about the company’s offerings, or to set up a conversation with a crypto expert, check out our financial advisor page here.

Important Disclosures

Bitwise Asset Management, Inc. and its affiliates (collectively, the “Manager”) has produced and distributes this Presentation for informational purposes only and in relation to a potential opportunity to subscribe for limited liability company interests (“Interests”) in any of several Funds offered only to certain Accredited Investors by the Manager, including the Bitwise 10 Private Index Fund, LLC; the Bitwise Bitcoin Fund, LLC; and the Bitwise Ethereum Fund, LLC; the Digital Asset Index Fund, LLC; and the Bitwise 10 Index Offshore Fund, Ltd. Any offer to sell or solicitation of an offer to buy Interests in those Funds will solely and exclusively be made through definitive offering documents, identified as such, in respect of each Fund and in compliance with the terms of all applicable securities and other laws. Such definitive offering documents, if any, will describe risks related to an investment in the Funds (including loss of the entire investment) and will qualify in their entirety the information set forth in this Presentation. This Presentation is neither an offer to sell nor a solicitation for an offer to buy Interests in any Fund. Any such offer or solicitation will be made solely through definitive offering documents, identified as such, which will contain information about each fund’s investment objectives and terms and conditions of an investment and may also describe risks and tax information related to an investment therein and which qualifies in its entirety the information set forth in this Presentation. “No Advice on Investment; Risk of Loss Prior to making any investment decision in respect of any Fund, each investor must undertake its own independent examination and investigation of the Fund, including the merits and risks involved in an investment in the Interests, and must base its investment decision – including a determination whether Interests would be a suitable investment for the investor – on such examination and investigation and must not rely on the Manager or the Fund in making such investment decision. Prospective investors must not construe the contents of this Presentation as legal, tax, investment, or other advice. Each prospective investor is urged to consult with its own advisors with respect to legal, tax, regulatory, financial, accounting and similar consequences of investing in the Fund, the suitability of the investment for such investor and other relevant matters concerning an investment in the Fund. This Presentation contains an overview summary of the terms of the Fund. The summary set forth in this Presentation does not purport to be complete, and is qualified in its entirety by reference to the definitive offering documents relating to the Fund. Do not place undue reliance on this Presentation.” Historical performance of Bitcoin (BTC) is not illustrative of the performance of the Bitwise Bitcoin Fund. The returns of Bitcoin are historical and unaudited and do not represent the returns of an actual account. These historical returns do not include the fees and expenses that are charged by any Fund. Actual Fund returns may differ materially from the historical returns of Bitcoin (BTC). The inception date of the Bitwise Bitcoin Fund is December 5, 2018. The Units and the Shares (the “Interests”) have not been registered under the Securities Act of 1933, the securities laws of any state or the securities laws of any other jurisdiction, nor is such registration contemplated. The Interests will be offered and sold under the exemption provided by Section 4(a)(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder and other exemptions of similar import in the laws of the states and jurisdictions where the offering will be made. The offer and sale of the Interests have not been registered with or approved or disapproved by the Securities and Exchange Commission (the “SEC”) or the securities commission or regulatory authority of any state or foreign jurisdiction.

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Author
Matt Hougan
Matt Hougan
Chief Investment Officer

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