How Bitcoin has (Forever) Changed the Face of Wealth Management
James McKay of McKay Research explores several key data points underpinning crypto assets’ current wave of popularity. He presents a compelling case for those wealth managers and family offices still on the fence to act now and take advantage of the opportunities in cryptoassets during this unique phase of development.
If 2020 was the year Bitcoin proved it still had life after the lengthy doldrums that followed the 2018 crash, then 2021 will surely mark the year it was well and truly embraced by mainstream business and finance. Bitcoin’s huge 101% surge from $28,989 on January 1st to a peak of $58,339 on February 21st, came off the back of a wave of institutional pile-ins and was propelled further by a series of high-profile announcements on new participation by industry in the digital assets space.
The evolved views of business and finance towards Bitcoin
From Tesla’s US$ 1.5 billion Bitcoin investment and MasterCard announcing its crypto-payments network, to the launch of the first North American bitcoin ETF on the Canadian TSX, the first months of 2021 have seen cryptocurrencies placed firmly on the global business and investment radar. Unsurprisingly, this rapid maturing of the industry is also very much playing itself out in the arena of wealth management.
Despite the paradox of major institutional money arriving into a space that was originally conceived by tech-savvy libertarians as an attempt to create a peer-to-peer value exchange layer with the potential to limit the excesses of the financial sector (of which the financial crisis of 2007 to 2009 was one obvious result), BNY Mellon, Black Rock, JP Morgan, and other major financial institutions have now entered the digital assets space with bullish aplomb.
These developments represent a rapid evolution in the perceptions and attitudes around Bitcoin. Even a mere two years ago, it would have been unthinkable to have some of the world’s largest financial institutions participating in this new digital asset class, while simultaneously seeing major corporations drawing down dollar-denominated cash balances in favour of Bitcoin.
Appetite for crypto assets transcends demographic groups
Examining the data on investor attitudes towards cryptocurrencies across different demographic profiles provides useful insight as to how and why institutions and businesses are starting to reflect the perceptions of the typical investor.
For example, a study conducted by financial advisory firm, Devere Group, found that some 73% of HNWIs were already invested in cryptocurrencies such as Bitcoin, Ethereum, and XRP or were planning to make such additions to their portfolio by 2022.
The importance of HNWI trends cannot be underestimated, as circumstances such as the erosion of wealth from Covid-19, and the need to achieve greater geographical diversification for both personal and investment reasons, has generated greater interest in alternative asset classes such as cryptocurrencies and citizenship by investment (for more see How Citizenship by Investment trends reflect global HNWI investment priorities).
Figure 1: Appetite for Bitcoin over most other asset classes has risen in the last three years
t the same time, millennials, too, appear to increasingly be favouring Bitcoin to traditional asset classes such as equities and fixed income, as well as to legacy stores of value such as gold. As early as November 2019, Edleman’s ‘Millennials and the Future of Money’ report indicated that 63% of cryptocurrency users were of the view that Bitcoin is a better investment than gold in a volatile economy.
In a 2020 survey of 5,000 participants across 17 countries, crypto media platform, The Tokenist, demonstrated how attitudes have shifted over a three-year period with respect to traditional investments and financial institutions (Figure 1). Comparative analysis of survey data between 2017 and 2020 showed how Bitcoin’s favourability has risen in the eyes of investors. Almost half of all respondents indicated that they would choose a US$ 1,000 investment in Bitcoin over bonds, real estate, and gold. This represents an increase of 13% in the past three years.
Bitcoin brings big returns, but the ‘cryptofication’ of business presents risks
Though the shift in attitudes is a key signpost of the broader investor swing towards crypto assets, it is important to highlight that this shift is very much tied to performance, not a preoccupation with the underlying technology. Plus, it is no secret that cryptocurrencies have been the top-performing asset class over the past decade, significantly outpacing traditional investments.
Alpha modelling reveals that adding a 1% bitcoin allocation in a traditional multi-asset portfolio consisting of 49.5% global equities and 49.5% global treasures from 2010, yields an average annualised return of 104.5% — highlighting Bitcoin’s out-sized impact on portfolio performance (Figure 2).
Figure 2: A small Bitcoin in a traditional multi-asset portfolio can yield impressive results
Source: Robeco, Jeroen Blokland, Bloomberg
Further supporting this portfolio data, is the growing body of evidence pointing to Bitcoin’s growing traction in the business world as a reserve asset — even prior to Musk’s recent bombshell announcement.
For example, the CEO of business intelligence firm, MicroStrategy, Michael Saylor, has been very vocal about accumulating a $3.1 billion position in Bitcoin. As the first publicly-listed company to invest in Bitcoin, the move generated a huge amount of media and investor attention which saw the company’s share price surge over 600% since Bitcoin purchases began in August 2020.
However, though corporates pursuing ‘cryptofication’ strategies as a means to optimise cash balance returns with Bitcoin appears a positive development both for the companies themselves and the broader cryptoassets space (Figure 3), it does present several novel challenges for wealth managers and investors.
Figure 3: Public companies with the largest Bitcoin holdings
Source: bitcointreasuries.org, fortune.com
In the case of Tesla for instance, not only could Bitcoin’s volatility impact its bottom line in a cyclical bear market, the energy-intensive nature of Bitcoin could undermine its sustainability credentials which is fundamental to its attractiveness to investors.
Secondly, many investors and wealth managers continue to view Bitcoin as relatively speculative, irrespective of price action. Therefore, those companies acquiring large unhedged positions could find themselves shunned by investors and portfolio managers due to a sudden perceived mismatch with individual risk tolerance.
Finally, firms broadcasting Bitcoin acquisitions could ultimately be sanctioned by the SEC or other regulatory bodies due to the troublesome nature of making public statements on a company’s financial condition.
Wealth managers must embrace Bitcoin but have a nuanced view
The data and trends presented here show just how rapidly Bitcoin and cryptocurrencies have disrupted the wealth management landscape.
However, as the state of crypto regulation is failing to keep pace with the global rise in crypto participation, family offices in particular will have to balance their fiduciary responsibility to advise clients on the merits of Bitcoin as an investment with their need to generate returns in an increasingly uncertain investment landscape.
In parallel, wealth managers must also take into account how the adoption of blockchain technology could benefit their own operations by reducingcosts and increasing efficiency. A March 2020 study by Accenture and McLagan found that blockchain technology could cut costs in central finance reporting by 70%; company and central operations by 50%, enforcement by 50%; and middle and back offices by more than 30%.
This underlines the need for a truly holistic approach to cryptoassets,. It will require Registered Investment Advisers (RIAs) and wealth managers to leave behind ‘off the shelf’ strategies in favour of innovative approaches in order to tap into the cryptocurrency sector’s myriad of opportunities.
For more information on the above insightful analysis on how Bitcoin is impacting the wealth management sector please email james@mckayresearch.com or visit www.mckayresearch.com.
James McKay is an independent research consultant in the fields of technology and investment with expertise in the design and end-to-end implementation of custom research projects. As principal and founder of McKayResearch, he has over 12 years’ experience providing strategic research services both to the world’s leading market intelligence firms and a growing portfolio of private clients that include legal consultancies and investment firms. His research instruments and analyses have been widely published by a variety of technology and business publications, including the Financial Times.
Source: bitcointreasuries.org, fortune.com
In the case of Tesla for instance, not only could Bitcoin’s volatility impact its bottom line in a cyclical bear market, the energy-intensive nature of Bitcoin could undermine its sustainability credentials which is fundamental to its attractiveness to investors.
Secondly, many investors and wealth managers continue to view Bitcoin as relatively speculative, irrespective of price action. Therefore, those companies acquiring large unhedged positions could find themselves shunned by investors and portfolio managers due to a sudden perceived mismatch with individual risk tolerance.
Finally, firms broadcasting Bitcoin acquisitions could ultimately be sanctioned by the SEC or other regulatory bodies due to the troublesome nature of making public statements on a company’s financial condition.
Wealth managers must embrace Bitcoin but have a nuanced view
The data and trends presented here show just how rapidly Bitcoin and cryptocurrencies have disrupted the wealth management landscape.
However, as the state of crypto regulation is failing to keep pace with the global rise in crypto participation, family offices in particular will have to balance their fiduciary responsibility to advise clients on the merits of Bitcoin as an investment with their need to generate returns in an increasingly uncertain investment landscape.
In parallel, wealth managers must also take into account how the adoption of blockchain technology could benefit their own operations by reducingcosts and increasing efficiency. A March 2020 study by Accenture and McLagan found that blockchain technology could cut costs in central finance reporting by 70%; company and central operations by 50%, enforcement by 50%; and middle and back offices by more than 30%.
This underlines the need for a truly holistic approach to cryptoassets,. It will require Registered Investment Advisers (RIAs) and wealth managers to leave behind ‘off the shelf’ strategies in favour of innovative approaches in order to tap into the cryptocurrency sector’s myriad of opportunities.
For more information on the above insightful analysis on how Bitcoin is impacting the wealth management sector please email james@mckayresearch.com or visit www.mckayresearch.com.
James McKay is an independent research consultant in the fields of technology and investment with expertise in the design and end-to-end implementation of custom research projects. As principal and founder of McKayResearch, he has over 12 years’ experience providing strategic research services both to the world’s leading market intelligence firms and a growing portfolio of private clients that include legal consultancies and investment firms. His research instruments and analyses have been widely published by a variety of technology and business publications, including the Financial Times.
#cryptoassets #bitcoin #wealthmanagement #wealthadvisers #investment #investincrypto #cryptocurrencies #civitaspost
Originally published at https://civitaspost.com/
