The recent approval of a Bitcoin spot ETF provides financial advisors with the potential gift of reducing portfolio risk, thereby insulating clients from the impact of Bitcoin itself.
There is no doubt that the launch of the Bitcoin ETF has sparked excitement among investors. BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin Fund each gained more than $3 billion in assets in the first 17 trading days, according to data from Bloomberg Intelligence, the first time they have been launched in the past 30 years. The only fund among 5,500 ETFs to do this.
This is not surprising. For years, some investors have been looking for an equity vehicle to capture Bitcoin without having to buy it on the open market. Advisors who want to allocate some client assets to Bitcoin also now have the tools to do so, as these can be more traditionally managed and counted as assets under management.
However, we know that investors have been buying actual crypto assets directly outside of their portfolios for years. This presents a challenge for financial advisors who want to take a holistic approach to client wealth. Many people know that their clients have large allocations to cryptocurrencies, but are unable to actually do anything about it. They are kept elsewhere and are often not easy to track. Advisors can do all the right things in the portions of their portfolios they manage, but there’s still a risk that Bitcoin’s traditional volatility could destroy investor wealth. There is nothing the consultant can do about it.
so far.
While advisors can now allocate Bitcoin instruments, they can also do something more important: hedge existing Bitcoin positions by using derivatives from Bitcoin ETFs.
Advisors know that options are a great way to provide downside protection or generate additional upside for a security. We like to think of these derivatives as directly related to their underlying securities, and in fact, prudent advisors can use options strategies to better plan around the movement of Bitcoin ETFs. that goes without saying.
However, the popularity of Bitcoin offers a new opportunity, although it requires different thinking. Advisors can now ask clients the value of the Bitcoin they own directly and then use the options to develop strategies to reduce risk in that portion of their portfolios. For example, if a client owns $1 million in Bitcoin, the advisor may have an option to buy or sell a Bitcoin ETF even if the client does not invest in the ETF itself. It becomes an elegant strategy for managing the traditional volatility experienced by Bitcoin. After all, options are designed to manage volatility.
There’s another benefit: tax management. Option strategies have long been used to deal with capital gains embedded in securities that would trigger large tax bills if sold. By selling calls, they can make money from the call premium itself to pay the tax if the underlying security doesn’t appreciate, or they can buy back the short call at a loss if the security rises and use those losses to offset elsewhere in the portfolio income. Either way, advisors relieve clients of volatility and tax burdens. A similar strategy can be used for Bitcoin, using options related to ETFs.
Advisors know that options are a smart strategy for investors who want to diversify their portfolios or hedge risk. The Bitcoin ETF’s derivatives options are a gift to advisors who are frustrated by their inability to manage cryptocurrencies as well as other assets. This is certainly a positive development for the asset class.
David Donnelly is a Managing Director at SpiderRock Advisors.
