The recent adoption of spot Bitcoin ETFs has given financial advisors a potential gift of de-risking portfolios, sparing clients from Bitcoin itself.
There's no doubt that the introduction of Bitcoin ETFs has sparked investor excitement. Data from Bloomberg Intelligence shows that BlackRock's iShares Bitcoin Trust and Fidelity's Wise Origin Bitcoin Fund have each secured more than $3 billion in assets in the first 17 days of trading, the only ones to do so of the 5,500 ETFs launched over the past 30 years.
It's a bit of a surprise. For years, some investors have been looking for an equity instrument to capture Bitcoin without the hassle of buying Bitcoin on the open market. Advisers who have wanted to allocate some client assets to Bitcoin also now have a means to do so, as these can be held more traditionally and counted as assets under management.
However, we know that investors have been buying actual crypto assets directly, out of portfolios for several years. This has created a challenge for financial advisors who want to take a holistic approach to their clients' wealth. Many know their clients have significant crypto allocations, but can't really do anything about it. They are held elsewhere and are generally not easy to track down. Advisors can do everything right in the portion of a portfolio they manage, but there is a risk that Bitcoin's traditional volatility can blow up an investor's fortune. And there was nothing a counselor could do about it.
Until now.
While advisors can now distribute in Bitcoin instruments, they can also do something even more vital: hedge existing Bitcoin positions using derivatives on Bitcoin ETFs.
Advisors know that options are a great way to either provide downside protection for a security or generate some additional upside. We tend to think of these derivatives in direct relation to their underlying security, and indeed, prudent advisors would be well served using options strategies to better plan the movement of Bitcoin ETFs. This is self-explanatory.
However, the popularity of Bitcoin presents a new opportunity, although it requires a different way of thinking. Advisors can now ask clients about the value of Bitcoin they own directly and then develop a strategy using options to de-risk that part of their portfolio. If a client has, say, $1 million in Bitcoin, advisors can buy or sell options on Bitcoin ETFs even if the client isn't invested in the ETFs themselves. It becomes an elegant strategy to manage the traditional volatility experienced by Bitcoin. Options, after all, are designed to manage volatility.
There is another benefit: tax management. Options strategies have long been used to address capital gains embedded in securities that, if sold, trigger substantial tax bills. By selling a call, they either make money to cover their tax bill from the call premium itself if the underlying security does not appreciate or, if the security goes up, they can buy back the losing short calls and use those losses to offset gains elsewhere in a portfolio. Either way, advisors mitigate volatility and their clients' tax bill. A similar strategy can be used with Bitcoin, using options linked to ETFs.
Advisors know that options are a smart strategy for investors who want to diversify their portfolios or hedge against risk. Options that are derivatives of Bitcoin ETFs are a godsend for advisors who are frustrated at their inability to manage crypto the way they do other assets. This is definitely a positive development for this asset class.
David Donnelly is Managing Director of SpiderRock Advisors.