How Bitcoin ETFs are Changing the Advice Game

How Bitcoin ETFs are Changing the Advice Game

Eaglebrook’s Damon Polistina details where and how bitcoin fits in client portfolios.

Reviewed by: Staff
Edited by: Staff

Damon-PolistinaDamon Polistina is the director of research at Bethesda, Maryland-based Eaglebrook Advisors, an investment platform that provides RIAs with direct access to digital assets.

“Something just told me that they were going to be incredibly disruptive and important in asset management moving forward. I just wanted to learn everything I could about them,” he explained.

Jeff Benjamin: Can you make a case for allocating to bitcoin over gold?

Damon Polistina: Yes, it comes down to what makes gold valuable, and whether you can make a case that bitcoin could replicate this. Bitcoin is often described as digital gold because the two assets share similar underlying monetary qualities. They are both scarce with limited supply, decentralized, durable, and uniform. 

Trust in gold’s ability to maintain or increase in value over time is due to these inherent attributes. Over thousands of years, gold has stood the test of time and competition from other types of monetary assets, remaining the most widely accepted store of value.

Bitcoin has the same qualities — but limited levels of overall trust, making it an emerging store of value. With all the same attributes that allowed gold to be the most trusted monetary asset in the world, bitcoin one-ups gold due to a few unique characteristics. 

One of these is portability. Bitcoin can be sent across the globe in minutes. Bitcoin one ups gold again with its absolute scarcity. The amount of bitcoin is known and set. If the price of gold skyrocketed, more gold mines would become operational, increasing the supply of gold. No matter the price of bitcoin, the supply can’t increase. This supply/demand dynamic is unique and has never been seen before in a monetary asset. 

JB: Would you describe bitcoin as a replacement for gold in an investment portfolio?

DP: At this time, no. Investors are not substituting bitcoin for gold in portfolios. Gold is universally viewed as a store of value and stands out as an inflation and portfolio hedge backed by many years of historical evidence. Investors accept it as the go-to hedge in times of stress. While bitcoin has the same underlying attributes as gold, it is not accepted to the same degree.

Currently, bitcoin is a risk-on asset within a traditional portfolio. An allocation to bitcoin represents investing in an early stage emerging technology, like the Internet in the 1990s. Investors do allocate to bitcoin for its diversification properties, but more for potential outsized returns driven by increasing global adoption and acceptance. Bitcoin's volatility and higher correlation with risk assets during times of market turmoil do not make it a viable replacement for gold in a portfolio.

With that said, bitcoin could evolve into a risk-off asset due to its limited counterparty risk and known, scarce supply. The banking crisis in March 2023 highlighted this dynamic. Bitcoin rose nearly 40%, while the regional banking sector wobbled precariously.

A fully decentralized asset, bitcoin represents the ultimate safe-haven asset in times of heightened counterparty stress. However, the market doesn't hold this viewpoint yet. Over time, as education and acceptance grow, bitcoin could become the de facto hedge against currency debasement, a safe-haven asset during market uncertainty, and the prevailing store of value.

JB: What kind of an impact has the spot bitcoin ETFs had on portfolio construction and use of crypto in diversified portfolios?

DP: The ETF has been a game changer, a watershed moment for bitcoin. The ETF has put a stamp approval on bitcoin and opened many eyes to the possibility of allocating to bitcoin. Before the ETF, discussions around adding crypto to a portfolio were difficult, with advisors raising various concerns.

The crypto conversation has seen a noticeable shift since the bitcoin ETF approval. Advisors are now significantly more open to the idea of crypto. Instead of questioning bitcoin’s viability as an investable asset, advisors are focused on developing a plan and proactively performing due diligence to find the best crypto investment solutions. 

JB: Where does bitcoin fit in a portfolio; is it a proxy for stocks, bonds, alternatives?

DP: Bitcoin should be considered an alternative asset. It is a nontraditional asset with a relatively low correlation to stocks and a higher risk-return profile compared to traditional asset classes. Given the asset's volatility and traditional market cycle length, investors should view it as a long-term allocation. Set it and forget it, and check the results in three to five years.

JB: How much bitcoin is enough to have an impact on a portfolio?

DP: A little bitcoin goes a long way. Based on industry research, which includes back-tests, portfolios with a 2% to 5% bitcoin allocation showed positive impacts compared to portfolios without bitcoin. Given the high level of volatility, keeping an allocation to the single digits limits the overall downside volatility of a portfolio while allowing for a meaningful impact on the portfolio on the upside.

These same research studies demonstrate that portfolios with a low-single-digit allocation to bitcoin see higher Sharpe ratios, improved diversification, and higher returns over a long-term holding period than traditional 60-40 portfolios. 

From a less technical standpoint, investors should allocate an amount they feel comfortable seeing daily moves of up to 10% or even more. Make a small allocation that allows you to sleep at night but a large enough allocation to provide significant portfolio upside. 

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.