Spot Bitcoin ETF Will Send Advisors to School

Nick Rygiel is the owner and financial advisor at Ironclad Financial, a firm that blends data-driven research with the latest in technological trends. He specializes in “digital-first” financial planning and investment management, catering to clients who are innovation enthusiasts, visionaries and pragmatists.  

Jeff Benjamin: Are you using bitcoin in any way now, and if so, how?  

Nick Rygiel: Yes, I have clients that have direct bitcoin exposure, either self-custodied or they use a custodian like Coinbase or Standard Custody & Trust. In this case, I utilize a technology platform called L1 Advisors to track and provide portfolio updates for them. Additionally, some clients have indirect exposure through stocks and ETFs from VanEck, Bitwise and Invesco that track blockchain or bitcoin mining stocks. 

JB: Are you seeing increased appetite from clients for bitcoin?  

NR: Yes, and I'd like to refer to the technology adoption curve framework here as I've observed diverse client reactions that transcend the simple left-right divide of the bell curve. 

The early majority is showing the greatest increased interest in bitcoin exposure, while the late majority and laggards remain negative or indifferent at best. The most intriguing responses, however, are from the innovators and early adopters. These clients already have exposure to bitcoin and other digital assets, so our conversations revolve around possible second order effects from spot bitcoin ETF approvals. They worry that the eventual approvals could set a precedent for ethereum ETFs and the rise of permissioned blockchains.   

This trend would mean diverging from the original ethos of cryptocurrency as a public utility for internet-based value transfer, a concept Milton Friedman foresaw back in 1999. The analogy I draw is getting the 1990s America Online version of the internet as a curated, walled garden with access to all private communications for surveillance and security purposes instead of the open, decentralized system we have today.  

JB: Would you use a spot bitcoin ETF if it becomes available? 

NR: I would, especially for those clients in the early majority segment of the technology adoption curve. This is because it would offer them all the usual benefits an ETF provides within a regulated framework with a custodian they are already accustomed to.  

JB: Where does a spot bitcoin ETF fit inside a diversified portfolio? 

NR: The first thing is understanding each client's financial suitability, knowledge and interest in bitcoin. 

In terms of portfolio diversification, bitcoin can serve as an alternative asset, similar to gold allocations for some clients. Research by Bitwise has shown a 5% allocation of bitcoin in a portfolio from January 2014 to June 2023 led to enhancing risk-adjusted returns. Additionally, firms like VanEck and Fidelity have research related to bitcoin in investment portfolios, as well. For clients with substantial exposure to the technology sector, bitcoin could offer diversification benefits, potentially mitigating sector-specific risks. 

JB: Do you see any unique challenges with a spot bitcoin ETF? 

NR: Yes. I anticipate advisors may encounter several challenges with incorporating spot bitcoin ETFs, which could directly influence their clients, many of whom will seek guidance before making decisions. I believe many advisors have either avoided or dismissed discussions about bitcoin due to personal biases, firm policies or the lack of reliable methods for buying, tracking and advising on it for them. 

Advisors and their firms may need to make updates to their firm policies and procedures while ensuring they are providing clients the proper disclosures and education relating to the unique risks associated with digital currencies. 

Some of these risks include the relatively new technology, liquidity risks, potential operational interruptions, regulatory uncertainty and systematic risks. Whether it's through a spot bitcoin ETF or direct exposure, clients will need to be educated and made aware of the distinct risks and inherent volatility of digital assets. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter