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Though crypto separately managed accounts have come to the US market in the absence of ETFs that directly hold crypto, some believe a bitcoin ETF would boost SMA demand, not offer competition.
Christopher King, CEO of SMA platform Eaglebrook Advisors, said he is “rooting for” a spot bitcoin ETF approval in the US.
Such a product — which he believes could be approved in late 2024 or early 2025 — would help legitimize crypto and send demand for crypto SMAs “into hyperdrive,” he said.
“It allows more people to dip their toes in … in an easier way, which will in turn drive demand for our solutions from advisers because of the extra value prop via strategies and assets they can’t access in the ETF wrapper,” King said.
Last month, asset management giant BlackRock filed to launch a spot bitcoin ETF — an action that spurred other fund issuers to renew their own bids. The SEC has never approved a spot bitcoin ETF.
An April 2022 survey by Nasdaq found 72% of financial advisers would be more likely to invest client assets in crypto if a spot bitcoin ETF were offered in the US.
“Once you understand bitcoin and get exposure to bitcoin, you go down the ETH rabbit hole, and then the other crypto protocols and alt coins,” King told Blockworks. “They’re going to look for that exposure, and I think that’s what would probably lead them to potentially using both a bitcoin ETF and more managed solutions and multi-asset exposure.”
Crypto SMAs vs. proposed spot bitcoin ETF
Bitwise Chief Investment Officer Matt Hougan said a spot bitcoin ETF is going to “grow the pie for crypto massively,” but added that crypto SMAs offer unique benefits.
The crypto-focused asset manager added three crypto SMA strategies to Eaglebrook’s platform in April. The firm also has an active filing for a spot bitcoin ETF being reviewed by the SEC.
Read more: Start your engines: Deadlines to watch for in the bitcoin ETF race
Unlike a spot bitcoin ETF, crypto SMAs offer exposure to a range of assets. Bitwise’s Crypto Category Leaders SMA, for example, owns the leading asset in seven categories, such as monetary solutions and Layer-1 networks. It currently owns polygon (MATIC), chainlink (LINK), uniswap (UNI), aave (AAVE) and lido DAO (LDO), alongside BTC and ETH.
“Crypto is a series of network effects markets, and network effects markets tend to be dominated by single players,” Hougan said.
In addition to diversified exposure, SMAs allow adviser clients to transfer their crypto into an SMA, without triggering a tax event, in most cases. Some accounts may be able to also engage in tax-loss harvesting — purposefully incurring capital losses to offset capital gains taxes — inside the SMA.
SMAs fit well into the workflows of advisers that might otherwise struggle to help clients invest through Coinbase, the Bitwise CIO added — noting that “ease of use is a killer app when allocating to crypto.”
Unlike an ETF, executives noted, SMAs allow clients to own the assets directly in their name at a qualified custodian.
While a spot bitcoin ETF competes with an SMA in the sense that it would be more convenient for many advisers, more financial professionals are likely to evolve from a spot bitcoin ETF to a crypto SMA, Hougan said, rather than the inverse.
“The only things a spot bitcoin ETF will steal market share from is private bitcoin-only funds, OTCQX traded bitcoin trusts, and bitcoin trading on exchange,” he told Blockworks. “Everything else in crypto — everything — will benefit from a spot bitcoin ETF.”
More TradFi players to enter space?
Like Bitwise, Franklin Templeton, a fund giant with more than $1 trillion assets under management, recently launched crypto SMAs.
Franklin Templeton’s first such offerings became available on the Eaglebrook platform late last year. One is a market cap-weighted strategy that invests in 10 to 15 of the largest digital assets, excluding stablecoins and memecoins. The other is similar in scope but caps allocations to bitcoin (BTC) and ether (ETH) at 25% of the portfolio each.
Just weeks after Franklin Templeton’s move, Ark Invest introduced its own crypto SMAs.
Registered investment advisor (RIA) partners have shown growing interest in offering clients access to alternative investments that include digital assets, according to Sam Marciano, Franklin Templeton’s head of SMA distribution.
A Franklin Templeton spokesperson declined to disclose its SMA assets under management. Bitwise and Ark Invest did not immediately return a request for those figures.
“We are continually assessing the industry growth trends and innovation required to best serve our distribution partners and clients,” Marciano told Blockworks. “We see blockchain enabling a robust pipeline of digital assets, increasing the opportunity sets from which we can create solutions for our clients.”
King said he expects that two or three other large asset managers — with at least $500 billion in assets under management — will launch crypto SMAs in the next 12 months.
These entrants are likely to be enticed by demand within a $40 trillion or so wealth management market for “long-only active, smart-beta and risk-managed” offerings, he added.
“My view is that bitcoin in the crypto space is the S&P 500,” King said. “These asset managers want to run strategies to do what they do … and outperform bitcoin. The only way for them to do that is in the SMA structure.”