The knowledge required to manage a crypto portfolio is much different than what is required to manage a portfolio of traditional investments like stocks and bonds.
Although people recognize the potential disruption that cryptocurrency and blockchain technology may have on various industries and are optimistic about the future of the industry, many of them do not understand how to invest in it and allocate a portion of their overall portfolio to it.
It’s no secret that crypto is a complex market, much different than traditional markets, which makes it challenging for individuals new to the space. For example, cryptocurrencies have their own jargon and lingo. There are many things found in crypto that do not exist in traditional securities, including tokenomics, 24/7 markets, hard and soft forks, airdrops, language barriers, technological security issues, etc. And some crypto assets are layer 1 blockchains, while others are tokens associated with layer 2 protocols.
As a result, many investors are discouraged by the tremendous learning curve that must be mastered in order to properly build a portfolio of cryptocurrencies and tokens. The good news is that these investors can outsource the management of their crypto portfolio – just like they can traditional assets. By doing so, they are able to achieve an exposure to the asset class while avoiding the difficult task of managing the portfolio.
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Outsourcing portfolio management
Outsourcing investment management is not a new concept. Individuals have been doing exactly this in traditional markets for a long time. Investors in traditional markets can outsource stock and bond management by using mutual funds or exchange-traded funds (ETFs). The mutual fund and ETF market is quite large – and rapidly growing.
These products have fund managers that select securities based on the goal of the fund. For example, if an individual wishes to invest in US large cap stocks, they can either purchase and manage the individual stocks or they can buy a US large cap stock fund, pay a small fee to the fund manager, and outsource the management. Many investors use funds in their portfolios and have used these products for a long time.
Beyond this, some investors do not wish to even select funds in their portfolio, so they outsource fund selection to financial advisors and financial planners. Financial advisors build and manage portfolios for individuals based on their specific situations. Advisors may select funds and investment strategies for their clients, and in doing so the client is able to outsource nearly all parts of their investing to professionals.
Outsourcing crypto portfolio management
While fund strategies and advisors are a popular solution in traditional markets, these concepts are still new in the crypto world. However, some select financial advisors offer cryptocurrency management, similar to what they offer for traditional financial portfolios.
When an investor wishes to outsource their crypto portfolio management to an advisor, the advisor will perform all the research, crypto selection and management on behalf of their client. In this situation, the client has their own account with a crypto exchange and custodian like Gemini or Coinbase, and the advisor has the ability to manage the account on their behalf.
It is important to note that the client owns the account and the underlying assets in the account, and that the advisor simply has authority to manage the holdings within the account. This strategy is often called a “Separately Managed Account” or SMA.
SMAs offer a unique solution for clients, which allows the client to hold their own cryptocurrencies in their own account. Advisors usually charge a 1-2% fee on the assets they manage on behalf of their clients. These SMA accounts are not yet offered by the traditional custodians like Fidelity or TD Ameritrade, although Fidelity has announced crypto custody and trading services.
Investors may also allocate to a crypto-specific hedge fund. In a hedge fund, all investor capital is pooled together and managed in a general account by the hedge fund traders and portfolio managers.
Hedge funds allow investors to gain exposure to the crypto asset class and hedge funds also have the ability to not only buy coins and tokens that are offered on crypto exchanges, but they can also take advantage of on-chain opportunities like DeFi and other opportunities that are discovered by the manager of the fund.
On the downside, although hedge funds are flexible and can provide a great opportunity to investors, they are often more expensive than using a crypto-specific SMA strategy. The common fees in crypto hedge funds are a 2% annual fee and a 20% fee on the profits generated.
Crypto ETFs and mutual funds still in limbo
Mutual Funds and ETFs that hold crypto directly do not yet exist. The US Securities and Exchange commission has repeatedly denied applications from investment companies to offer a crypto ETF.
While mutual funds and ETFs present a simple solution for many investors in traditional markets, the SEC has been vocal about their concerns with approving a crypto-based fund to exist in the US public markets.
The crypto industry is pushing back on the SEC’s denial of crypto ETFs. Recently, Grayscale, a large crypto-focused investment firm, sued the SEC when their request to convert from a trust to an ETF was denied in the summer of 2022. The Grayscale Bitcoin Trust (GBTC) currently has over $12 billion in assets under management (AUM). GBTC trades “over the counter” on public exchanges and many investors are able to purchase the asset in their traditional brokerage accounts.
Many people have pointed out that traditional investors are very interested in purchasing publicly traded crypto products, noting that to the size of GBTC’s AUM is evidence of investor appetite and interest in crypto. If a crypto-focused ETF or mutual fund were approved by the SEC, there are many investors that would prefer the simplicity of purchasing that type of fund directly in their already-existing investment accounts.
More crypto investment options underway
Options for professional crypto management are still limited, especially when compared to the options in the traditional markets.
However, while the market for professionally managed crypto accounts is still maturing, desire from traditional investors to invest in crypto is evident.
Fortunately, these investors have the ability to hire a financial advisor to manage a crypto portfolio for them via an SMA or may choose to allocate to a crypto-specific fund.