- Self-Directed Accounts
- Investment Types
- Why Equity Trust
- Institutional Solutions
The following was written by guest blogger Daniel Eyre of Blockchange.
Digital (crypto) assets offer investors a rare opportunity: the ability to invest in an entirely new
asset class that is still in its relative infancy. With interest at an all-time high, particularly as younger crypto-savvy investors come of age, financial advisors are facing significant pressure from their clients to provide exposure to this new asset class. Advisors who are able to offer clients this exposure are well-positioned to grow their client base and AUM as the asset class matures.
Exposure to digital assets through retirement accounts offers some interesting opportunities for investors to diversify their risk and maximize growth over the course of their investing lifetime. In this article we look into why investing in crypto makes sense generally, as well as some unique benefits when applied to retirement accounts.
As digital assets have seen more mainstream interest and support, their value has grown. Every
new merchant that accepts payment with cryptocurrency, every new exchange that supports
digital asset trading, and every new financial services firm that offers them improves the
long-term viability and popularity of this new asset class.
As digital assets experience mainstream adoption, demand increases. And because many
cryptocurrencies such as Bitcoin have a fixed supply, increased demand tends to increase their
value. Even today, digital assets are still in a relatively early phase of their lifecycle, so these
trends will benefit investors who opt in today.
The performance potential of digital assets is well illustrated by the standout performance of Bitcoin over the last five years (2016 through 2021) compared with conventional stocks as illustrated below. Bitcoin yielded the best returns when compared with comparables like AMD and Facebook, the S&P, and Gold, appreciating almost two orders of magnitude during the period.
Many investors believe that investing in a mix of stocks and bonds gives their portfolios
sufficient diversification to reduce risk. However, that isn’t necessarily correct. Investors need a
wide range of assets, across multiple asset classes, to achieve a truly diversified portfolio.
Gold and silver are the traditional investments of choice when diversifying an investment
portfolio to protect against macroeconomic uncertainty. Now digital assets are increasingly
becoming the new “digital gold and silver”, offering yet another way of protecting investments against market risks. This has become particularly important in the light of potential inflationary pressures from the fast growth in money supply versus economic output during the COVID pandemic.
One of the main attractions of digital assets in a diversification strategy is their lack of correlation with traditional asset classes. Bitcoin, for example, has maintained low correlations with both the S&P and gold over the last six years.
Digital assets and blockchain technology are right at the forefront of growth in almost all industries. The current stage of the blockchain-based business and investing ecosystem has strong parallels with the internet boom in the late 1990s and early 2000s which minted many millionaires and billionaires. As such, digital assets are well-positioned to be very much part of future technological advancements and wealth creation. Their importance for investors will continue to grow.
Retirement accounts hold perhaps the majority of available investable resources for most middle-class investors. As such, they represent a significant percentage of AUM for most financial advisors. Being able to offer exposure to crypto in these accounts is one of the primary ways that advisors can help their clients enjoy the many benefits of digital assets referenced above.
Because retirement accounts are tax-deferred or tax-free, advisors can take advantage of short-term market changes by rebalancing and reallocating the portfolio asset mix without resulting in a taxable event. With regular investment accounts, advisors may have their hands tied to annual rebalancing and/or reallocation to maintain long-term capital gain tax status. Because this is not the case with retirement accounts, advisors can manage portfolios more actively, buying on dips and selling on highs as they occur without creating taxable events. Over time the effects of such actively managed strategies can become significant.
Because retirement accounts mandate keeping funds invested until retirement, if it’s going to be locked up for decades it makes sense to account for the possibility that monetary policy may disrupt or even destroy the current economic order and pave the way for a new one, similar to what happened with the Internet in the early part of this century. Digital assets offer a unique opportunity to diversify into an asset class that isn’t correlated with the stock market or the US Dollar, that also represents the next stage of the internet, or Web 3.0. That means you can balance your performance and risk over a lifetime of investing.
The optimal mix and allocation of digital assets in a retirement portfolio depends on both investment strategy and risk tolerance. Typically, most advisors and asset managers suggest an allocation between 1% and 5%, providing a strong foundation for improved returns with minimal risk. More aggressive investors may find a larger allocation to digital assets appealing.
Digital assets represent a great opportunity for investors to diversify risk and maximize growth in their portfolios, substantial portions of which are locked in retirement accounts. Investment advisors who are able to guide their clients through the process of investing in crypto in these accounts have a great opportunity to grow their client base and AUM in the future, especially as younger more crypto-savvy investors come of age. Understanding the different options and products to provide this exposure for clients is an important next step for advisors.
Daniel Eyre is CEO at Blockchange.
Daniel Eyre is not an employee of Equity Trust Company. Opinions or ideas expressed are not necessarily those of Equity Trust Company nor do they reflect their views or endorsement.
Equity Institutional services institutional clients of Equity Trust Company. Equity Trust Company is a directed custodian and does not provide, tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Investing involves risk, including possible loss of principal. Whenever making an investment decision, please consult with your tax attorney or financial professional.
You are leaving trustetc.com to enter the ETC Brokerage Services (Member FINRA/SIPC) website (etcbrokerage.com), the registered broker-dealer affiliate of Equity Trust Company. ETC Brokerage Services provides access to brokerage and investment products which ARE NOT FDIC insured. ETC Brokerage does not provide investment advice or recommendations as to any investment. All investments are selected and made solely by self-directed account owners.Continue