Even As Bitcoin Dips, Crypto ETFs Break Down TradFi Barriers

The recent bitcoin sell-off is shining a fresh light on crypto ETFs, and financial advisors are scrambling to stay out of the dark.

While the general financial planning community, along with much of traditional Wall Street, initially held a cautious view of digital currencies, crypto has been gaining momentum ever since the first spot bitcoin ETFs launched in the US nearly two years ago. Today, there are more than 150 crypto-related ETFs across a host of strategies, representing the fastest growing segment of exchange-traded funds.

The iShares Bitcoin Trust ETF (IBIT), by far the largest crypto ETF at nearly $88 billion, is often viewed as a proxy for the state of crypto ETFs. While IBIT dipped slightly this year through the end of November, the price of bitcoin hit an all-time high of more than $126,000 in early October. That rally was followed by a selling spree, which was led by profit-taking and hedge-covering and pushed the price down to $81,000 in the third week of November. But even against that backdrop, which included $2.4 billion worth of net outflows from IBIT last month, the flagship ETF had $25 billion worth of net inflows through the first 11 months of the year, ranking it sixth among a universe of more than 4,700 ETFs, according to VettaFi.

“The price volatility has spooked a lot of people, but on the grander scale, it doesn’t look too bad,” said Roxanna Islam, head of sector and industry research at VettaFi.

It’s an Institution

Crypto purists view the volatility as part of an upward trajectory maintained by the steady conversion of traditional Wall Street. Ric Edelman, founder of the Digital Assets Council of Financial Professionals, attributes the recent bitcoin price correction to early investors taking profits combined with forced selling for investors covering exposure to leveraged crypto positions. The reason that selling didn’t drive the price down even more, he said, is because of the growing institutional influence from organizations such as the Harvard University endowment and the establishment of the Texas Strategic Bitcoin Reserve. There are other major firms that have opened up to access to crypto in recent weeks:

• The Vanguard Group opened access to crypto ETF trading on its platform in December. 
• Bank of America has announced it will allow its 19,000 advisors to start recommending crypto ETFs to clients beginning in January. 

By Edelman’s math, even a few percentage points worth of allocation to crypto ETFs from the 50 million investors combining for $11 trillion at Vanguard and another $5 trillion under advisement at Bank of America Merrill Lynch will have a major impact on crypto prices. “When you’re talking about an estimated $300 billion flowing into Bitcoin and other digital assets that would take the market cap up by 20%,” he said. “These are very bullish signals.”

Edelman sees the ETF industry as uniquely poised to drive the growth of cryptocurrency investing. “The ETF industry is really good at manufacturing products, and crypto represents the biggest growth opportunity for ETFs in decades,” he said.

Well beyond the first spot bitcoin ETFs launched in January 2024, the landscape now includes leveraged and inverse crypto exposure, crypto yield and even buffered strategies that reduce volatility.

Cryptic Crypto

For financial advisors, whether fans of cryptocurrency investing or not, the volatility is often a concern. There are plenty of advisors like Alvin Carlos, a financial planner at District Capital Management who’s still keeping crypto at arm’s length.“We recommend zero crypto exposure to our clients,” he said. “We don’ t consider it an investment, but rather a speculative venture.” 

Others, like Mike Casey, president of AE Advisors, suggested clients keep crypto exposure to as much as 5% or 10%, and said the rise of spot Bitcoin ETFs have given the investors a regulated, low-friction way to participate. “Bitcoin’s drawdowns have historically been frequent but temporary, and disciplined investors have used them to rebalance into an asset with long-term upside,” he said. Similarly, John Bovard, owner of Incline Wealth Advisors, said his firm caps crypto allocations at 10% of an overall portfolio. “I think it is a good time to add a little to (crypto exposure), because I think the price will quickly rebound.” 

The crypto-curious generally aren’t worried about the pullback — and say normal market corrections are usually driven by broader macro uncertainty and increasing investor caution — especially after Bitcoin hit new all-time highs earlier this year. “Over longer periods, bitcoin’s value tends to follow broader adoption trends and its appeal as a hedge against monetary debasement and inflation is much like gold,” said Damon Polistina, director of research at Eaglebrook. For clients looking to take advantage of volatility, he suggests maintaining or adding to their exposure through a bitcoin ETF, he said. “The near-term outlook is always hard to call, but the long-term, structural investment case for Bitcoin remains as strong as ever.”

Keep Calm and Crypto On. Ultimately, as crypto tailwinds pick up, financial advisors will be faced with more challenges and opportunities. When clients ask if a drop in bitcoin prices make it a good time to buy crypto ETFs, it’s best to try to slow the conversation down, said Brett Polzin, founder of Eight Peaks Wealth Management. “Periods like this naturally attract attention, but price movement alone doesn’t determine whether something makes sense for an individual investor,” he said. “What matters far more is why someone wants exposure in the first place, how it fits into their overall plan and whether they fully understand the volatility they’re signing up for.”

In terms of where crypto ETFs fit inside client portfolios, Polzin stressed it should never be a core holding. “I’m currently at between 5% and 10%, like what I would be with precious metals or sectors,” he said. “The biggest risk I see isn’t volatility itself, it’s allocating more to an asset than someone can realistically stay committed to when markets get uncomfortable.”