The recent approval of Bitcoin spot ETFs has given financial advisors a potential gift to de-risk portfolios, saving clients from Bitcoin itself.
There’s no doubt that the introduction of Bitcoin ETFs has sparked investor excitement. Data from Bloomberg Intelligence show BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin Fund have each secured more than $3 billion in assets in their first 17 trading days, the only ones to do so of the 5,500 ETFs launched over the past 30 years.
It’s little wonder. For years, some investors have looked for an equity instrument to capture Bitcoin without the hassle of buying Bitcoin in the open market. Advisors who have wanted to allocate some client assets into Bitcoin also now have a vehicle to do so, since these can be more traditionally custodied and counted as assets under management.
Yet, we know investors have been buying actual crypto assets directly, outside of portfolios for several years. This has created a challenge for financial advisors who want to take a holistic approach to their clients’ wealth. Many know their clients have significant allocations to crypto but can really do nothing about it. They are custodied elsewhere and generally aren’t easy to track. Advisors can do everything right in the portion of a portfolio they manage, but there remains the risk that the traditional volatility of Bitcoin could blow up an investor’s wealth. And there was nothing an advisor could do about it.
Until now.
While advisors can now allocate into Bitcoin instruments, they can also do something even more vital: hedge existing Bitcoin positions by using derivatives to the Bitcoin ETFs.
Advisors know that options are a great way to either provide downside protection for a security or generate some additional upside. We tend to think of these derivatives in direct relationship to their underlying security, and, indeed, prudent advisors would be well-served using options strategies to better plan around the movement of Bitcoin ETFs. That goes without saying.
Yet, the popularity of Bitcoin presents a new opportunity, though it requires a different way of thinking. Advisors can now ask clients about the value of the Bitcoin they directly own and then develop a strategy using options to de-risk that part of their portfolio. If a client has, say, $1 million in Bitcoin, advisors can buy or sell options to the Bitcoin ETFs even if the client is not invested in the ETFs themselves. It becomes an elegant strategy to manage the traditional volatility that Bitcoin experiences. Options, after all, are designed to manage volatility.
There is one other benefit: tax management. Options strategies have long been used to handle embedded capital gains in securities that, if sold, trigger substantial tax bills. By selling a call, they either make money to cover their tax bill from the call premium itself if the underlying security doesn’t appreciate or, if the security rises, they can buy back the short calls at a loss and use those losses to offset gains elsewhere in a portfolio. Either way, advisors mitigate their clients’ volatility and tax bill. A similar strategy can be used with Bitcoin, using options related to the ETFs.
Advisors know options are a smart strategy for investors who want to diversify their portfolios or hedge against risk. Options that are derivatives of the Bitcoin ETFs are a gift to advisors who have been frustrated in their inability to manage crypto as they do other assets. This is inarguably a positive development for this asset class.
David Donnelly is Managing Director of SpiderRock Advisors.