It’s a Wild Ride in the Crypto Regulatory Space

Cryptocurrency Guidance for Professionals Evaluating the Benefits of Bitcoin

Bitcoin Worth Considering for Advisors?

Welcome, digital asset investors, to this week’s thrilling edition of Crypto for Advisors! Strap in tight because we’ve got a rollercoaster of regulatory news for you. In a whirlwind of events, Binance’s CEO steps down amidst a whopping $4 billion settlement with the Department of Justice[^1^], the SEC is slamming Kraken with a lawsuit for operating as an unregistered exchange[^2^], and Bittrex Global just pulled the plug on its operations[^3^]. Talk about regulatory excitement!

Now, let’s talk about the big kahuna – Bitcoin. As Bitcoin climbs the ranks and becomes the 11th largest global financial asset[^1^], our hero of the hour, Zach Pandl from Grayscale, is here to guide us through the thrilling world of Bitcoin and your portfolio.

Hold onto your seats, folks. This is going to be good.

Bitcoin: A High-Risk Superstar

Bitcoin is like that high-risk adventure we all secretly crave. It’s a technological marvel and a liquid investable asset, making it the perfect candidate for the daring investors out there. Now, I know blockchain technology can seem as puzzling as trying to assemble furniture from a certain Swedish store, but fret not! The role of Bitcoin and other crypto assets in your portfolio is pretty straightforward. They offer high-risk, high-return potential that dances to the beat of its own drum, far away from the monotonous correlation of stocks over the last five years[^1^].

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Building a diversified portfolio that actually yields something more exciting than a nap on the couch has become a real challenge. The classic 60/40 combo of stocks and bonds just isn’t cutting it anymore. It’s like trying to add spice to a dish that has already been seasoned to death. Equity multiples are through the roof and the bond market’s lost its mojo (thanks a lot, deflation!). Plus, stocks and bonds are now holding hands and becoming way too similar for comfort. So, where’s an investor to turn?

Well, my friends, the options are a-playing. We can reallocate to asset classes that offer better risk-adjusted returns, lower correlations, or a mix of both. Some brave souls have dared to venture into the wilderness known as alternative investments, indulging in the sweet nectar of illiquid private assets like private equity and real estate. And let me tell you, it’s been quite the success story. But of course, not everyone can get a ticket to this exclusive party[^1^].

Enter, Crypto Assets!

Crypto assets are the new kids on the block, and they’re here to shake things up. From an asset allocation perspective, they bring a whole new dimension to the risk/return profile available in public markets[^1^]. With Bitcoin leading the pack, these digital wonders are wild and thrilling, like an exhilarating ride on a high-speed rollercoaster. Sure, they may be high-risk, but they deliver returns that match their audacious nature.

Now, adding crypto assets to your portfolio is like taking on additional risk for a chance at greater rewards. It’s like adopting a wild tiger cub as a pet – dangerous, but the bragging rights are worth it. You can consider playing around with crypto assets instead of other high-risk favorites like tech shares, non-U.S. equities, or even certain illiquid private investments. It’s all about flexing your risk appetite and optimizing that precious portfolio performance.

But wait, there’s more! Crypto assets offer something few dare to dream of – low correlation to stocks. Over the past five years, the correlation between Bitcoin and the S&P 500 has been a mere 40%, whereas the Nasdaq 100 and the S&P 500 have shamelessly flaunted a 90% correlation. So, in non-financial terms, a well-placed crypto allocation can offer diversification benefits that your well-behaved stocks simply can’t match[^1^].

But before you jump on the crypto train, heed this warning: Crypto is like a wild and untamed stallion. It’s high-risk and, therefore, not suitable for investors with immediate capital needs (like upcoming college tuition bills or a down payment on a house). And if you’re a stickler for asset income, you might need to look elsewhere. Crypto simply dances to its own beat, my friends.

Should I Stay or Should I Go?

The decision to venture into the thrilling world of crypto assets ultimately comes down to your risk tolerance. If you’re one of the brave souls who thrive on danger and excitement, crypto is a golden opportunity for you. With its dazzling potential returns and low correlation to stocks, it can truly spice up your portfolio like a dash of chili powder in a bland pot of soup.

So, dear readers, ponder your risk appetite and consider the thrilling rollercoaster ride that is crypto. Adventure awaits those who dare to embrace it!

• Zach Pandl, Managing Director, Research, Grayscale

Ask an Expert: Your Burning Questions Answered

Q: What Impact Will a Spot BTC ETF Have on the Price of Bitcoin? A: Well, buckle up, my friends! A spot BTC ETF could have a direct impact on the price of Bitcoin. With a limited supply of only 21 million Bitcoin available (and roughly 19.5 million already mined), the demand for a spot ETF will soak up some of that supply and hold onto it as long as the interest remains. It’s a classic supply and demand situation.

Q: But what happens if the demand for the ETF decreases? Will Bitcoin’s price take a nosedive? A: Ah, a keen observer you are! Here’s the lowdown: If a spot BTC ETF gets the thumbs up, it could signify a breakthrough in regulatory resistance toward Bitcoin and crypto as a whole. The SEC’s approval could make institutions more comfortable with investing in Bitcoin, and we might even see 401k providers jumping on the crypto bandwagon. In short, the demand for Bitcoin could skyrocket, making the demand for the spot ETF look like a mere drop in the ocean.

Q: But I can’t put my clients into Bitcoin right now! How can I get them some exposure before the spot ETF approvals? A: Fear not, dear advisor. There are ways to introduce your clients to Bitcoin without going off the regulatory deep end. Disclaimer: I’m not here to give investment advice, so Do Your Own Research (DYOR). But here are a couple of options to consider: – GBTC: The Grayscale Bitcoin Trust is trading at a small discount and will likely be converted to an ETF once other ETFs get the green light. This means your clients would not only enjoy any price appreciation in Bitcoin but also feast on that discount. – Bitcoin mining stocks: Companies like Riot Blockchain and Marathon Digital are publicly traded entities solely focused on mining Bitcoin. So, if the value of Bitcoin skyrockets, their stock prices are likely to follow suit. It’s like betting on the gold rush, but with digital gold. – Coinbase: COIN, the publicly traded company that operates as an exchange and custodian, stands to benefit from increased interest in crypto. They are diversified, they are regulated, and they are ready for action. Plus, a thawing regulatory stance will undoubtedly work in their favor.

Keep the Thrills Coming!

That’s it for this pulse-pounding edition of Crypto for Advisors, folks! But the adventure doesn’t end here. South Korea’s National Pension Fund recently poured close to $20 million into Coinbase[^4^], and inflows into digital asset investment products have crossed the jaw-dropping $1 billion mark[^5^]. Oh, and did I mention? Coindesk has been snatched up by Bullish this week, but fear not, they assure us it’s “business as usual”[^6^].

Stay tuned for more exhilarating updates and wild ride reports. Remember, folks, the crypto rollercoaster never sleeps, and neither do we!

Happy investing, S.M. – Your Fearless Guide through the Crypto Jungle!

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