Today’s edition of the Crypto for Advisors newsletter is brought to you by me! Join me as I delve into the remarkable expansion of the cryptocurrency sector. In this issue, Kim Klemballa from CoinDesk Indices addresses key inquiries that advisors have regarding the valuation and benchmarking of this asset class in the “Ask the Expert” section. I hope you find our newsletter insightful. I appreciate the opportunity to guide you through this journey and extend my gratitude to the exceptional contributors who share their experiences week after week. I am excited to see where we will be in the next two years.
Webinar Alert: Exploring Digital Assets Beyond Bitcoin
Mark your calendars for an informative webinar focusing on the digital asset market and the various avenues for engaging with the crypto asset class beyond just Bitcoin. Join Ric Edelman from DACFP, David LaValle from Grayscale Investments, and Andrew Baehr from CoinDesk Indices on July 16 from 1-2 p.m. ET. Please note that this will be a live-only event, and continuing education credits will be available for attendees.
Reflecting on Two Years of Progress
Two years ago, I embarked on my journey as the editor of Crypto for Advisors during a significant turning point. It was the middle of 2023, and the cryptocurrency sector was grappling with a severe downturn. The downfall of major lending platforms and the collapse of FTX reverberated throughout the industry, creating a tumultuous environment. The regulatory landscape in the U.S. was marked by a stringent enforcement-first approach, leaving many feeling uncertain about the future. Yet, beneath this turmoil, there were unmistakable signs of a larger transformation. Fast forward to the present day, and we find ourselves on the brink of what Bank of America describes as a “once-in-a-millennium transformation.” This transformation transcends mere speculation and memes; it signifies a profound evolution in global financial systems, economic frameworks, and concepts of digital ownership, all propelled by the crypto movement.
Bitcoin: The Revolutionary Beginning
“Bitcoin deserves to be mentioned alongside groundbreaking innovations like the printing press and artificial intelligence.” — Bank of America. Established in the wake of the 2008 financial crisis, Bitcoin introduced a groundbreaking concept: a decentralized digital currency with a fixed supply. It operates independently of any government, corporation, or central authority. This innovation sparked a movement characterized by early adopters, including students experimenting with GPUs, developers creating wallets, entrepreneurs launching exchanges, and miners seeking cost-effective energy globally. This led to a technological and economic revolution. Today, we witness the emergence of Bitcoin exchange-traded funds (ETFs) from leading asset management firms such as BlackRock, Fidelity, and Grayscale. Additionally, nations like the United States and the UAE are striving to position themselves as global leaders in the crypto space, signaling an unparalleled acceleration in financial innovation.
The Emergence of Ethereum and Smart Contracts
While Bitcoin ignited the initial spark, Ethereum and its introduction of smart contracts provided significant utility and programmability, enabling the tokenization of various assets including real estate, carbon credits, fine art, identities, equities, and yield-generating protocols. Although Bitcoin and Ethereum frequently dominate discussions, there are tens of thousands of digital assets available. While investment opportunities capture attention, blockchain technology is quietly revolutionizing supply chains, intellectual property, finance, and more. Over 140 publicly traded companies have disclosed Bitcoin holdings, signaling a growing trend where exchanges like Coinbase and Kraken are set to offer tokenized equities, and retail platforms like Robinhood are expanding their crypto offerings. Access to digital assets is multiplying through various channels, including direct-to-consumer platforms, numerous ETFs, tokenized funds, and direct ownership options.
Adapting to a Changing Landscape
Initially, only a small number of advisors embraced cryptocurrency, but this trend is gradually changing. There is an increasing acknowledgment of the potential to assist clients, strengthen relationships, and attract new business. More advisors are reporting that they are acquiring clients simply by being open to discussions about Bitcoin. Conversely, the lack of regulation, restrictive firm policies, the volatility of digital assets, and general uncertainty surrounding this emerging asset class have contributed to hesitance among many. Additionally, advisors are already managing various responsibilities, and the necessity of learning about this dynamic and evolving asset class adds to their workload. Despite these challenges, clients are eager to gain exposure to digital assets. Recent surveys conducted by CoinShares reveal that clients desire their advisors to be knowledgeable about digital assets. Over 80% of respondents indicated they would prefer to work with an advisor who provides guidance on digital assets, and 78% of non-crypto investors expressed interest in seeking counsel from advisors if crypto support were available. Impressively, nearly 90% of participants stated that they plan to increase their cryptocurrency investments by 2025.
A Call to Action for Advisors
Blockchain technology is foundational, and crypto encompasses much more than just an asset class; it represents a technological advancement that extends far beyond mere investment opportunities. The industry is evolving, regulations are progressing, and major institutions are increasingly building on blockchain technology. U.S. Treasury Secretary Scott Bessent remarked recently that “crypto is the most significant phenomenon occurring in the world today.” Advisors do not need to be crypto traders or blockchain developers; however, as fiduciaries—guides and planners—it is crucial to understand the developments taking place in this space. Education remains paramount. Throughout my two years of curating this newsletter, I have observed a notable shift in sentiment from skepticism to curiosity and now towards strategic integration. This is just the beginning, and I am excited to accompany you on this crypto journey. Please feel free to reach out with suggestions for future topics you would like to see covered.
Ask the Expert
Q. Why do digital assets have varying prices across different exchanges?
A. Unlike equities, which are “plugged in” to a centralized exchange that allows for a single price, cryptocurrencies are decentralized. This means there isn’t a singular reference point for pricing any digital asset. Cryptocurrency prices fluctuate based on supply and demand, among other factors, and each exchange operates independently, resulting in varying prices across platforms.
Q. How can I access dependable pricing data for digital assets?
A. Numerous digital asset index and data providers offer pricing information. It’s important to choose data from a reputable provider with a solid track record in digital assets. Look for a transparent and rules-based methodology for data construction, as well as clear criteria for how pricing is determined. The methodology of the index is crucial. For example, if an index’s selection criteria included “trading on more than one eligible exchange” with thoughtfully designed eligibility, then during events like the FTX collapse, tokens such as FTT (the exchange token of FTX) would be excluded from the index, thus avoiding bad actors.
Q. Why is Bitcoin often used as a benchmark for the entire digital asset market?
A. Currently, Bitcoin represents 65% of the total digital asset market, but there have been times when its market share was below 40%. Relying on a single asset to benchmark the entire asset class is not ideal. Diversification is essential for institutional investors to manage volatility and seize broader opportunities. Effective benchmarking should cater to multiple stakeholders, facilitating performance assessment, supporting investment strategies, and establishing industry standards. Indices such as CoinDesk 5 (CD5), CoinDesk 20, CoinDesk 80, CoinDesk 100, and CoinDesk Memecoin have been developed to meet the needs of those looking to benchmark, trade, or invest in the continuously evolving digital asset market.
