Crypto Update: Is the Teenager Maturing into an Adult???

May 24, 2024

Crypto like Bitcoin and Ether have been making waves as of late, with some significant recent developments. After a terrible 2022, Bitcoin and other cryptocurrencies have been on a roll.

In January of this year, we wrote a blog entitled “Bitcoin Spot ETFs Approved” and talked about how DWM would be here to provide you with updates as the crypto industry grows and matures. We also specifically mentioned that “the introduction of the Spot Bitcoin ETF is more than a new investment vehicle—it's a symbol of cryptocurrency's increasing integration into mainstream finance. This move signifies a broader acceptance of digital assets and may influence future regulatory policies, investment strategies, and the market's perception of cryptocurrencies. For the broader investment landscape, the ETF offers a bridge between traditional financial markets and the digital economy, potentially attracting a new wave of investors. Some compare Bitcoin’s (and other cryptocurrencies) journeys to gold’s. In the early 2000’s, gold wasn’t an institutional asset. Now, many people have gold included in their portfolio in the form of a gold trust…In theory, greater accessibility leads to greater exposure, causing more demand across traditional markets, and bolstering the coin’s value.” We also mentioned how it would probably be a long while before another cryptocurrency would get ETF approval. Well perhaps, it won’t be that long as the odds of a spot Ether ETF approval has gone way up in the last few days.

Bitcoin is the most well-known crypto out there, but most would say that Ethereum (the blockchain-based platform behind everything from financial transactions to digital art sales) or Ether (the name of the cryptocurrency that fuels the Ethereum digital ecosystem) would be next on the list.

Why? According to Bitwise Asset Management chief investment officer Matt Hogan, “there has been a real sea change in Washington around crypto” and highlighted recent bipartisan crypto legislation. He went on to say “It looks like Washington has gotten the message that crypto is good for America and that it’s popular with American Voters”.

Further, the Ether ETF approval process may be much faster than Bitcoin’s due to the legal precedent set by a lawsuit won by Grayscale (a digital financial company) against the SEC where the SEC’s initial rejection of the Grayscale’s Bitcoin ETF application was overthrown. A futures-based Ethereum product is already available, so it’s just logical to assume that the next approval would be a spot Ethereum product, i.e. ETF. Same thing that happened with Bitcoin. 

The fact of the matter is, is that politicians and the SEC initially wanted to squash cryptocurrency, but now they realize it’s here to stay, so they might as well get it regulated correctly. With Bitcoin now available in ETF format and a good chance of Ether in an ETF format, this crypto emerging asset class can no longer be ignored.

And although Bitcoin has only been a household name for the last several years, the Bitcoin blockchain-based network is now over 15 years old. It is only getting stronger. Blockchain, Bitcoin, Ether, and other cryptos are not going away. With this “regulatory unlock”, crypto - like in the example of gold above - is an opportunity that investors and financial advisors need to analyze. At DWM, we have been following this area and have participated most recently via blockchain-based ETFs. With another approval around the corner, we are g comfortable with taking a very minor position in actual cryptocurrency. Further, as advocates of the CFA teachings, we believe in the Efficient Frontier and higher Sharpe Ratios. To put that in layman terms: by adding a small piece to crypto (which has a very low correlation to the stock market) to one’s portfolio, one should expect a higher risk-adjusted return. Specifically, a small allocation to a higher risk/higher return asset with low correlation to the rest of the portfolio can really pay off over time.  The graph below shows this at work.

In a moment of secular take off for this emerging asset class, only 3 to 4% of the world population currently holds crypto. We feel more and more people will be getting into this, creating an excellent long-term investment opportunity.

Of course, there will be pullbacks within this volatile asset class – per the chart below, returns are typically extreme, i.e. big ups and big downs. This makes portfolio management using dollar cost averaging and rebalancing so prudent. In our January blog, we made the analogy that Bitcoin was like a 15 year old “trying to find its place in the world, it’s moody, unpredictable, and constantly evolving. It has great potential for success, as well as great potential for failure. No one will know for sure until it’s an established adult.” Well, it and other cryptos are not adults yet, but they definitely have grown a little older. Kinda like an 18 year-old now, they’re old enough to vote, but not old enough to drink. Prudent management would require adult/wealth manager supervision. At DWM, we are looking forward to seeing this young adult through college and prospering into the real world!

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page