Andrew Pratt expects recommending Bitcoin to his company’s investment committee to be a smooth process. With Bitcoin’s 140% surge in the past year, almost erasing memories of cryptocurrency crashes and scandals, and companies like BlackRock supporting Bitcoin funds, Pratt believes adding a 1% Bitcoin allocation to some client portfolios would not be a big issue.
Pratt, an investment manager at Wiser Wealth Management in Marietta, Georgia, stated, “Even if Bitcoin crashes, the loss would only be 1%. However, the potential returns could be substantial.”
The debate about Bitcoin’s value seems to have become irrelevant. Whether or not this virtual currency has practical value or applications has gradually become insignificant. With the rise of numerous new cryptocurrency products and services, Bitcoin has reached new heights, with a total market value of a staggering $1.3 trillion, driving the entire token market to $2.5 trillion.
For years, Wall Street has dismissed cryptocurrency. However, the attitude of Wall Street has changed; they have started to embrace cryptocurrency as a viable investment option. This change is driven by Wall Street’s desire for profits and concerns about missing out on this wealth creation opportunity. Nowadays, fewer executives are willing to openly criticize cryptocurrency and see it as something intangible.
Many strategists still view cryptocurrency as a speculative trade lacking practical use, with its valuation being a mystical blend of technical analysis involving assumptions about token supply, US investor and overseas trader demand, and the expectation that Bitcoin can continue to exist as a store of value like gold. The opaqueness of the market, lack of liquidity, and fluctuating trading volume, coupled with the absence of valuation models that align with traditional assets, pose significant challenges for mainstream financial institutions to embrace cryptocurrency.
“To become a true asset, it must generate cash flow,” said Barry Bannister, Chief Equity Strategist at Stifel. “Cryptocurrency is also trying to become a currency, but that requires it to be used for transactions. Until I see Bitcoin widely used for transactions in daily life, it cannot be called real currency and is more like a speculative tool.”
However, the attitude of Wall Street executives towards cryptocurrency has undergone a dramatic change. Larry Fink, CEO of BlackRock, is a prominent representative of this shift. His iShares Bitcoin Trust Fund was approved in January, making it one of the many cryptocurrency exchange-traded funds (ETFs). BlackRock’s fund has now become the second-largest Bitcoin ETF in the market, with assets nearing $18 billion. Fink praises Bitcoin and recently expressed great confidence in its long-term prospects, stating that he is “very optimistic” about Bitcoin in an interview with Fox Business.
BlackRock’s support for a Bitcoin ETF has successfully caught the attention of investment advisors like Pratt, who are considering allocating some cryptocurrency to their clients. As a global asset management giant, BlackRock manages assets exceeding $10 trillion, and the influence of its CEO, Fink, is significant.
Will Peck, Head of WisdomTree Digital Assets, stated, “Fink’s views always attract widespread attention.” WisdomTree has also launched a Bitcoin ETF and is developing asset tokens similar to government bonds, aiming to enable clients to freely trade in digital wallets.
In addition, some well-known Wall Street companies and asset management firms are optimistic about Bitcoin’s price prospects and have set higher price targets. For example, Bernstein Research raised its year-end Bitcoin price target to $90,000, indicating a nearly 30% increase compared to the current price of around $69,000. Ark Invest CEO Cathie Wood even boldly predicts that Bitcoin’s trading price will exceed $1 million by 2030, demonstrating her strong bullish confidence in Bitcoin.
For Bitcoin to maintain its current momentum, it requires support from several key factors. Its upward trajectory aligns with the market’s expectation of an imminent interest rate cut by the US Federal Reserve. However, if the macro environment becomes unfavorable, Bitcoin could experience a decline similar to other tech stocks.
Furthermore, Bitcoin’s price surge is also influenced by the anticipation of the upcoming “halving” event in April. Halving is a significant event that occurs every four years, reducing the number of Bitcoins miners receive from processing network transactions by half. After the next halving, miners’ rewards will decrease to 3.125 Bitcoins. While bulls believe this halving event will further drive up Bitcoin’s price, analysts at JPMorgan warned that once the “mania” brought by halving dissipates, the price of Bitcoin could retreat to $42,000.
Whether it’s $42,000 or $1 million, is Bitcoin really worth that price? This is a question that nobody can accurately answer, indicating that Bitcoin’s valuation and trading dynamics are always shrouded in mystery. It often experiences significant fluctuations due to seemingly ordinary news. Regulatory agencies have pointed out issues of market manipulation and wash trading on many trading platforms, especially those based overseas, where traders artificially create trading volumes by exchanging tokens with themselves.
Considering these potential risks, some financial advisors believe that adding a small amount of Bitcoin to client portfolios is not without risk. When Pratt mentioned considering including Bitcoin in client portfolios to his colleagues, their feedback was, “That’s too crazy.”
However, the fact that traditional financial firms are now supporting cryptocurrency will undoubtedly attract more people to invest in cryptocurrency. “Because legitimate Wall Street institutions are offering these products, people tend to assume they are legitimate when purchasing them,” said Mark Hays, Senior Policy Analyst at Americans for Financial Reform. “But that is not the case.”
One concern for those inclined towards investor protection is that investment firms can sell and trade Bitcoin without traditional investor safeguards. For example, investment banks must separate their research departments from their banking operations and disclose their relationships with banks when conducting stock trading to avoid conflicts of interest in research. Tyler Gellasch, former SEC counsel, believes that since Bitcoin is not considered a security, these regulations may not apply to Bitcoin.
Gellasch pointed out, “It’s easy to see that Bitcoin may face various abuses that have plagued investment research businesses since its inception.”
Wall Street’s expectations for cryptocurrency go beyond ETFs. Although these products currently hold assets exceeding $55 billion, the fee revenue they generate is relatively limited. For example, BlackRock charges only 0.12% for the first $5 billion of assets in the iShares Bitcoin Trust Fund until January next year, and the fee rate for the remaining assets is around 0.25%. Even after the exemption period ends, the fund will only charge a quarter of a basis point in fees. Other companies such as Invesco, Franklin Resources, and WisdomTree also charge similar or lower fees. For companies like BlackRock, which had revenues of up to $17.9 billion in 2023, the income from Bitcoin ETFs is just a fraction.Steven McClurg, the Head of US Asset Management at CoinShares, has stated that the true goal of most Wall Street firms is to convince pension funds, sovereign wealth funds, and insurance companies to include Bitcoin in their investment portfolios and to open separate cryptocurrency trading management accounts for them. McClurg, who is also a co-founder of Valkyrie Investments, a company that recently acquired CoinShares’ ETF business and was one of the nine firms to launch a Bitcoin ETF in January this year, has revealed that he is now competing with large investment management firms to win business from pension funds and insurance companies.
“In the past four years, I have actively sought to engage with them, and now, they are coming to me,” McClurg said when referring to executives from the traditional finance industry.
The embrace of Bitcoin by the financial industry is not a recent phenomenon. Fidelity Investments CEO Abigail Johnson has been actively involved in the company’s early research and experimentation with Bitcoin. In 2017, the company started allowing employees to use Bitcoin for payments in the company cafeteria, as revealed by Johnson at industry conferences. Fidelity has also hosted blockchain gatherings and compiled an internal list of dozens of potential use cases for cryptocurrencies. Furthermore, Fidelity has begun offering Bitcoin custody services to institutions.
Today, Fidelity is fully entering the cryptocurrency space through ETFs, custody, and brokerage services, and its research department typically takes a positive stance on cryptocurrencies in its reports. Additionally, Fidelity offers digital asset accounts to sponsors of 401(k) plans to help them better manage their crypto assets. However, Fidelity declined to comment on the growth of its 401(k) products and crypto platform.
According to a former executive at Fidelity, some early executives were concerned about Johnson’s focus on Bitcoin, but they did not dare to challenge her decisions due to her family’s control of the company. Johnson herself stated in 2022 that her early push for cryptocurrencies was “controversial within the company” and added that “many people are still confused about it, and that’s understandable.”
However, 2022 may have been a low point for the crypto market. From the end of 2021 to the end of 2022, the token market plummeted by 70% due to a series of scandals, ultimately leading to the bankruptcy of Sam Bankman-Fried’s FTX trading platform. In March this year, a federal judge sentenced Bankman-Fried to 25 years in prison for fraud, marking the end of the crypto frenzy.
Nevertheless, several major cryptocurrency companies, including Coinbase, remain resilient, and the token market is gradually recovering amid a strong rebound in risk assets. In June last year, BlackRock applied to launch a Bitcoin ETF, which greatly boosted market confidence. While BlackRock’s product and other related applications did not immediately receive approval, many on Wall Street viewed it as a safe signal to enter the cryptocurrency field.
BlackRock emphasized in a statement, “We will continue to strengthen investor education and remind investors that when considering investing in Bitcoin, they must consider its potential upside as well as the associated instability and risks.”
Today, the focus is no longer on whether to hold cryptocurrencies but on how much to hold. Kyle DaCruz, the Director of Digital Asset Products at VanEck, pointed out that in the past, companies and advisors supporting Bitcoin generally believed that allocating 0.5% of Bitcoin in a portfolio could achieve risk-adjusted returns. However, they are now discussing portfolio allocations of 3% to 5%.
Advisors supporting cryptocurrencies state that the launch of ETFs solves two major issues: on one hand, it makes holding Bitcoin more convenient and seamlessly meets investors’ demands; on the other hand, it also allows advisors to more easily charge fees for digital assets.
Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, noted, “In the history of Bitcoin’s development, we are providing a simple and familiar way for everyone to participate for the first time. Now, more and more advisors are seeking education and training in cryptocurrencies, and personnel of companies offering model portfolio investments are no exception. Frankly, advisors can finally charge fees based on assets.”
For years, major banks have considered many products in the cryptocurrency industry, such as high-yield accounts and stablecoins pegged to the US dollar, to be similar to banking products and therefore subject to corresponding regulations. Now, lobbying groups such as the Bank Policy Institute and the American Bankers Association are actively urging the SEC to adjust rules that make it difficult for banks to custody crypto tokens.
However, there are still cryptocurrency skeptics on Wall Street. Jamie Dimon, the CEO of JPMorgan Chase, is one of them. Despite his company’s attempts to use blockchain technology, Dimon still refers to Bitcoin as a “pet rock.” Sharmin Mossavar-Rahmani, the Chief Investment Officer at Goldman Sachs Wealth Management, recently told The Wall Street Journal that her company’s executives “do not believe in cryptocurrencies.” Vanguard remains unmoved, stating that it will not add new Bitcoin ETFs to its brokerage platform due to Bitcoin’s lack of fundamentals.
In Washington, the crackdown on cryptocurrencies is ongoing. The SEC’s enforcement actions continue, with particular attention on Coinbase Global. SEC Chairman Gary Gensler has stated that the entire cryptocurrency industry is rife with fraud. Another major test will come in May when the SEC decides whether to approve an Ethereum ETF.
Many companies, including Coinbase, are actively lobbying Congress in the hope of introducing specific rules for cryptocurrencies, but they have not yet gained enough support. These companies have provided over $80 million in funding to political action committees supporting cryptocurrencies during this election cycle, which is a significant amount by Washington’s standards. The funds aim to support cryptocurrency-friendly candidates while curbing the forces that oppose cryptocurrencies.
Brian Armstrong, the CEO of Coinbase, stated at a Washington, D.C. policy event in March this year, “Now, cryptocurrency skeptics are becoming rarer year by year.”
His comments reflect the fact that as prices rise and returns increase, a technology aimed at disrupting the financial industry is being accepted. However, although Bitcoin bears may have temporarily quieted down, they may just be waiting for the next crash to come.
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Original article link: https://www.bitpush.news/articles/6595488
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