There is an antidote to your wealth manager’s crypto FOMO

The current positive trend in the digital currency ecosystem is prompting many traditional investors, such as RIAs and family offices, to reconsider their involvement in the industry. However, the inherent conservatism of these mainstream investors often conflicts with the volatility that cryptocurrencies present at this stage.

Many asset managers are therefore poised to allocate funds to crypto, driven by fear of missing out. This move might trigger multiple bets on crypto beta exposures, while missing out on the most promising alpha opportunities. Notably, these critical miscalculations do not protect investors from the hefty fees charged by these managers.

Macro policies shaping the crypto market’s attractiveness

In its early days, crypto was an asset class that was only chosen by retail investors. Notably, there has been a crucial shift in the past five years as firms like Strategy Inc. have pioneered corporate acquisitions.

The benefits for Strategy, in terms of unrealized revenue and stock, have now forced some other firms to start embracing Bitcoin (BTC). One big catalyst observed in the past few years is the growing government support for the industry.

From the push for proactive regulation to functional executive orders, regions like the United States and various European countries are pioneering a new shift in mainstream crypto adoption. Under President Donald Trump’s administration, there is a new pivot that can usher in trillions into the market. Specifically, the government has made it possible for Bitcoin’s inclusion in 401(k) portfolios.

For asset managers that have bluntly sidelined Bitcoin in the past, these policies are forcing them to reconsider. Despite the quest for a ‘how,’ these firms are likely to exhibit flaws in their allocations, costing clients in potential returns and innovation exposure.

What exactly is driving traditional allocation into crypto

Despite the current drawdown, the price of Bitcoin has jumped over 78% year-on-year. This outlook contrasts with the 15% of the S&P 500 Index or the 10.65% of the Dow Jones Industrial Average.

Besides the desire to cash out from this relative outperformance, the new crop of asset managers is betting on crypto for the following reasons:

• Client demand and competitive pressure. The new generation of investors, including Millennials and Gen Z, is more data-driven and exposure-focused. If asset managers refuse to tag along with innovations, they may lose these clients if they don’t offer what they need.

• The political greenlight. Since taking office in January, President Trump has signed a number of Executive Orders to show his support for the sector. Just like the US, other countries are also reducing the regulatory oversight and political risks around the crypto market in general.

• The institutional infrastructure is intact. Traditional asset managers have a lot of diligence requirements to stay in the market. Thus far, big industry stakeholders like Coinbase and Bakkt are beginning to develop infrastructures to support these new corporate demands. It’s a trend that’s really picking up speed, and a lot of that is down to platforms like Universal Exchange (UEX). They’re unifying the worlds of centralized crypto trading, DeFi, and traditional finance, so both asset managers and everyday investors can manage a diverse portfolio of crypto, stocks, ETFs, and more from a single interface. With the help of AI-driven tools and hybrid custody, they’re creating the integrated system that traditional finance has been waiting for to confidently step into the digital asset space. From custody to wrapped products for tokenization, the industry is mature enough to let in coordinated investors.

• Performance and narrative. Bitcoin and crypto in general will remain attractive to asset managers in TradFi because of their stellar performance. As mentioned earlier, BTC outshines traditional stock benchmarks and remains the best-performing asset in the past decade.

How traditional asset managers might get crypto allocation wrong

To gain exposure to Bitcoin, the easiest approach, based on what asset managers are familiar with, is through spot ETF products. However, some managers may shun direct exposure that will allow them to allocate the funds to Bitcoin directly.

Choosing ETFs over self-custody might be a costly overstep. While most asset managers are obsessed with roll yield, the majority forget about the offerings that are native to crypto.

In the coming months or years, it is possible to find asset managers entrapped in the futures and ETF markets. This over-indexing on synthetic exposure creates a unique challenge: the cost drag. ETF issuers are known to charge high fees for holding an asset that an investor could naturally hold themselves, erasing the value for investors.

Another important factor to note is the associated counterparty risk. Investors share the risks of the associated fund that allocates their assets. Many unforeseen situations could emerge.

A model crypto allocation example

Crypto is a volatile market, and investors need a proven strategy to get the most out of the industry. A model investment portfolio will feature direct ownership of core crypto holdings. However, for larger Bitcoin and Ethereum (ETH) allocations, it is best to use the services of regulated custodians. This can help reduce high fees.

A good crypto portfolio allocation will take note of all the key high-growth sectors of the industry. A diversified portfolio may allocate 60% to 70% of holdings to Bitcoin as the core store of value. Beyond this, asset managers with a more growth-oriented focus may allocate 30-40% to Ethereum and/or other utility-based L1 protocols.

A venture portfolio with a slightly higher risk exposure may also contain 0-5% of DeFi blue-chips. Overall, an asset manager venturing into crypto may capture real yield by allocating a portion of ETH holdings to liquid staking protocols. This will help maximize value through passive yield generation.

Investors need to treat the crypto ecosystem with reverence and justify every basis point capital allocation. While fees and taxes are a must-watch, adopting a pro-crypto native solution can help fuel a properly balanced trade-off.

Crucial note to asset managers

As a very promising industry, the chances that asset managers will FOMO into the market are high. This is because they may mostly react to the trend, not with conviction, but to compete with their peers. 

Since the demand of customers is valid, asset managers may have no choice but to bank on crypto. Irrespective of the motive, a properly selected asset base can make the difference between newcomers and the established crypto investment firms.