‘Right wrapper’: Why ETFs could be the key to crypto adoption in advice

As interest in digital assets continues to grow in Australia, Global X ETFs Australia senior product and investment strategist, Marc Jocum, said most of the flows going into exchange-traded funds (ETF) from this asset class in Australia are from retail investors, not financial advisers.

Speaking on a panel at Momentum Media’s Australian Wealth Management Summit in Sydney on Friday, Jocum explained this is due in part to trustees and licensees that “don’t allow them to have it in their portfolios”, which Jocum suggested only pushes clients to retail platforms in order to access these assets, cutting out the adviser who is unable to meet this demand.

Notably, VanEck’s Bitcoin ETF reportedly hit $290 million in assets within its first year after launching in June 2024, largely driven by mass affluent investors who were investing an average of $35,000.

Despite the strong demand for this asset class, the firm found financial professionals were still cautious about cryptocurrency with anecdotal evidence suggesting that just one in five financial advisers would invest in a bitcoin ETF.

Speaking in June, Arian Neiron, chief executive and managing director at VanEck Asia-Pacific, said: “Bitcoin continues to push through price barriers – the most recent being the US$100,000 mark – and we think its upside potential is significant.

“But it is important to note that bitcoin’s evolution as an asset class is still in its early stages. It remains a polarising asset class, with many financial professionals considering bitcoin speculative due to its price volatility and a lack of conviction in its investment thesis.”

Looking at how advisers might go about utilising digital assets or cryptocurrency, Jocum said he believes that an ETF is the “right wrapper” to hold these kinds of assets because of its flexibility.

“It’s liquid. They’re traded daily if you need to. Portfolio rebalancing, which is incredibly important. If you’re holding too much, let’s say you have a 2 per cent allocation in bitcoin, it does an incredible run and all the sudden you’re taking a bit too much risk for the portfolio, you want to dial that back, imagine having to deal with multiple exchanges, rebalancing, depositing cash,” Jocum said.

“The ETFs make it so much easier to do. A lot of crypt natives don’t like the ETFs because it is, like I said, the traditional finance mixed with the decentralised finance, but it’s just an access point.”

Noting the successful adoption seen from US financial advisers and platforms, Jocum predicted that it is simply “a matter of time before that happens in Australia”.

“Even though there are a lot of ETFs, pick the one that you have the most comfort with,” he said.

“Consider things like fees, have a look if you can redeem or not, look who the custodian is, is it a one-layer structure that just invests directly in bitcoin, is it a two-layer structure using a feeder fund? These are all the types of questions that you can ask, but for financial advisers, a bitcoin ETF makes the most sense to me.”

Also speaking on the panel, AMP head of portfolio design and management, Stuart Eliot, explained that one of the biggest challenges for advisers when it comes to accessing cryptocurrency is professional indemnity (PI) insurance misconceptions.

Namely, Eliot believes many licensees think PI insurers have a “blanket ban” on bitcoin and digital assets, which stops them from allowing access to these products.

“Having spoken to a PI insurance broker, it’s their view that many of the PI insurers are willing to underwrite on a case-by-case basis, and advice or an allocation. So, it could be, ‘This customer wants to invest, will you insure that?’ They’ll look at that and say yes,” Eliot said.

“Or you might go to your insurance and say, 85 or 100 per cent growth investors, we will allow them to go up to 5 or 10 per cent allocation, will you underwrite that, and in many cases, the insurance will say yes.”

Lucia Uen, the general manager of CloudTech Custody, added that wealth platforms also have a role to play in supporting adviser access to cryptocurrency by helping establish a sense of trust and security through key measures.

“One of the things that could support adoption is having regulation custodians supporting advisers in the wealth platforms, holding crypto and your keys safely, ensuring that you can access it, have controls and risk management in place just like traditional custody, so that people feel that their assets are secure,” Uen said.

“And when they look into their wallets, what’s in their wallet is theirs and it’s all segregated and they can see exactly what they’re holding. That gives people the confidence and the trust to enter the market and know that what they’re holding is theirs.”