Crypto for Advisors: The Growth of Bitcoin as Collateral

In today’s issue, Adam Reeds, CEO of Ledn, looks at the evolving landscape of bitcoin financing products in the market as the number of opportunities to use bitcoin as collateral is growing.

In Ask an Expert, Kevin Tam from Raymond James answers questions about crypto trends, regulatory changes and sovereign ownership of cryptocurrencies.

–Sarah Morton

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Bitcoin Financing Rewrites the Rules for Asset Managers

As traditional investment products face declining yields, savvy asset managers must consider emerging opportunities within the cryptocurrency space to meet growing client demand. Bitcoin and ether have moved from speculative corners into the mainstream of institutional portfolios, driven by the approval of spot bitcoin ETFs and a growing appetite for yield in a low-interest-rate environment.

Are advisors meeting client interest in this asset class?

The recent regulatory approval of spot bitcoin ETFs has significantly expanded the accessibility of digital assets. We’ve seen new net inflows of $17 billion, meaning new buyers and a tailwind for bitcoin prices.

Financial institutions, including notable players like Goldman Sachs, are taking substantial positions, with Goldman reportedly purchasing $400 million worth of bitcoin ETFs earlier this year. This move signals not only the growing legitimacy of crypto as an asset class but also institutional confidence in its role as a portfolio diversifier. Analysts at Standard Chartered have projected fund inflows between $50 billion and $100 billion into bitcoin and crypto products by the end of 2024 as wealth managers and advisors reassess their strategies to meet client interest.

The opportunity in Bitcoin financing

For wealth managers and institutional advisors seeking to keep pace with client demand while enhancing returns, Bitcoin financing presents an untapped opportunity. Bitcoin-backed loans and financing structures are emerging as competitive alternatives to traditional fixed-income products like bonds, which have struggled to deliver meaningful yields amid the global low-interest-rate environment. Bitcoin loans, which often come with high spreads and are over-collateralized, can offer superior yields with comparable risk to traditional fixed-income strategies.

The economics of bitcoin-backed lending are particularly attractive in the current financial landscape. As traditional fixed-income products struggle to provide meaningful returns, bitcoin-backed loans are delivering significantly higher yields, often in the range of 7.5-12.5%. This premium exists due to the perceived risk in the digital asset industry, but as more traditional institutions enter the space, this premium may shrink over time.

Bitcoin-backed loans mitigate risk through over-collateralization, and bitcoin's unique market dynamics – including its 24/7/365 liquidity – provide an additional advantage for asset managers. Unlike bonds, which are subject to market hours and liquidity constraints, bitcoin-backed loans allow for the liquidation of large positions at any time, offering enhanced flexibility in managing portfolio risk.

Institutional adoption is on the rise

The movement into crypto isn’t limited to speculative investments; it has caught the attention of institutional investors, including pension funds. Recent moves by large pension funds like the Wisconsin Investment Board and the Fairfax County Employees’ Retirement System reflect a growing shift towards diversifying into crypto. These pension funds, like others globally, have been forced to reevaluate their portfolios as traditional income strategies falter in the face of low yields and rising inflation.

Historically, pension funds have relied heavily on stocks and bonds, often using liability-matching strategies to meet long-term obligations. However, the need for portfolio diversification has seen an increasing allocation to alternative assets like private equity, real estate, and now digital assets. Bitcoin-backed financing, with its strong collateral requirements and potential for higher yield, offers an appealing option for those looking to hedge against macroeconomic volatility and inflation while enhancing returns.

Meeting client interest and fiduciary duty

For financial advisors, the key question remains: are they doing enough to meet client interest in crypto assets? According to recent surveys, approximately 39% of family offices are already actively investing in cryptocurrencies, with many more expressing interest in diversifying into digital assets. However, there is still a gap between client interest and advisor action. Advisors who are proactive in understanding the opportunities in bitcoin financing and other crypto products are not only responding to client demand but are also positioning themselves as forward-thinking, innovative partners in wealth management.

The rapid adoption of crypto-backed financing solutions offers a compelling case for advisors who are looking to meet client interest in alternative assets while delivering superior performance in a challenging market environment. By embracing bitcoin financing, wealth managers can provide their clients with access to a new avenue for yield enhancement, portfolio diversification, and inflation hedging.

As the global financial landscape continues to evolve, advisors have a unique opportunity to lead the way in embracing bitcoin and other digital assets as a core part of their investment strategy. The ability to offer innovative solutions like bitcoin-backed loans not only helps meet client interest but also reinforces an advisor’s fiduciary duty to explore all viable options for enhancing returns in today’s low-yield world.

- Adam Reeds, co-founder and CEO of Ledn

Ask an Expert

Q. What are the main trends shaping the crypto market?

The current primary trend is the institutional adoption of bitcoin as a digital asset and a store of value.

Institutional adoption continues to unfold in many ways, including the launch of spot bitcoin and ether ETFs that allow investors to buy and hold exposure to bitcoin directly. Additionally, options markets are emerging, and bitcoin has been considered for inclusion in mutual funds and ETF portfolios. Fidelity Canada has a 1-3% bitcoin allocation with their ownFidelity Advantage Bitcoin ETF Fund, which is a fund of funds with exposure to various asset classes. These developments are positive indicators of institution adoption and are expected to continue moving the crypto market forward.

Institutional investors have considered alternative assets like bitcoin to diversify their portfolios and hedge against inflation. Hedge fund billionaires Stanley Druckenmiller and Paul Tudor Jones have publicly endorsed bitcoin as part of a well-diversified portfolio.

Additionally, BlackRock, the biggest asset fund manager in the world, with $10 trillion in assets under management for institutional clients(including central banks), discusses bitcoin's unique position as a diversifier in investment portfolios.

Q. What are the existing regulatory frameworks governing crypto?

In Canada, the regulatory environment for digital assets is clear and supportive, with the Canadian Securities Administrators (CSA) requiring crypto trading platforms to register and comply with securities laws, like KYC and AML regulations.

The Securities Exchange Commission (SEC) in the US applies a regulation-by-enforcement approach by actively pursuing action against major players in the crypto space. Going afterunregistered broker-dealers, exchanges and clearing houses. In most cases, this results in court decisions that set a precedent for future cases.

While Canada has a more cohesive regulatory framework that encourages innovation in cryptocurrency markets, the US has challenges due to its fragmented approach. Other countries are watching these developments closely as they form their regulatory landscape to foster growth while ensuring investor protection.

Q. Which country owns the most bitcoin?

El Salvador has accumulated 5,748 bitcoin on the open market and has used it as legal tender since 2021.

The Kingdom of Bhutan owns 13,029 bitcoin worth more than $780 million, and they started mining in 2019 with their vast hydroelectric energy sources.

Other countries, such as the USA with 215,000 bitcoin, China with 190,00 bitcoin, the United Kingdom with 61,000 bitcoin and Germany with 50,000 bitcoin, have seized bitcoin from companies that have contravened local securities legislation. Generally, the respective governments will conduct public auctions to sell off the confiscated assets.

- Kevin Tam, Digital Asset Research Specialist & Senior Branch Compliance Supervisor, Raymond James Ltd.

Keep Reading

• According to Citi’s “Global Family Office 2024 Survey Report”, the number of family offices that are optimistic about cryptocurrency ownership has increased this year, and they are primarily interested in direct ownership.
• The US Securities and Exchange Commission has approved Nasdaq to list and trade options on BlackRock’s spot bitcoin exchange-traded fund product,
• BNY Mellon has secured approval from the US Securities and Exchange Commission to offer Bitcoin custody