Investors looking to outsource crypto portfolio management have options
The knowledge required to manage a crypto portfolio is much different than that required to manage a portfolio of traditional investments such as stocks and bonds.
Although people recognize the potential disruption that cryptocurrency and blockchain technology can have on various industries and are optimistic about the future of the industry, many of them do not understand how to invest in it and allocate a portion of their overall portfolio to it.
It’s no secret that crypto is a complex market, much different than traditional markets, making it challenging for individuals new to the space. For example, cryptocurrencies have their own jargon and lingo. There are many things that exist in crypto that are not found in traditional securities, including tokenomics, 24/7 markets, hard and soft forks, airdrops, language barriers, technological security issues, etc. And some crypto assets are layer 1 blockchains, while others are tokens linked to layer 2 protocols.
As a result, many investors are discouraged by the huge learning curve that must be mastered in order to properly build a portfolio of cryptocurrencies and tokens. The good news is that these investors can outsource the management of their crypto portfolio – just like they can traditional assets. By doing so, they are able to gain exposure to the asset class while avoiding the difficult task of managing the portfolio.
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Outsourcing of portfolio management
Outsourcing investment management is not a new concept. Individuals have been doing exactly this in traditional markets for a long time. Investors in traditional markets can outsource stock and bond management using mutual funds or exchange-traded funds (ETFs). The fund and ETF market is quite large – and growing rapidly.
These products have fund managers who select securities based on the fund’s objectives. For example, if a person wants to invest in US large cap stocks, they can either buy and manage the individual stocks, or they can buy a US large cap mutual fund, pay a small fee to the fund manager and outsource the management. Many investors use mutual funds in their portfolios and have used these products for a long time.
In addition to this, some investors do not even want to choose funds in their portfolio, so they outsource fund selection to financial advisors and financial planners. Financial advisors build and manage portfolios for individuals based on their specific situation. Advisers can select funds and investment strategies for their clients, and by doing so the client can outsource almost any part of their investments to professionals.
Read more: 7 Key Ways to Evaluate a Cryptocurrency Before Buying It
Crypto portfolio management outsourcing
While fund strategies and advisors are a popular solution in traditional markets, these concepts are still new in the crypto world. However, some select financial advisors offer cryptocurrency management, similar to what they offer for traditional financial portfolios.
When an investor wishes to outsource their crypto portfolio management to an advisor, the advisor will perform all research, crypto selection and management on behalf of the client. In this situation, the client has their own account with a crypto exchange and custodian such as Gemini or Coinbase, and the advisor has the ability to manage the account on their behalf.
It is important to note that the customer owns the account and the underlying assets in the account, and that the adviser is simply authorized to manage the holdings in the account. This strategy is often called a “Separately Managed Account” or SMA.
SMAs offer a unique solution for clients, which allows the client to hold their own cryptocurrencies in their own account. Advisers typically charge a fee of 1-2% on the assets they manage on behalf of their clients. These SMA accounts are not yet offered by traditional custodians such as Fidelity or TD Ameritrade, although Fidelity has announced crypto custody and trading services.
Read more: Multi-Signature Wallets Can Keep Your Coins Safer (If You Use Them Right) Investing in Crypto Hedge Funds
Investors can also allocate to a crypto-specific hedge fund. In a hedge fund, all investor capital is pooled and managed in a general account by the hedge fund traders and portfolio managers.
Hedge funds allow investors to gain exposure to the crypto asset class, and hedge funds also have the ability to not only buy coins and tokens offered on crypto exchanges, but they can also take advantage of on-chain opportunities such as DeFi and other opportunities discovered by the manager of the fund.
On the downside, although hedge funds are flexible and can provide a great opportunity for investors, they are often more expensive than using a crypto-specific SMA strategy. The usual fees in crypto hedge funds are an annual fee of 2% and a fee of 20% on the profits generated.
Read more: 3 ways traditional investors can gain crypto exposure
Crypto ETFs and mutual funds still in limbo
Mutual funds and ETFs that hold crypto directly do not yet exist. The US Securities and Exchange Commission has repeatedly rejected applications from investment companies to offer a crypto ETF.
While mutual funds and ETFs are an easy solution for many investors in traditional markets, the SEC has been vocal about its concerns with approving a crypto-based fund to exist in the US public markets.
Read more: Everything you need to know about Bitcoin ETFs
The crypto industry is pushing back against the SEC’s denial of crypto ETFs. Recently, Grayscale, a large crypto-focused investment firm, sued the SEC when their request to convert from a trust to an ETF was denied in the summer of 2022. Grayscale Bitcoin Trust (GBTC) currently has over $12 billion in assets under management (AUM). GBTC trades “over the counter” on public exchanges, and many investors are able to purchase the asset in their traditional brokerage accounts.
Many have pointed out that traditional investors are very interested in buying listed crypto products, noting that the size of GBTC’s AUM is evidence of investor appetite and interest in crypto. If a crypto-focused ETF or mutual fund was approved by the SEC, many investors prefer the simplicity of buying that type of fund directly into their pre-existing investment accounts.
More crypto investment options in the works
The options for professional crypto management are still limited, especially compared to the options in the traditional markets.
But while the market for professionally managed crypto accounts is still maturing, there is obvious desire from traditional investors to invest in crypto.
Fortunately, these investors have the option of hiring a financial advisor to manage a crypto portfolio for them via an SMA, or they can choose to allocate to a crypto-specific fund.
