The COVID-19 pandemic put a spotlight on all things digital, accelerating the long-awaited digital transformation of the wealth management industry, too. As technology stocks soared in 2020, so have the high-risk, high-reward asset class of cryptocurrencies, which financial powerhouses and institutions are now getting behind.
When the mysterious Satoshi Nakamoto launched Bitcoin over a decade ago, it divided investors into cryptocurrency sceptics and cryptocurrency enthusiasts, groups that still exist to this day. Needless to say, many financial institutions fell into the first category. However, in line with the digital transformation the wealth industry is experiencing, many large financial institutions who once slammed the concept, despite having found use cases for the blockchain technology behind cryptocurrencies, have now changed their tune, and the asset class is no longer being put to the side.
Besides the growing ranks of cryptocurrency exchanges, such as Coinbase, which recently went public, many digital investment platforms have unsurprisingly also been supportive of cryptocurrencies in recent years. Players such as Robinhood and WealthSimple have offered cryptocurrencies, while crypto-specific robo-adviser Makara has also recently emerged.
The bigger story, though, is the larger financial institutions now changing their tune on offering the highly volatile asset class to their clients. Fidelity has announced that it will offer a bitcoin exchange-traded fund, Goldman Sachs announced it is close to offering bitcoin and other digital assets, and Morgan Stanley confirmed its wealth management clients have access to two crypto funds. So, as it stands, cryptocurrency has overcome another obstacle to being accepted by the mainstream: getting the support of financial powerhouses.
According to our 2020 Global Wealth Managers Survey, cryptocurrencies made up approximately 1% of a high-net-worth investor’s portfolio globally last year. Predictably, too, as the cryptocurrency market is unpredictable and prone to sudden crashes and rises – as seen most recently in mid-April 2021, when all-time highs for many cryptos were reached, yet many coins saw gut-wrenching double-digit dips by the week’s end.
Cryptocurrency is not for the fainthearted, and although they do have periods of “going to the moon,” as the enthusiasts say, the crashes are significant. The financial institutions’ approach to crypto through funds, or the ability to invest in Coinbase or other crypto-related stocks as opposed to direct exposure to the unregulated asset class, provide more investor safety. This will be more enticing to sceptical investors who still want in on the action, so this expansion should bode well.
Furthermore, many of the digitally native next-generation investors are pro-cryptocurrencies, whether they are fans of the technology or fans of the hefty gains that have been made through many coins. So a wealth manager not being proactive in allowing access to cryptocurrencies runs the risk of the heirs to the throne choosing other players to invest their family wealth with. This is especially the case at a time when DIY investing is on the rise and investors can achieve triple-digit growth through cryptocurrencies like Ethereum, which is up 900% in the past year, on their own.
All investments carry some level of risk, and cryptocurrencies are one of the riskier alternatives. Yet, with Wall Street titans giving crypto investments the imprimatur of respectability, other wealth managers need to plan how they will adapt. Two keys to future success in the wealth management industry, and to meeting the demands of the next generation, are choice and personalisation. Allowing clients to diversify into cryptocurrencies is a forward-thinking move, and those that continue to dismiss the concept may lose out on existing or new assets under management.