Bitcoin’s historic surge past $90,000 in 2024 marks a pivotal moment after a prolonged bear market. Following a 30% increase since the presidential election, the digital asset’s climb is driven by key regulatory shifts and growing acceptance.
Bitcoin surpassed $70,000 in March 2024, largely fueled by the SEC’s approval of spot Bitcoin ETFs, enabling easy access to Bitcoin through brokerage and retirement accounts. Ethereum also entered the ETF market in July, further legitimizing crypto assets.
With crypto ETFs gaining traction, wealth advisors might wonder: is Bitcoin now a viable option for clients? Here’s what you need to know.
The Importance of Bitcoin ETFs Bitcoin ETFs represent a critical development in simplifying access to crypto investments. Previously, most Americans were wary of crypto’s reliability; a 2023 Pew Research survey indicated that 75% of respondents doubted its security. However, regulatory changes, starting with a court ruling in favor of Grayscale’s Bitcoin Trust conversion and culminating in January’s SEC-approved spot Bitcoin ETFs, are reshaping that narrative.
Spot ETFs invest directly in Bitcoin, closely mirroring its price without the complexities of storage or exchange-related risks. “There’s never been an ETF directly tied to Bitcoin’s price,” says Ric Edelman, founder of the Digital Assets Council of Financial Professionals. These funds offer custodial security under SEC oversight, streamlining Bitcoin exposure within familiar brokerage and IRA settings.
Adding Bitcoin to Investment Portfolios: Pros and Cons Bitcoin’s rally may be enticing, but its speculative nature demands careful consideration. Bitcoin is unlike traditional income-generating investments, such as stocks or bonds. Instead, it’s purely speculative, reliant on price appreciation without dividends or earnings. “Traditional assets create value through production,” explains Michael Finke, professor of wealth management at The American College of Financial Services. “Bitcoin’s value is speculative, disconnected from income generation.”
Unlike equities that provide dividends and compound through reinvestment, Bitcoin’s returns hinge solely on market-driven price increases. This can skew perceptions of growth. For example, Hartford Funds research shows that 69% of the S&P 500’s historical return comes from dividends rather than pure price gains—a key distinction for advisors counseling clients on long-term, sustainable investments.
Understanding Bitcoin’s Volatility Bitcoin’s price volatility is a hallmark feature, often swinging more dramatically than traditional markets. The recent price rise echoes Bitcoin’s past cycles, but the downside risks remain. During the turbulent 2022, for example, the S&P 500 declined by 19%, while Bitcoin plummeted over 60%.
For clients intrigued by Bitcoin’s high-return potential, Edelman suggests a conservative allocation of 1% to 5%, recognizing both the high risk and reward possibilities. “A small Bitcoin exposure could benefit a portfolio, but only in low single-digit allocations to avoid excessive risk,” he advises.
Bitcoin’s Role in Diversification Historically, Bitcoin offered portfolio diversification benefits due to its low correlation with equities. However, recent studies reveal a growing correlation between Bitcoin and stock prices. The IMF’s 2023 report observed that Bitcoin and equity prices became increasingly aligned after 2020, particularly in times of economic strain. Georgetown University researchers also highlighted this trend, noting that Bitcoin failed as a hedging asset during crises such as COVID-19 and the Ukraine conflict.
Will Bitcoin Make It to 401(k)s? While spot Bitcoin ETFs are a significant step, they may not be coming to most 401(k) plans soon. Though firms like Fidelity offer crypto options for certain retirement accounts, Finke believes that fiduciary concerns will limit Bitcoin’s mainstream availability in 401(k)s. “Plan sponsors have a duty to minimize risk, making them cautious about including high-volatility assets like Bitcoin,” he notes. The Department of Labor also advises caution, emphasizing the complex evaluation required for crypto investments.
Considerations for Advisors Deciding whether Bitcoin fits a client’s portfolio involves weighing both potential and risk. Advisors should assess clients’ motives and ensure a solid foundation in diversified assets. Speculative investments like Bitcoin should typically be limited to funds that investors can afford to lose.
“Investors often get lured by assets with recent high returns, but this often leads to disappointment,” says Finke. “Bitcoin’s surge captures attention, yet may not sustain the momentum long term.”
For wealth advisors, Bitcoin’s rise underscores the importance of balancing enthusiasm with caution, guiding clients with a clear understanding of both the potential rewards and the inherent risks in this rapidly evolving market.
