Crypto for Advisors: Advisors Pivot to On-Chain Support

In the ever-evolving world of digital assets, there's a constant influx of new investment opportunities. Whether it’s direct ownership, current or upcoming ETFs, various funds, or investments offering exposure to this dynamic asset class, there’s lots to learn.

In this edition, we're excited to have Miguel Kudry from L1 Advisors guide us through the examples of investment models available.

Happy reading.

– S.M.

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The discourse on digital assets has undergone a significant transformation in recent years. Previously, financial advisors debated the merits of these assets, questioning their investable value and the wisdom of including them in diversified portfolios. A growing segment of cautious digital-asset pioneers have allocated low single-digit percentages of their client portfolios to different vehicles that offer exposure to digital assets. However, these investment vehicles have failed to address the needs of investors who begin to realize the value of owning these tokens directly – a key feature of digital assets.

Over the last decade, the industry rolled out products that offered different levels of exposure to digital assets in compliant, often publicly-traded vehicles, sidestepping the complexities tied to the type of instrument, custodial responsibilities or even fee structures. These vehicles have traditionally included publicly-listed ETFs linked to futures markets, index funds, trusts and options. However, for U.S. advisors, directly tracking the actual performance of the underlying assets remained elusive until the introduction of Separately Managed Accounts (SMAs), which opened the door to a broader range of investable digital assets safeguarded by custodians, granting investors a more genuine experience with digital assets ownership.

While each new product that went to market brought investors closer to these tokens, a prevailing theme continued to be high fees and the missing benefit of direct ownership of these tokens, such as the ability to stake and generate yield, borrow against or lend them. For this reason, a substantial segment of more informed investors has chosen the self-directed route, independently managing and investing in digital assets outside of their advisory relationship. This shift has grabbed the attention of advisors, signaling a potential overhaul in their roles and a new chapter in advisor-client dynamics.

According to a recent Coinbase & Morning Consult survey, 20% of Americans have a Coinbase account. If this is any indicator, a significant portion of advisor clientele have also proactively embraced crypto. Historically, advisors played the role of introducing clients to new investments and assets. Today, the trend reveals a client-led revolution, with digital assets at the forefront.

While investment decisions are paramount, custody remains a pivotal concern. The susceptibility of centralized platforms like FTX, Celsius, and BlockFi to fraud, risk-management failures and systemic breakdowns has amplified the appeal of self-custody. Here is a significant opportunity for advisors to focus on: to meet their clients where they already are and to incorporate these assets into their clients' financial plans. And to even be able to charge fees on the assets under management.

Through my work at L1 Advisors, I see how advisors are starting to cater to a whole new segment of individual and institutional clients who hold or want to hold digital assets themselves.

One example is Nick Rygiel, the owner and financial advisor at Ironclad Financial, who works with self-custodied clients and provides recommendations for transactions that clients can execute on-chain. The main benefit to Ironclad’s clients is that they can generate additional yield on the assets they already hold by deploying them to yield-generating protocols like Uniswap V3.

Another firm, Lumida Wealth Management, is going after an entirely new segment of clients: crypto-native individuals and institutions who have either generated most of their wealth, or who hold all of their treasuries and capital, on-chain. These clients generally don’t have the option of moving off-chain, but they still have the same financial planning, risk management, income generation, and investment management needs of traditional clients.

We are long past the debate of whether digital assets are an investable asset class. At this point, advisors would do well to understand how tokenization – what effectively makes a digital or on-chain asset – will change their business, as other asset classes become digital assets themselves. Current data from DeFi Llama indicates that so-called “real world assets (RWAs)” – think tokenized bonds, loans, real estate – worth over $2 billion are now locked in DeFi protocols, signaling the start of a move of assets on-chain .

This monumental shift isn't merely technological. A new generation of clients that has experienced the efficacy of transparent digital assets now expects this efficiency across their entire investment portfolio. The lines separating conventional from digital are fading. Hence, in the coming year, you can anticipate a surge in wealth and asset management firms launching on-chain investment solutions to meet their clients where they already are. This will kickstart the global migration of tens of trillions of dollars worth of assets onchain. And with that we’ll see a new world of possibilities for our industry.

–Miguel Kudry, CEO, L1 Advisors

If BTC and ETH go up 2x in a bull run, which crypto assets will go up 10x?

I can’t even pretend I know. However, you can certainly perform some analysis and due diligence and help your clients find some crypto assets that may outperform. Many protocols are creating positive cash flow, which may flow to the token. Just know they are riskier, so should be an even smaller portion of their crypto allocation. As we keep saying…have an investment thesis and plan.

– Adam Blumberg, Interaxis

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