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Bitcoin is back! Well, not all the way back in relation to the April highs around $63,500, but the world's largest digital currency is flirting with $49,000 as of Aug. 21 and that's an impressive move from the July lows around $29,800.
Still, a roughly $34,000 peak-to-trough decline and an almost $20,000 rebound all in the span of about four months are reminders of bitcoin's volatility. Experienced crypto investors know moves such as the aforementioned are common in the crypto universe. Bitcoin has had plenty of price declines and rallies like this over its 12 years on the market.
The drama associated with bitcoin's price not only serves to get clients interested in this and other digital currencies, it also serves as an avenue for advisors to add education, value and articulate to clients that direct ownership of crypto isn't for everyone.
Predictably, the struggle for many advisors and clients comes from human nature, meaning it's often easier to focus on big price gains and fear of missing out on those gains than it is to account for crypto volatility and alternatives to the asset class. There's some good for advisors because there are avenues for helping clients access digital currencies without being directly involved with a still new asset class with an obvious penchant for volatility.
ETF Elixirs for Alternative Crypto Exposure
Thanks to exchange traded funds, some of which are new and well-timed, advisors can present clients with another way of getting involved with bitcoin and the broader crypto universe and these avenues don't include funds backed by digital currencies or futures.
Rather, advisors can deliver to clients crypto exposure via equity-based vehicles and when executed properly, there's value (and growth potential) in this way of doing things. It's also easy to convey to clients, some of whom are perplexed by the broad crypto space.
“Digital asset companies are doing business within the digital asset ecosystem, but are NOT the same as underlying digital assets,” according to VanEck research. “An investment in Coinbase is not the same as an investment in bitcoin, although a significant portion of Coinbase’s business relies upon users trading bitcoin on the Coinbase platform. There are a wide range of business lines that digital transformation companies can participate in — from exchanges, to mining, to asset management. Generally speaking, bitcoin and other digital assets may play a crucial role in a company’s business operations, but companies should not be conflated with digital assets.”
By embracing digital transformation companies, or a basket of such equities, clients can command elevated correlations to bitcoin and ethereum. Many of these companies either are small parts of or aren't represented in widely followed broad market indexes like the Nasdaq-100 and the S&P 500, meaning those benchmarks, not surprisingly, have low correlations to bitcoin and ether.
“Low correlations and low overlap with broad market and tech-heavy indexes indicate that an allocation to digital transformation companies makes sense from a modern portfolio theory perspective,” adds VanEck. “Digital transformation companies are providing portfolio diversification and the potential for alpha. Keep in mind, these companies are early-stage movers, operating within a long-term structural growth environment.”
How to Play It
The VanEck Vectors Digital Transformation ETF (DAPP), which debuted in April, is a practical, straight forward idea for clients seeking equity-based crypto exposure.
DAPP follows the MVIS Global Digital Assets Equity Index (MVDAPPTR), a basket of 25 digital transformation companies. With new ETF launches on a record-breaking pace this year, DAPP confirms investors' enthusiasm for crypto-related stocks as it already has $41.5 million in assets under management. That's pretty good work for a five-month old thematic ETF.
Fortunately, DAPP doesn't require a leap of faith on behalf of advisors. Several of its holdings are well-known, credible companies that just happen to have above-average correlations to bitcoin. Think Square (NYSE:SQ), Coinbase (NASDAQ:COIN) and Taiwan Semiconductor (NYSE:TSM). The fund charges 0.50% per year, which is reasonable for an ETF of this ilk.
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