Mar 13, 2021
CF Benchmarks Recap - Issue 23
WisdomTree plants Bitcoin ETF flag with SEC filing
What happens when Bitcoin is added to a standard 60/40 portfolio?
“Nothing is more powerful than an idea whose time has come”. The quote, widely attributed to Victor Hugo, characterises the current momentum of the cryptocurrency industry’s maturation well. For the umpteenth week, large U.S. investment banks drip-fed fresh details of initiatives signalling they’re no longer standing aside from crypto financial assets, despite mixed messages. Elsewhere, $6.4bn Norwegian conglomerate Aker was the latest multinational to establish a unit broadly dedicated to the space, with a clear focus on investments. And PayPal confirmed the acquisition of multi-party computation specialist Curv (a crypto custodian), reputedly for c.$200m, telegraphing crypto ambitions that previously appeared to be limited to b2c and b2b payments. Still, it was the institutional investment segment that was once again the hottest section of the heatmap, including long-awaited news that, for CF Benchmarks at least, will count among the most seminal junctures of the year. That says something after the only EU and UK regulated crypto Benchmark Administrator in recent weeks became reference price provider for one of the first three Bitcoin ETFs, swiftly followed by Evolve, the sponsor of Bitcoin ETF (‘EBIT’ on TSX) applying to offer a pioneering Ether ETF based on our ETH benchmark. But the U.S. remains the preeminent institutional investment market on a number of metrics, so industry attention has been most raptly trained south of Toronto. There, attempts to win approval for a U.S. Bitcoin ETF span seven years. A successful application would be widely seen as a symbolic and actual watershed moment. The possibility moved closer to reality this week: WisdomTree filed an application to offer WisdomTree Bitcoin Trust using the CF Bitcoin Settlement Price (US Close) as its daily valuation index.
Roots in Wall Street and crypto
WisdomTree Investments Inc., New York-based asset manager with around $70bn in AuM, plans to list WisdomTree Bitcoin Trust on the CBOE’s bZx Exchange under the ticker BTCW. The group has long bridged the divide between Wall Street’s institutional investment market and Bitcoin as a long-term investment product. It’s an established track record that offers advantages compared to applications for other Bitcoin ETFs currently filed at the SEC. Here’s some essential background:
- WisdomTree products cover U.S. and global equities, commodities, fixed income, leveraged and inverse, currencies and alternative strategies
- The group was among the first to adopt the concept of fundamentally weighted ETFs and active ETFs and is an industry leader in both categories in AuM terms
- Its family of ETFs includes funds that track its own indices, those that track third-party indices and actively managed funds
- WisdomTree is also an exchange traded product sponsor and asset manager providing investment advisory services in the United States, Europe, Canada and Japan
- These activities are reported in its U.S. business segment that comprises it’s United States business and Japan sales office, which primarily engages in selling its United States-listed ETFs to Japanese institutions. An International Business segment comprises its European and Canadian businesses
- WisdomTree’s United States-listed products comprise fixed income, currencies, commodities and ‘Alternative Strategy’ ETFs. Its portfolio of products listed outside of the U.S. include WisdomTree UCITS ETFs and Boost ETPs
- AuM: WisdomTree managed approximately $68.658 billion in ETF assets under management (AuM), as of March 5, 2021. That represented AuM growth of around 54% in 5 years
- This AuM growth rate makes WisdomTree Investments Inc. one of the fastest-growing U.S. asset management firms of its kind and size
What happens next?
The application process has two basic stages encapsulated by the preliminary S-1 form and one known as 19b-4. Following the Commission’s acknowledgement, the latter kicks off a formal review. Alternative applicants have filed their 19b-4, though it’s unclear whether formal reviews have begun. WisdomTree’s eventual 19b-4 filing will be the next key event to note.
Featured benchmarks: CME CF Bitcoin Reference Rate
The ‘Bitcoin Effect’ on the traditional 60/40 portfolio
Bitcoin ETF launches reflect demand for tried and trusted ways to disrupt the most traditional portfolio with one of the most modern assets
Let’s face it, the credibility of the 60/40 portfolio as a long-term investment strategy has taken a battering over the last couple of decades, to say the least. After around twenty years of historically low interest rates coupled with the advent of equity market phenomena like FAANG stock market leadership, representation and influence, the ability of an allocation of 60% to equity and 40% to ‘safer’ assets to clearly outperform riskier approaches has been severely undermined.
Put another way, the jury is out on the question of whether the traditional 60/40 portfolio still offers an adequate basis upon which more customised long-term investment advice can be built. The dilemma of whether to minimise risk or maximise risk-adjusted returns looms large.
Of course, to the extent that the one-size-fits-all investment strategy has increasingly been recognised as unrealistic, the erosion of confidence in 60/40 was inevitable eventually, either way. Still, as Forbes’ renowned investment columnist Gary Mishuris notes, a large swathe of personal financial assets overseen by U.S. investment managers are still likely deployed in some variation of the 60/40 portfolio. And it appears that–with some justification—the investment management industry is more focused on variants of the tradition than on optimising individual investment approaches on a case-by-case basis.
As such, with digital assets showing clear signs of having passed the point of no return within the institutional investment zeitgeist, it’s still cogent to consider the impact of potential investments into the most prominent and important of such assets—Bitcoin—on the traditional 60/40 portfolio.
To be clear, this is by no means a novel area of research. Here’s a link to a paper on one of the most thorough examinations of the topic available, published by Bitwise Asset Management. Generally, what studies like Bitwise’s and others illustrate is that an allocation of between 1% to 5% to Bitcoin within a traditional portfolio tends to produce cumulative long-term returns superior to those from traditional portfolios with no allocation to Bitcoin.
With the proportion of assets referencing CF Benchmarks’ regulated CME CF Bitcoin Reference Rate (BRR), such as Evolve Funds Group’s Bitcoin ETF, almost certainly set to increase in coming months, specific data on the effect of ETFs referencing the BRR on a typical traditional portfolio will soon become more readily available. For now, recognising that at a minimum, some form of rebalancing is essential when assessing the ‘Bitcoin effect’ it’s already clear that when utilising pricing data from BRR Constituent Exchanges, the broad outcomes of long-term returns cohere very closely with existing observations. This is illustrated in the two charts below.