In the ever-changing landscape of digital assets, new investment opportunities continue to emerge regularly. Whether it's direct ownership, currently available or upcoming ETFs, various funds, or investment options providing exposure to this dynamic asset class, there's always something new to explore.
In this edition, we are delighted to feature Miguel Kudry from L1 Advisors, who will guide us through different investment models available in the realm of digital assets.
Enjoy the read.
How Are Advisors Meeting the Digital Asset Investment Needs of Their Clients?
The conversation around digital assets has undergone a significant transformation in recent years. Previously, financial advisors debated the merits of these assets, questioning their suitability for investment and their place in diversified portfolios. Some forward-thinking digital asset pioneers allocated small percentages of their client portfolios to vehicles offering exposure to digital assets. However, these investment options fell short of meeting the demands of investors who recognized the value of directly owning these tokens – a fundamental aspect of digital assets.
Over the past decade, the industry introduced products that provided varying levels of exposure to digital assets within compliant, often publicly traded vehicles. These offerings sidestepped the complexities associated with the type of instrument, custody responsibilities, or fee structures. Traditionally, these vehicles included publicly-listed ETFs linked to futures markets, index funds, trusts, and options. However, for U.S. advisors, tracking the actual performance of underlying assets remained challenging until Separately Managed Accounts (SMAs) were introduced. SMAs opened the door to a wider range of investable digital assets, safeguarded by custodians, granting investors a more authentic experience of owning digital assets.
Despite each new product bringing investors closer to digital tokens, a common theme persisted: high fees and the absence of direct ownership benefits, such as staking, generating yield, borrowing against, or lending them. As a result, a substantial portion of informed investors chose to independently manage and invest in digital assets outside of their advisory relationships. This shift has caught the attention of advisors, signaling a potential transformation in their roles and a new chapter in advisor-client interactions.
According to a recent survey by Coinbase & Morning Consult, 20% of Americans have a Coinbase account. This suggests that a significant portion of advisor clientele has also embraced cryptocurrencies proactively. Historically, advisors introduced clients to new investment opportunities and assets. However, today's trend indicates a client-led revolution, with digital assets taking center stage.
While investment decisions remain crucial, custody is a key concern. The vulnerability of centralized platforms like FTX, Celsius, and BlockFi to fraud, risk management failures, and systemic breakdowns has increased the appeal of self-custody. This presents a significant opportunity for advisors: meeting their clients where they already are and incorporating these assets into their clients' financial plans, potentially charging fees based on assets under management.
In my role at L1 Advisors, I observe how advisors are beginning to cater to a new segment of individual and institutional clients who hold or wish to hold digital assets themselves.
One example is Nick Rygiel, the owner and financial advisor at Ironclad Financial, who works with self-custody clients, offering recommendations for on-chain transactions. Ironclad's clients can generate additional yield on their existing assets by utilizing yield-generating protocols like Uniswap V3.
Another firm, Lumida Wealth Management, is targeting a completely new segment of clients: crypto-native individuals and institutions who have generated most of their wealth on-chain or hold all their treasuries and capital in the digital realm. These clients share similar financial planning, risk management, income generation, and investment management needs with traditional clients, despite their crypto-centric focus.
We have moved beyond debating whether digital assets are a viable asset class. Advisors must now understand how tokenization, the process that effectively makes an asset digital or on-chain, will reshape their businesses as other asset classes become digitized. Current data from DeFi Llama shows that "real-world assets (RWAs)" – including tokenized bonds, loans, and real estate – worth over $2 billion are now locked in DeFi protocols, signaling the beginning of a shift of assets onto the blockchain.
This monumental transformation extends beyond technology. A new generation of clients, accustomed to the transparency of digital assets, expects this efficiency throughout their entire investment portfolio. The boundaries between traditional and digital assets are fading. As a result, in the coming year, we can anticipate 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 onto the blockchain, ushering in a new realm of possibilities for our industry.
– Miguel Kudry, CEO, L1 Advisors
Ask an Advisor: Answering Crypto Questions
If BTC and ETH experience a 2x increase during a bull run, which crypto assets might see a 10x increase?
I cannot predict with certainty. However, through analysis and due diligence, you can assist your clients in identifying crypto assets that have the potential to outperform. Many protocols generate positive cash flow, which may benefit the token. Keep in mind that these assets carry higher risk, so they should constitute a smaller portion of your clients' crypto allocation. As always, it's essential to have an investment thesis and plan in place.
– Adam Blumberg, Interaxis
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