Financial advisors are not embracing Bitcoin ETFs.

• Financial advisors are not directing their clients to invest in bitcoin ETFs, despite a major case for them six months ago.
• The CNBC Advisor Council was surveyed about the reasons for the market's volatility, and many respondents attributed it to the time spent in the market and regulatory changes.
• Bitcoin's high-risk and speculative nature continue to deter some advisors, but others are preparing to recommend it, with some viewing it as inevitable.

Financial advisors needed regulated funds like ETFs to direct their wealthy clients to invest in bitcoin.

Despite the passage of almost six months since the launch of those ETFs, there are few indications that advisors are eager to invest in them. In fact, many remain just as skeptical about bitcoin as they were before. However, this does not mean that the ETFs were a complete failure. On the contrary, bitcoin ETFs have been widely acclaimed as one of the most successful ETF launches in history. For instance, BlackRock's iShares Bitcoin Trust (IBIT) has already reached $20 billion in assets under management this week, despite advisors staying away.

"I am researching something because I believe I will eventually recommend it, but I am not there yet," said Lee Baker, founder and president of Apex Financial Services in Atlanta. "As advisors, we increase the likelihood that it will end up in client portfolios if we have more of a track record."

CNBC interviewed Baker and other members of its Advisor Council to understand why financial planners remain skeptical of bitcoin and bitcoin ETFs. The reasons boil down to two key factors: the length of time in the market and regulatory compliance.

"If bitcoin becomes more regulated, it will lead to more adoption, according to Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. However, even without regulation, if bitcoin proves to be as stable as a technology firm over time, it will also see more adoption, as Jenkin views it as early technology rather than just money."

The majority of advisors are not initiating conversations or fielding client inquiries about ETFs, and most have only one client who has made an allocation to these funds. Among those advisors, some are actively educating themselves about bitcoin investing, while others, typically those with a more traditional and conservative client base, are more dismissive.

Some advisors who work with younger clients have a greater appetite for risk and a longer investment time horizon. They say that their clients were already interested and educated in crypto exposure before this year, and that the arrival of ETFs hasn't motivated them to jump in.

Performance review

Bitcoin is currently in a maturity phase similar to that of a teenager, with significant potential but still experiencing a lot of volatility. This year, Bitcoin has increased by over 59%, and about 230% from its 2022 low that deepened during the collapse of FTX. Over the past three, five, and ten years, Bitcoin has gained 85%, 704%, and 10,854%, respectively. However, it has also experienced several 70% drawdowns that not all investors could handle.

Some are deterred from investing in bitcoin ETFs due to their high volatility, despite the hope that consistent inflows may reduce it over time.

"YMW Advisors in Boulder, Colorado, offers a safe, reliable, and regulated way for financial advisors to provide clients with access to bitcoin, said Bradley Klontz, managing principal. "I love it as a tool in our toolbox for clients who want it," he added. However, most firms are not recommending bitcoin due to its high volatility, according to Klontz."

Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, stated that her clients prioritize stability and long-term growth over high-risk opportunities. The "relatively early stage of bitcoin ETFs in the financial landscape and the ongoing volatility associated with bitcoin" are the main reasons why bitcoin ETFs are not included in her investment strategies.

Oakland, California-based financial planner Cathy Curtis stated that she is uncertain about the stability of bitcoin as an asset class but would consider incorporating it into client portfolios if it exhibited consistent returns over a 15-year period.

"Perhaps," she said, "if it proved itself to be a true diversifier along equities, then I would believe its history."

Baker from Apex Financial highlighted that investors have access to numerous software and tools that can demonstrate the potential impact of a specific percentage of a bond, ETF, or other asset in their portfolio on returns or volatility.

"Baker stated that as a group, they are fairly conservative and somewhat risk-averse. They are so accustomed to analyzing performance through charts and markets that it has become almost second nature to them."

As bitcoin has been in the market for a few more years, investors may be able to model similar investments, which will help advisors warm to the funds. He added that advisors' embrace is not a matter of if but when.

"At this point, everyone should be convinced that Bitcoin is here to stay, but they may not understand the metrics in the same way we value stocks and bonds," he stated. "The lack of an underlying foundation is another reason for the slow adoption."

"I believe we will see an uptick or increase in advisor use within the next two to three years."

Not regulated enough

Despite the existence of regulated bitcoin ETFs in the U.S., advisors may not always be certain if or when they can recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York City.

"The compliance offices still have a significant role in determining which broker-dealers will allow advisors to offer ETFs, even if the ETF has been released. The ability to allocate to an ETF is not straightforward and requires careful consideration by compliance offices."

Some broker-dealers have approved the purchase of bitcoin ETFs but have imposed restrictions on the amount that can be bought, while other firms do not allow advisors to sell bitcoin ETFs.

The crypto industry has a notorious reputation for fraud, scandal, and crime, which has left a scar on the industry. Some attribute this to the lack of regulation, which increases the likelihood of consumer complaints, potential lawsuits against broker-dealers, and fines from the Financial Industry Regulatory Authority (FINRA).

"Jenkin stated that one reason for the lack of popularity is the heavy compliance issues within the industry. Many firms are concerned about the communications financial advisors have with clients regarding digital assets and do not want to risk violations with FINRA."

"Broker-dealers are risk mitigators who want to enable advisors to provide services to clients but do not want to be exposed to more risk. This is why there is a slow adoption of this."

Building confidence

Vanguard, a well-known investment firm, has stated that it does not plan to offer Bitcoin or its ETFs due to their speculative nature. However, if the asset were to become less speculative, Vanguard may reconsider its stance.

"Boneparth stated that client confidence will improve as we move from the early stages to the mature stages. This shift will occur after years of failed exchanges, which have tainted people's trust in Bitcoin."

The best position advisors can be in is one where they educate their clients, he stated.

Despite the lower risk and regulation associated with bitcoin ETFs, the link to bitcoin remains a deterrent for clients, according to Dorsainvil.

Ether ETFs may deter advisors even more due to their added complexity and use cases, despite the recent SEC approval of spot ether ETFs. While some investors predict success for these ETFs, it may not be as much as bitcoin ETFs have experienced.

"Institutions, including pensions and large funds, have found it easy to invest in bitcoin through ETFs, according to Boneparth. However, the process is still challenging for retail advisors and their clients."