Can Bitcoin Buttress the Asset Management Industry?

The outlook for the global wealth management industry, which has been plagued by relentless fee pressures in recent years, is starting to brighten. With memestocks, decentralized finance, and non-fungible tokens making headlines, asset managers need to keep up with the times. A new report suggests that the cryptocurrency markets are a great opportunity for fund managers and wealth management firms to tap a new client base and develop a new source of income. Color me skeptical.

The Bank for International Settlements has just placed crypto assets in the highest risk category, suggesting that banks must hold a dollar in capital for every bitcoin value on their books. Risks are numerous, including regulatory uncertainty, the role of crypto in money laundering, the apparent vulnerability of wallets to theft, and backlash against the environmental costs of mining digital currencies. Not to mention the volatility Bitcoin has traded in a range of 130% this year, which is currently about 40% below its April high.

However, the potential growth of an asset class that has exploded in recent years means the fund management community must be ready to meet customer demand, according to a study recently published by investment bank Morgan Stanley and consultancy Oliver Wyman.

If Bitcoin is truly digital gold, then the gold market offers a guide to its potential. Gold’s market capitalization has traditionally been between 5 and 15% of the world’s gross domestic product, with around 50% of the demand coming from its use as a store of value rather than as a commodity. On that basis, the report argues that Bitcoin’s market cap could reach $ 6 trillion by 2025.

The real El Dorado could come when the Securities and Exchange Commission finally approves an exchange-traded fund that can buy Bitcoin in the US with potential annual sales of $ 4.5 billion. No asset manager in the highly competitive passive space is going to want to miss out on such a potential gold mine.

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There are other ways for the investment industry to grow revenue over the next five years, say the report’s authors. In terms of personal wealth, total wealth could almost double to $ 13 trillion by 2025. The chunky fees still available from assets like private equity, venture capital, and real estate make it a $ 21 billion-a-year revenue mover.

Another hot spot is the environment, social affairs and governance. A shift towards “more mature” ESG strategies, including impact investing, will grow the market from approximately $ 2 trillion to $ 6.5 trillion. And in wealth management, the report says advances in technology will make it cheaper for companies to create bespoke portfolios for a wider range of high net worth clients, even those less than $ 10 million.

But especially in the crypto arena, investment firms face the most difficult choice. “There are likely significant benefits to being an early mover,” the report said. There are also significant reputational and financial risks. This is likely to stifle the widespread adoption of virtual currency portfolio tools, especially while regulators are wary of being viewed as legitimizing the asset class.

All of this makes the SEC’s delayed decision to approve a Bitcoin ETF a key moment. If so, then there will be a rush to create a universe of investment products tied to digital currencies. Until that happens, crypto is likely to remain a bit too racy for most of the mainstream financial community.

This column does not necessarily represent the views of the editors or Bloomberg LP or their owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Melissa Pozsgay at mpozsgay@bloomberg.net

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