By Eric Ervin
As someone who has spent years in the financial advisory space, first as an advisor at Morgan Stanley, then running Reality Shares as an ETF company, and later founding a crypto hedge fund and Onramp Invest (now Securitize for Advisors), I’ve seen firsthand the evolution of investment vehicles. While ETFs and funds offer their own set of advantages, the landscape of digital assets brings new opportunities for investors that traditional structures can’t match. Here’s why direct ownership of crypto, especially when managed by a knowledgeable advisor, offers potential benefits.
1. Tax Advantages and Tax Loss Harvesting
The tax advantages are among the most compelling reasons to opt for direct crypto ownership. Advisors specializing in crypto or offering crypto services can implement strategies like tax-loss harvesting to optimize clients’ tax situations. When holding crypto directly, the wash sale rule—which prevents claiming a tax deduction on a security sold at a loss and then repurchased within 30 days—doesn’t apply as the IRS considers crypto property. This means all Bitcoin could be sold at a 10% loss and bought right back—locking in a tax loss that could save clients thousands of dollars. However, this strategy may not be suitable for everyone, and it’s important to consult with a tax advisor to understand how these strategies may apply to your specific situation.
In contrast, while this is subject to some debate, the wash sale rule is generally considered to apply to crypto ETFs, even if a different ticker is bought, making tax-loss harvesting more restrictive and less effective. Given the volatility of crypto markets, the opportunities for tax-loss harvesting can be significant, providing a potential tax optimization benefit. However, investors should also be aware of the risks associated with this strategy, especially given the volatility of the market.
In traditional asset management, the amount of “tax alpha” that an asset manager can harvest is typically a function of the underlying assets’ volatility. According to Parametric, systematic tax-loss harvesting can add significant after-tax value by consistently capturing loss opportunities throughout the year. “Market downturns are an opportunity to collect additional tax losses, harvest, and reinvest the proceeds to maintain market exposure,” says ar, Parametric’s director of investment strategy.
Bitcoin’s volatility has been a significant factor in 2024. Despite some stabilization, Bitcoin remains more volatile than many traditional assets, which can provide numerous tax-loss harvesting opportunities. According to DataTrek Research, Bitcoin’s volatility is still more than twice that of large-cap U.S. stocks, presenting ongoing opportunities for tax-loss harvesting amidst its price swings, which can generate significant tax alpha.
2. Professional Management
The potential for high returns in crypto is significant, but so are the risks. Effective management of these assets is crucial. Many clients already hold crypto, and advisors can provide a valuable service by managing these assets. This benefits the clients by ensuring attentive and informed management while allowing advisors to enhance their service offerings.
Having an advisor manage crypto can make a significant difference in navigating this complex market. Advisors provide professional insights and strategies that individual investors might overlook. From my experience running an ETF company, I’ve seen the value of professional management in helping to navigate risks and potentially enhance returns. Furthermore, advisors don’t need to be crypto experts themselves. They can collaborate with our partner model and asset managers specializing in this field, ensuring their clients get the best possible guidance and support for their needs. At Securitize for Advisors, we work with qualified custodians to ensure that crypto assets are securely held, keeping clients’ investments safe and sound.
3. Diversification
Diversification is crucial for reducing risk and enhancing returns in any investment portfolio. Direct crypto ownership allows advisors to diversify their clients’ holdings beyond traditional assets like stocks and bonds. Numerous strategies are available, including active and risk management, diversified model portfolios, crypto custodians, and service providers. My experience as an advisor at Morgan Stanley taught me the importance of diversification, and incorporating crypto into a diversified portfolio can truly be a game changer. However, it’s important to note that diversification does not eliminate the risk of loss.
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While ETFs and funds have their place in traditional finance, the potential benefits of direct crypto ownership, especially when guided by a knowledgeable advisor, make it a compelling choice for modern investors. The tax advantages, professional management, and diversification are strong considerations. As the world of digital assets continues to evolve, those who embrace direct ownership will likely find themselves at the forefront of this exciting new frontier.
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Disclaimer: Investing in cryptocurrencies carries significant risks and may not be appropriate for all investors. Please evaluate your financial situation and consult with a financial advisor before making any investment decisions. The information provided is for informational purposes only and should not be construed as investment advice.
Crypto services are not provided by Securitize Markets LLC.
The opinions expressed in this material are solely those of the author and do not necessarily represent the views of Securitize Markets LLC.