Bitcoin Tops $60,000. The Force Behind Its Recent Surge.

Wall Street is earning millions in fees off the ETFs, thanks partly to
Bitcoin’s
45% rally this year, pushing the token past $60,000. But the industry’s interest in crypto runs far deeper than ETFs. Wall Street hopes the products will be the gateway to other funds, trading strategies, and digital-asset services, putting crypto on the menu for mainstream investors and the broader universe of $100 trillion in global wealth under management. 

“This is the beginning of a crypto asset-management renaissance,” says Steve Kurz, global head of asset management at
Galaxy Digital,
which launched a Bitcoin ETF with
Invesco.

Wall Street aims to be the new face of crypto—giving it legitimacy after the first wave of empire builders nearly tanked the asset class. Sam Bankman-Fried and Changpeng Zhao—who built the giant exchanges FTX and Binance, respectively—no longer run their companies. Bankman-Fried is in jail for fraud. Zhao pleaded guilty to violating anti-money-laundering rules and is scheduled to be sentenced this spring. Scores of other crypto promoters have faded away as their firms went bankrupt or collapsed under a regulatory onslaught, leaving a void that Wall Street is stepping into.

Now, instead of relatively unknown companies pitching crypto, more investors will hear the story from traditional Wall Street firms and advisors they trust. BlackRock CEO Larry Fink, a former naysayer, now says he’s a ”big believer” in Bitcoin as an asset class that can ”protect” you similar to gold, according to a recent CNBC interview. He frequently appears on TV calling it a ”store of value.” Fidelity—which is building a crypto ecosystem of trading, ETFs, and custody services—advertises ways to “train your brain” so that you can “trade crypto with clarity.” 

“The impact of trusted financial names talking about Bitcoin is huge,” says Sandy Kaul, who helps lead
Franklin Resources
’ digital-asset initiatives. Franklin was among the firms to issue a Bitcoin ETF in January and offers model crypto portfolios for institutional investors and registered investment advisors that it hopes to expand.

Bitcoin ETFs could soon start making it into managed portfolios. Advisory firms typically put new ETFs under a due-diligence microscope, taking months to evaluate their underlying financials, liquidity, and other factors before allowing advisors to use the products. Kurz expects some big Wall Street firms, overseeing hundreds of billions worth of assets, to waive a typical requirement for a monthslong track record before putting the ETFs on their platforms.

Some smaller advisory firms have already added the products. Carson Group, an advisory firm with $30 billion in assets, approved four Bitcoin ETFs for client portfolios in February.  

The next stop could be retirement portfolios. Fidelity Canada, which has offered Canadian Bitcoin ETFs for years, in 2022 added Bitcoin to its “all-in-one” asset-allocation ETFs, including a 1% Bitcoin slug in the “conservative” version. In the U.S., Fidelity now lets employers include digital-asset accounts in the 23,000 401(k) plans the company administers. The U.S. Labor Department has warned plan sponsors to take “extreme care” before adding a cryptocurrency option.

There aren’t plans to put Bitcoin ETFs in Fidelity’s U.S. allocation funds, according to a person familiar with the matter. Still, Fidelity and others would benefit if the ETFs wind up in IRAs and other retirement accounts.

Bitcoin ETFs aren’t likely to be large moneymakers for the big Wall Street firms. Most ETF issuers initially waived management fees to build assets. Some of those waivers are starting to expire. BlackRock, for instance, has $7.2 billion in its ETF, and it’s charging an average 0.16%, according to J.P. Morgan analyst Kenneth Worthington. For a firm with trillions of dollars under management, however, Bitcoin ETFs are tiny. 

Incremental buying on a large scale would still be positive for Bitcoin and other tokens. And the ETFs have kindled gains in the token: Since they started trading on Jan. 11, Bitcoin’s price has surged 29% to about $60,000.

The financial industry’s plans for crypto go well beyond ETFs.

Another way to make money would be to tokenize financial assets—putting securities like stocks and bonds or entire funds on blockchains. The idea is to lower the administrative costs of the funds and put some illiquid assets on the blockchain—like real estate or private equity—that can’t easily fit into traditional fund structures.

The idea is gradually taking hold.
Citigroup
in February said it had successfully completed a test run of a “tokenized” private-equity fund with Wellington Management and
WisdomTree.
ETF sponsor WisdomTree already has a suite of blockchain-powered funds holding traditional assets such as stocks and Treasuries, which have gained about $19 million under management.

Wall Street’s enthusiasm for crypto hasn’t stopped the industry’s regulatory troubles. Digital Currency Group and other firms are fighting a lawsuit filed by New York Attorney General Letitia James, claiming they defrauded investors out of billions of dollars held in crypto interest-bearing accounts. DCG denies the charges.

The federal government also continues to crack down. A judge in late February approved a $4.3 billion penalty against Binance, after the company and Zhao pleaded guilty to money-laundering-related charges brought by the U.S. Department of Justice. Binance agreed to be monitored by an independent firm for five years.

Coinbase Global
faces peril, too: The Securities and Exchange Commission has sued the company, claiming it’s operating as an unregistered securities exchange. A federal judge is expected to rule in a few weeks on whether the case can proceed. Coinbase is seeking to have the charges dismissed.

For now, Bitcoin ETFs are creating new winners and losers. The biggest casualty so far has been the Grayscale Bitcoin Trust, which lost nearly $7 billion in assets since converting to an ETF. Grayscale opened the gateway to Bitcoin ETFs with a successful lawsuit against the SEC. But to fulfill a preconversion promise to its investors, GBTC cut its management fee to 1.5% from 2%. Its GBTC ETF will still be profitable, raking in $315 million in fees this year at recent asset levels, but the firm would have taken in another $245 million at its prior fee and asset levels. 

Coinbase benefits from Bitcoin ETFs but also faces threats to its core trading business. The firm custodies the assets of most Bitcoin ETFs, for which it earns a fee. Coinbase’s head of investor relations, Anil Gupta, says the firm views the ETFs as a “net positive,” since it brings more interest to crypto.

The downside for Coinbase is that the ETFs can be traded commission-free at most brokerages—making them less costly for investors than trading Bitcoin directly at Coinbase, which charges fees and earns a ”spread” on bid/ask prices. As traditional financial firms expand to other products, Coinbase could face fee pressure and competition on other fronts, as well.

For now, investors seem to think Coinbase will be a winner; the stock was up 55% in February, hitting 52-week highs and outpacing Bitcoin’s gains.

Wall Street’s next major foray into digital assets will likely come in May. That’s when the SEC faces a deadline to approve or deny the first ETFs to hold Ether, the second-largest crypto, with a $393 billion market value. Firms including Fidelity, BlackRock, and Invesco have applied to launch Ether ETFs. A Bernstein Research report in February said it’s nearly certain that the products win approval in the next year.

Bitcoin mania hasn’t entirely swept Wall Street or the fund industry. Vanguard Group says it won’t offer its own Bitcoin ETF or allow its brokerage customers to trade them. “Crypto is more of a speculation than an investment,” said Vanguard global head of ETF capital markets Janel Jackson in a blog post, citing the asset class’ lack of cash flows or other investment attributes.

Investor advocates caution that while Wall Street may profit, the gains may be far from widespread. “A firm like BlackRock will make money whether the price of Bitcoin goes up or down,” says Mark Hays, a senior policy analyst for Americans for Financial Reform, an investor advocacy group. “Their investment in this is as much about profiting from being an intermediary as it is about their confidence in the Bitcoin market. This amplifies the risk.”

Write to Joe Light at [email protected]