As money flows into the new spot bitcoin ETFs in step with the leading cryptocurrency’s rallying price, at least one platform sees an opening for financial advisors to better manage crypto assets held directly by clients.
SpiderRock Advisors, a Chicago-based firm specializing in option overlay strategies, plans to use put and call options on some of the new spot bitcoin ETFs to create collars on crypto investments, with the goal of reducing volatility and better managing tax consequences.
“We see this as the biggest opportunity in the space,” said Dave Donnelly, SpiderRock managing director. “The ability to hedge an outstanding universe of crypto is probably the biggest story as it pertains to wealth managers having access to these products.”
The issue SpiderRock aims to address is crypto assets held by clients outside of the accounts already managed by advisors.
Spot Bitcoin ETF Options
“Financial advisors have been put in a horrible box because they have clients with millions of dollars’ worth of crypto that the advisors can’t advise on,” Donnelly said. “Oftentimes, they can’t see it, can’t charge a fee on it, and there’s nothing that connects those crypto assets to their clients’ accounts.”
Founded in 2015, SpiderRock manages more than $4.5 billion, mostly in option overlay strategies on concentrated individual stock positions for financial advisors and institutional investors.
SpiderRock sold a minority ownership stake to BlackRock Inc. in 2021.
Key to applying the strategy to crypto assets, which typically caps the upside and limits the downside of the underlying investments, is access to and the liquidity of options.
So far, the breakout leaders from the dozen spot bitcoin ETFs that launched on Jan. 11 include the iShares Bitcoin Trust ETF (IBIT) now at $4.7 billion and the Fidelity Wise Origin Bitcoin ETF (FBTC) up to $3.8 billion.
Then there’s the $22.9 billion Greystone Bitcoin Trust (GBTC), which was converted from a futures-based ETF into a spot bitcoin fund.
Donnelly believes the size and volume of some of the largest spot bitcoin ETFs will be sufficient to produce a viable options market on those ETFs by midyear. That would open the door for SpiderRock to start offering option overlay strategies for advisors with clients that have direct crypto ownership positions.
“When a client has crypto somewhere, an advisor can take some risk off the table without triggering a tax bill,” Donnelly said.
While the universe of crypto investors might be large and diverse, Donnelly admits the collar strategy that caps upside and limits downside will not appeal to all crypto investors.
“People who like the volatility are trading it; not investing in it,” he said. “A hedge is probably not appropriate for them.”
However, for those crypto investors that might want to protect some gains or take some profits, Donnelly said this is an opportunity for financial advisors to offer a unique service and bring those crypto accounts into portfolios on which fees are charged.
Donnelly said SpiderRock typically charges 50 basis points annually for the overlay strategy, and that financial advisors often tack on their own fees.
“This is an existing strategy here, we’re just doing it with a different ticker symbol,” he said. “We haven’t done it yet because we need time to make sure there’s suitable option liquidity on one or more the newly minted ETFs.”