Hi everyone!
This is the first of a series I am starting called Yield to Maturity: Extended Duration.
I wanted an opportunity to share some of the most fascinating things I experienced recently and figured when better to publish special editions than a Saturday morning? I am still working on the cadence of this series. It may be sporadic, depending on when something really interesting happens.
Over the last month, I observed one of the coolest things thus far in my career. So cool that even other advisors reached out to learn more about the process.
I have been following the crypto ETF space for a while. I was always aware of the process I am about to outline. However, minimums deterred many from executing.
Two other parties assist in facilitating these transaction but nonetheless, knowing these parties existed and the work they did was very helpful.
Let’s get into it.
As our hypothetical, assume someone was an early adopter of bitcoin.
They’d held it for years and they currently had a position worth over $10,000,000 in just this one holding. They might be apprehensive to continue to self-custody. They might also be interested in many other items that are generally served better from a traditional finance lens.
Right now, people have more options than ever to “bridge” from the De-Fi space to the Trad-Fi space.
Whenever cryptocurrency enters the picture, it is not uncommon to see one spouse that is deemed a “crypto native” and one spouse being out of their depth when it comes to managing outright cryptocurrency holdings.
A crypto native would have experience with self-custody, cold wallets, hot wallets, and institutional custody. Self-custody is when an individual holds their cryptocurrency outright. This can be done with a “hot wallet,” or an online wallet, or through the use of cold storage wallets that are not tied to the online world.
However, when the other spouse is not familiar with how to manage these items, a large issue can arise. I’d even go as far as to call it “key-persons risk.”
This poses a significant risk to the holdings. In the event one spouse does not have any experience on this front, it can be wildly hard to manage. Without a clear understanding of at least the basics, this $10,000,000 position could nearly be deemed a liability.
Outside of the key-person risk, it is important to take into consideration some additional hurdles that holding outright crypto can bring.
On the gifting front: Any gift recipient would need to be somewhat well versed in crypto themselves. They’d need to know how to receive the asset, track the basis, and log the sale using a cryptocurrency exchange.
On the estate planning front: Funding trusts with outright crypto can be a serious hassle. There are just some hurdles here that can be truly a drag. Setting up a wallet, worrying about security, etc.
On the borrowing front: Many look to borrow against their low-basis positions to fund any type of venture; expenses, other investments, home purchases, etc. And this can be done “onchain,” which means on a blockchain itself. But then another whole slew of risks enter the picture. Using hot wallets, platform security, on top of the borrowing risk.
The solution? An in-kind ETF creation.
With the rise of cryptocurrency ETFs, people can hold their preferred cryptocurrency within an ETF wrapper. In my opinion, the ETF serves as a bridge from the De-Fi (decentralized finance) world to the “Trad-Fi” (traditional finance) world.
The ETF can sit in any standard brokerage account, basis transfers over from the initial spot holdings, and the risks outlined above are largely mitigated. It can be borrowed against, gifted with ease, and used to fund any number of trusts either for legacy, estate, or tax planning.
The crypto ETFs are interesting because they offer in-kind creation. You hand over your crypto holdings and they provide you with the equivalent amount held within an ETF. Of course, this costs a small fee. But I was surprised to learn the cost of this transaction was relatively nominal.
There would also be a fee associated with the ETF itself. However, many major institutional crypto custodians are charging fees as well.
Recently, there was a major decrease in the amount needed to facilitate an in-kind creation. Certain providers are offering in-kind exchanges in the range of $1,000,000 - $3,000,000 as the minimum.
Through one of the ETF issuers as well as an authorized participant, there is the ability to facilitate an in-kind creation. The ETF issuer manages the ETF and the authorized participant has the ability to create or redeem shares of the ETF.
The outright holdings are then transferred to the authorized participant and in just about 2 days (can vary significantly based on how quickly someone completes the onboarding process), the ETF shares can be held in a brokerage account for the household.
Simple as that. The household can now have a more traditional avenue in managing their holdings, while maintaining their cost basis. Resulting in essentially zero tax implications for moving to the ETF wrapper as the transaction is done in-kind.
This is genuinely one of the most intriguing things I’ve observed. There is so much going on in this planning and wealth advisory space and new solutions for niche areas of planning are coming out almost every month.
I’ll try to drop one of these Extended Duration newsletters once a month, but don’t hold me to it! We’ve been busy and things are seemingly taking off around here!
This material is for informational and educational purposes only and is not investment, tax, legal, or estate planning advice. Cryptocurrency and cryptocurrency-related investments involve significant risks, including volatility and possible loss of principal, and may not be suitable for all investors. An ETF may address certain considerations associated with direct cryptocurrency ownership but does not eliminate investment risk and involves its own risks, fees, and expenses. The transaction and outcome described were based on specific facts and circumstances and should not be considered representative of results that other investors may experience. Similar outcomes are not guaranteed and may not be replicated. The availability, costs, eligibility, and tax treatment of an in-kind transaction vary based on the transaction and individual circumstances. Investors should consult appropriate tax and legal professionals.
This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.