- Darrell Cronk is the president of Wells Fargo Investment Institute, an investment-research division.
- He told Insider his team is in the final stages of adding a crypto strategy for wealthy clients.
- He explained why they changed their minds on crypto and the key merits and risks of the asset.
- See more stories on Insider’s business page.
Major cryptocurrencies are down in the doldrums after Elon Musk, Tesla’s chief executive, fired off a whirlwind of tweets over the weekend.
Darrell Cronk, the president of Wells Fargo Investment Institute, told Insider in an exclusive interview that the investment-research division of Wells Fargo Wealth and Investment Management is planning to evaluate and onboard an actively managed cryptocurrency strategy to its platform for qualified investors.
The search for “a professionally managed solution” has been in the works for months and is now in the final stages of the manager research and due diligence process. The strategy is likely to be added to the platform around mid-June, he said.
Wells Fargo Wealth and Investment Management, which also includes Wells Fargo Private Bank, Abbot Downing, and Wells Fargo Advisors, oversees nearly $2 trillion in assets as one of the largest wealth managers in the US.
The research and due diligence effort for the crypto strategy is being led by the institute’s global manager research team, which is headed by Greg Maddox.
Not too long ago, Wells Fargo Investment Institute was wary of the regulatory vagueness related to the crypto space. At its 2021 outlook media briefing in December, John LaForge, the head of real asset strategy at the investment institute, said the analyst team did not have an official recommendation on crypto and clients could not hold crypto at Wells Fargo.
So what’s changed, and why is the team diving into crypto now?
“We think the cryptocurrency space has just kind of hit an evolution and maturation of its development that allows it now to be a viable investable asset,” Cronk said, adding that the 9,000 cryptocurrencies that add up to over $2 trillion in market value illustrate the depth and breadth of the market.
But he still sees crypto as an evolving asset that requires deeper due diligence, labeling it an “alternative investment” rather than a “strategic allocation.”
“So we’re still not suggesting in our work that it is its own dedicated asset class with a strategic allocation to it in every portfolio,” he said. “For those investors who qualify and have an interest, there’s some good academic and money-management work to suggest that it can be a nice diversifier to portfolio holdings.”
An alternative investment with alternative benefits
With “quite a bit of interest” from clients, Cronk’s global-investment-strategy team has also published the institute’s first-ever research report on the investment rationale for cryptocurrencies.
“There’s a lot of education and informational work that has to be done,” he said. “It is a complex topic, and while investors have interest, it is important that they understand it for what it is.”
For investors who understand the basics of blockchain and cryptocurrencies, the report highlights the “insignificant long-term correlation of crypto with other traditional investments,” the increasing stability and declining volatility of the asset as key reasons for investing in crypto.
Similar to global stocks and commodities, short-term crypto prices appear to be driven by macroeconomic and financial conditions. But long-term determinants of the crypto prices differ from traditional asset classes, as is evidenced by the investment-strategy team’s research below.
Additionally, the team also views the long-term supply and demand dynamic of most cryptocurrencies as conducive to their stability. For example, bitcoin, the largest cryptocurrency by market value, has a fixed supply of 21 million coins. As it grows at a “restricted and declining” rate, the price of the digital token has shot up 340% in the past year despite the recent pullback.
“Anytime you reduce the supply of anything, even if demand holds constant, it should increase the price. Over time, as people become more familiar with these and as they become more mainstream, I think it will naturally go up,” Cronk said of cryptocurrencies. “We’ve seen that happen quite consistently over the last decade, but we’ve seen it accelerate during the pandemic because there’s been more digitalization of platforms.”
Lastly, despite the recent wild fluctuations of crypto prices, its volatility has steadily declined. The annualized volatility in a cryptocurrency index constructed by the team was 160% between July 2010 and August 2015, but it fell by half to 80% between August 2017 and March 2021, the report said.
Plenty of risks
The investment institute offers only private placements for investing in digital assets because the Securities and Exchange Commission has yet to approve a crypto exchange-traded fund.
The active strategy is also expected to be limited to qualified investors — usually an individual with an annual gross income of more than $200,000 or a net worth of more than $1 million.
Cronk said the restrictions are set in place because there are still “plenty of risks” associated with investing in crypto, including additional regulation, technology failures, operational risks such as handling and storing crypto, and the contentious issue around the heavy energy cost in mining crypto.
“There’s a whole element of consumer protections and regulations that have to still evolve with the changing landscape,” Cronk said. “So we’re not without risk, it’s just that we think there can be a viable investable option for those clients who show an interest.”
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