Does Your Financial Advisor Speak Crypto?

It’s pretty much impossible to avoid frequent headlines declaring that Bitcoin or some other new cryptocurrency is the gold standard of the new world of digital assets. Nobody wants to miss out on a gold rush, but Bitcoin isn't gold, and neither are and of its rival protocols such as Ethereum, Solana, or FTX Exchange Token. However, just as with gold mining, crypto mining involves expending energy to acquire something that, depending on the coin's inflation schedule, may have finite availability.

As of March 2022, there were more than 12,000 cryptocurrencies that facilitate peer-to-peer transfers of data and value.1 Where does this leave the individual who believes in the future of these crypto-assets but can't figure out how to invest in them?

Is This Investing or Gambling?

That's the question people have been asking about futures trading since the Dojima Rice Exchange opening in Japan in 1710. There are many factors to consider and plenty of good articles to educate yourself about the technology behind cryptocurrencies. But who can advise you on whether to buy in? 

Don’t expect any crypto buy, hold, or sell recommendations from your financial advisor. Even among investment advisors who like alternative assets that tend to move independently of the S&P 500 Index, you'll be hard-pressed to find many willing to suggest putting a chunk of your portfolio into any of the cryptocurrencies. Most wealth managers are steering clear for two reasons.

Your Advisor is Skeptical

First, because they mostly see this rush as just another new fad in the financial space that has to play itself out before there can be any real guidance.  Second, it is a space that has no clear regulators yet,but does have some who hate all cryptocurrencies when sold to retail customers.

With so many cryptocurrencies and the game-like nature of obtaining them, plenty of individual investors want to jump in. But make no mistake: cryptocurrencies may be thrilling but putting your money in a new financial product without any real understanding of how it works really is gambling.

Even Advisors Who Understand Crypto-Assets Aren't Betting on Them – Yet

One Boston-based financial advisor notes that when clients ask how they can invest in crypto, for example, it's often because they've heard how much money they could make. The problem with this way of thinking, the advisor explains, is that cryptocurrencies are so risky that investing in them right now is essentially gambling. 

A better way to think about cryptocurrencies is to focus on the technology behind them: the blockchain. The blockchain is more or less a distributed ledger. Bitcoin is the most well-known cryptocurrency because it was the first viable one. Then it began trading around the globe.

Blockchain technology was originally developed with payment processing in mind, but in reality, there are a lot of truly solid potential uses for it. Some of the possibilities include digital identity, tokenization of data, data management, and secure audit trails.

Your Advisor Is Trying to Protect Your

Although an advisormay be deeply knowledgeable about crypto-assets, the advisor can’t—and won’t—provide any recommendations on whether to buy or to sell any digital currency. The advisor is not alone in this way of thinking. The reason: An advisor's job is not to sell transactions, but rather to manage their clients' money and their expectations. This crypto advisor explains how the broad concept behind blockchain technology works and what it's actually trying to accomplish and points out the challenges.

Wanting to protect advisory clients, sometimes from themselves, the advisor screens out the noise in the market and steers them away from the many cryptocurrency scams that have cropped up. Just to put that in perspective, crypto scammers stole some $14 billion in 2021.

Be sure to keep track of your cryptocurrency passwords. If you lose them, or don't leave them to your heirs, no one can get at those millions you've mined.

Here's What Your Financial Advisor Can Do

In an ideal world, you'd turn to your financial advisor, ask about adding some cryptocurrencies to your portfolio and discuss which ones and how much. In the real world, the vast majority of advisors don't even recognize them as an investable asset class. Therefore, many are not able to talk about them intelligently.

So where can you go for real advice about investing in Bitcoin, Ethereum or any other cryptocurrency you're considering? You can always fall back on the less-than-5% rule, a simple guideline that dictates not putting more than 5% of your portfolio into any high-risk category. Even then, at this point, you'll have to get a little creative in your quest for crypto investments if you're working with most financial advisors. 

Different Ways to Get in this Marke

There is more than one way to participate in cryptocurrencies, however, and not all of them involve actually buying the digital assets directly. Some knowledgeable advisors would rather take one of these indirect approaches instead of actually helping you own cryptocurrency. 

Your financial advisor might go for one or more of the following alternatives: 

Bitcoin-related stocks and companies with exposure to blockchain

Bitcoin futures

Cryptocurrency-focused hedge funds

Remember: Like betting on a horse race, the amount of money you’re willing to risk on cryptocurrencies should be limited to the amount you can afford to lose. Of course, the high level of risk associated with crypto-assets doesn't automatically mean that they're gambling and not an investmen. There are plenty of so-called "real" assets that come with loads of risk, as well. 

Still, if cryptocurrencies do take their place among conventional investments, then "real" advisors will have to catch up with those who waded into the fray long before them.

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