Advisors & The Crypto Conundrum

I never thought about a new asset class emerging in my lifetime. New industries or even sectors, sure, but a whole new asset class? Things like bonds, equities, commodities and currencies all have a century or more of trading behind them, if not millennia.

If I had seen digital assets coming even, say, eight years ago, I’d be rich beyond my wildest dreams. But hindsight is 20/20, and the fact is, digital assets are here to stay.

If you’re in retirement, in a comfortable spot and merely looking to maintain the lifestyle you already have, digital assets have nothing meaningful to offer you unless you’re really into risk. But for younger investors, digital assets—especially cryptocurrencies like bitcoin—are likely something you can’t afford to ignore. And if you’re an advisor, you really need to understand the space for the sake of your clients.

Shifting Asset Allocation
Let’s face it, the nature of asset allocation has changed. Fixed income no longer behaves the way we were all taught to expect. The traditional 60/40 portfolio will no longer deliver the results it did in the past. In the last few years especially, with yields drying up, the discussion over how to find a way to fill that void has reached fever pitch.

Clearly, cryptocurrencies in their current (volatile) state aren’t going to replace fixed income in the asset allocation paradigm, but maybe it’s time for an entirely new model. After all, it can’t be a coincidence that as fixed income began to falter in its traditional role, a new asset class emerged almost simultaneously. Something had to fill that vacuum.

Fixed income and cryptocurrency have very little in common—possibly the understatement of the century. It may be time to take a step (or many steps) back and reconsider all asset classes from a bird’s-eye view and how they fit together in a portfolio. Maybe options and futures strategies could even fill some of the gaps, especially given how options in particular can provide both income and ballast to a portfolio. 

An addition of cryptocurrency exposure could bring potential upside and greater diversification to a portfolio given the space’s volatility and lack of correlation with existing asset classes.

Opportunity For Advisors
All of this suggests cryptocurrency could be a boon to the advisory industry if RIAs are willing to seize the opportunity. But it means they’re going to have to do quite a bit of work. Digital assets aren’t exactly a simple subject, so the learning curve is intimidating, but not impossible.

With ETFs democratizing investing and robo advisors taking on much of the work of building portfolios, advisors need to be able to offer added value, and understanding the crypto space is foremost. Many firms add value by providing comprehensive planning services around things like taxes, life milestones and becoming more high-touch with their clients. Crypto now offers them the chance to add yet another  arrow to their quiver.

Investors are asking for guidance on digital assets, especially cryptocurrencies, where new ones are cropping up regularly – not all of them equal, some of them farcical. By educating themselves about cryptocurrencies and the wider digital assets space, advisors can bring that expertise to their clients’ portfolios and demonstrate the power of their value proposition.

At the very least, advisor cannot afford to ignore the crypto space any longer.