By now, it’s fair to say that every working financial advisor today is aware of the existence of cryptocurrencies. But what do financial advisors need to know about how to approach the newest asset class with their clients?
Three experts in the cryptocurrency space gave their thoughts at the Morningstar Investment Conference last week.
Emphasizing Risk & Education
Cryptocurrencies tend to be portrayed as violently volatile assets due to their day-to-day swings in price. Annemarie Tierney, the principal of Liquid Advisors and a former member of the team that created the first Bitcoin trust, said every other asset class bears risk, such as a bet that a real estate investment will produce returns decades down the line when there’s no guarantee there’ll be a liquid market for it.
In her mind, a key part of an advisor’s job is understanding whether a client is truly able to stomach the risk inherent in a new and maturing asset class, and whether that risk profile fits within a longer-term goal.
“That's the problem with getting people new to space. [They] have to be ready for [Bitcoin to drop from] $60,000 to $20,000,” she said. “That's a very significant impact on people's portfolios. They're not ready for it.”
Bitwise Asset Management CEO Matthew Hougan said with the proliferation of smartphone-ready exchanges, it’s likely some clients are already buying and selling crypto assets without their advisors’ knowledge.
“There are more Coinbase accounts than Schwab, TD, E-Trade and Ameritrade combined,” he said. “If you haven't asked your clients if they're investing in crypto, that's the first thing you should do after this panel, because they're already doing it. They're probably not managing it well. They're probably falling prey to behavioral risks.”
What Is Crypto For, Exactly?
Onramp Invest CEO Tyrone Ross said it isn’t enough to know how cryptocurrencies work; advisors need to be able to explain how the blockchain can personally affect them from an investment perspective and in everyday life.
Ross drew on his own experience growing up in an unbanked home to argue why directly owning cryptocurrencies makes sense not from an investment perspective, but from day-to-day use.
He recalled watching his mother rush to cash checks to make payments on time at the end of the month, and using checks wasn’t an option because of the several days it can take for a check to settle. There was a real risk of eviction because cash was the only option to transfer value in real time.
But he says the ability to transfer crypto and stablecoins instantaneously between parties solves that issue, and can play a massive role in providing justice to marginalized communities that haven’t been served by the financial system.
“There are people in this country going through that right at this moment. This is here in the United States—not Nigeria, not Argentina, not El Salvador. Fifty percent of the people in the South Bronx are unbanked, and crypto is a godsend to these people,” he said.
From the aspect of a financial advisor talking to clients, Ross said advisors also need to talk about digital estate planning, especially since losing a password to a crypto wallet can leave those assets stranded with no method of recovery.
Prospects Of Bitcoin, Other Crypto ETFs
There are 19 pending filings for bitcoin ETFs in front of the U.S. Securities and Exchange Commission, and comments from Chairman Gary Gensler point to the likelihood of futures-based crypto ETFs getting priority for approval. Several industry watchers speculate that the SEC will grant approval for those ETFs within the year.
But practically anyone with a smartphone and a bank account can gain exposure to the cryptocurrency of their choice. So what benefit would an ETF carrying crypto as the underlying provide?
For Hougan, the benefit of a Bitcoin ETF is the same benefit that’s provided from a gold ETF: It provides exposure to the asset with the added benefit of a custodian to manage it.
“The beauty of ETFs is that they plug in seamlessly into the way financial advisors work, and that's why it will be a game changer and open up the market significantly,” he explained.
Tierney, who is also a former SEC staffer, said she doesn’t understand the holdup for a Bitcoin ETF when investors not only have access to direct exposure, but can also buy into private placement trusts or index funds traded on OTC markets.
“The SEC is supposed to be a disclosure agency, not a merit regulator,” she said. “To my mind, they're doing a disservice to the U.S. investment market.”