Ric Edelman is the founder of Edelman Financial Engines, an independent financial advisory firm. He has been named the No. 1 independent financial advisor three times by Barron’s. ETF.com recently spoke with Edelman to get his take on the cryptocurrency space and his new organization, the RIA Digital Assets Council. The following transcript has been lightly edited for clarity.
ETF.com: How do you view the crypto space? Do you see it as a fad, or something with more lasting potential?
Ric Edelman: This has lasting potential. Blockchain technology—and, by extension, digital assets—represents the most profound technological innovation for commerce since the invention of the internet.
Most financial advisors don’t realize this, and the result is they're doing themselves and their clients a significant disservice.
That’s why I created the RIA Digital Assets Council: to help educate financial advisors about this technology, and show them its role in practice management and portfolio strategy, so that they can serve their clients’ best interests.
ETF.com: How should an advisor who wants to invest in this space go about doing that? Where do they start?
Edelman: The best place to start is with education. You need to understand how this technology works and the different investment opportunities available. It’s important to learn about the regulatory obligations, tax considerations, recordkeeping responsibilities and compliance/risk management.
By going through that educational process—which is the same that advisors do with every other aspect of their practices—they’ll be able to determine the best way to approach this subject for each of their individual clients.
Because this is an emerging asset class, it’s fairly easy to approach, because there aren’t yet very many options. Think back to when ETFs were new. There weren’t very many ETFs available. And frankly, the lack of options made the choices rather simple. That’s where we are today. Although there are 8,000 or more digital coins available in the marketplace, along with thousands of non-fungible tokens, bitcoin and ether together comprise about 90% of the market.
So, there isn't much of a need, at this stage, to go far beyond the largest coins. They are the most established. They have the greatest market share and can be expected to be the survivors in a rapidly developing ecosystem.
Once an advisor develops a broader array of knowledge, they can then feel more comfortable in building into other areas of this growing environment.
But to begin, I would argue that, just as a first-time investor should probably look at an S&P 500 stock fund, as opposed to an emerging markets fund, I would take the same approach in digital assets, focusing on the major players that are the most well-established, and go from there.
ETF.com: Is indexing a viable strategy in the cryptocurrency space?
Edelman: Yes, I think it’s extremely viable. The Bitwise Top 10 Crypto Index Fund (BITW) is an excellent choice, for two reasons. First, it provides you market-cap-weighted exposure to the 10 largest digital assets. Although bitcoin and ether represent the bulk of that fund, the other eight names are ones that frequently change because they’re much smaller and much more volatile.
And rather than you doing the research on your own, trying to figure out which coins you should buy and in what quantity, the index fund does it for you. Instead, you can focus on serving your clients without having to spend hours on a daily basis evaluating the intricacies of this emerging asset class.
Just as most financial advisors now prefer ETFs because of their passive approach to portfolio construction, the same concept applies to digital assets. Bitwise’s approach is an outstanding solution for a great many advisors and their clients.
ETF.com: Is that the type of product that investors should be looking at, given that we don’t have any U.S.-listed ETFs in the space right now?
Edelman: Clearly, we would all prefer to have a bitcoin ETF and other related ETF products—ether ETFs and so on. We all agree that the ETF format is the best available structure for investors. ETFs are extremely low-cost. They're fully transparent. They have high levels of liquidity. It’s very clear why ETFs have gained in popularity over the past few decades.
Unfortunately, the SEC has not yet approved of any ETFs in the digital assets space, and it’s not likely to do so for another nine to 18 months, at the earliest.
So, in the absence of an ETF, the next best choices are the OTC trusts and private placements that exist in the marketplace today. Bitwise, Grayscale and Osprey all offer these funds.
They are fairly low in cost. They are available in private placement versions for accredited investors, typically with a $25,000 minimum, with a six-month to one-year lockup period. And they're also available as OTC securities that have the same liquidity features as mutual funds and ETFs.
They also, however, [can feature] the share price deviating from the net asset value—very similar to the way closed-end funds operate. When they’re trading over the counter, these trusts can trade at a premium or at a discount. Advisors need to be aware of how that works.
Having said that, these represent excellent opportunities for advisors to engage with digital assets today without having to wait for the SEC to allow ETFs to come onto the market.
It could be a while before the SEC approves a bitcoin ETF. In the meantime, how much longer are you going to wait, and how much more profit are you going to miss out on? Bitcoin is already at $40,000, and ether is nearing $3,000. Are you going to miss the next doubling or tripling in price?
ETF.com: Tell us about the RIA Digital Assets Council. This is an organization that was designed specifically to educate advisors on the digital assets space, is that right?
Edelman: Yes, we’re very excited about this. It’s getting a lot of attention from both the digital asset community and the financial services community. We have established partnerships with many leading organizations within the financial field.
We have launched the certificate in blockchain and digital assets—an opportunity for financial advisors to obtain the knowledge they need to serve their clients’ best interests. It’s an 11-module online self-study program.
The first part is about understanding digital assets: What is blockchain technology; what are the differences between bitcoin and other digital assets; what are tokens; what is decentralized finance?
The second part is all about practice management: the investment thesis; how do you construct a portfolio; what are the investment options that are available; understanding the tax law; learning about the custodians and exchanges that exist in the marketplace; compliance and regulation.
Most importantly, you learn about how to talk to your clients about this. It is such a new innovation; you need to learn how to explain this to clients and how to answer their questions.
We already have more than 700 advisors enrolled in the certification program. About 200 have completed the course and have obtained their certificate. And many organizations are making the certification program available to advisors at a discount. The tuition is $549, but through many organizations, such as the Financial Planning Association and others, advisors can enroll at a significant discount.