There is no denying that the recent Bitwise survey showing that more than 80 percent of financial advisers had received questions from clients about crypto is one of many polls showing that average folks want to figure crypto out and profit from it.
No one has asked me about bitcoin recently, which means it may finally be a good time to discuss it.
The wrong time for average investors to talk about bitcoin specifically and cryptocurrencies in general would be when the market for them is frothy and frenetic, which has been much of the last few years.
In all of the foaming coming from bitcoin/crypto enthusiasts during a recent price decline, one thing that was lost was how a leading light in the financial-planning world recently came out suggesting that “every financial adviser” needs to educate themselves about cryptocurrencies and “most should be considering an allocation for clients.”
That statement was made in early October, by Ric Edelman of Edelman Financial Services, the firm Barron’s named as the nation’s top Registered Investment Advisory firm for 2018. Edelman, a best-selling author and radio host, made that statement as part of the announcement that he was investing in Bitwise Asset Management, one of the firms leading the way toward creating cryptocurrency indexes and index funds.
It would be easy to pass off Edelman’s public statements about crypto as priming the pump for his investment in Bitwise, for the efforts he will make on their behalf to educate advisers on how to use crypto as an investment tool in a diversified portfolio.
But there is no denying that the recent Bitwise survey showing that more than 80 percent of financial advisers had received questions from clients about crypto is one of many polls showing that average folks want to figure crypto out and profit from it.
For the many people confused about bitcoin, here is an incomplete primer:
Bitcoin, currently, is the best-known digital currency in the world. A digital or cryptocurrency is a form of money that you can’t hold in your hand, but you can buy/trade online and store in a digital wallet (think “electronic vault”). Where traditional currencies are influenced by the monetary policy of the issuing country’s central bank, plus inflation and exchange rates and more, the price of bitcoin or any digi-currency is determined by supply and demand on the exchanges where it trades.
Demand is like rocket fuel to bitcoin’s price; unfortunately, the tank can empty just as quickly as it can fill up. The price of a bitcoin went from about $350 four years ago to nearly $20,000 late last year, and now has fallen back to roughly $3,750. Riding that roller coaster, a trader could have made and/or lost several fortunes on that action.
In that kind of environment, the big winners and losers have plenty to crow about, most of it sounding like “I told you so.”
In that way, bitcoin feels a bit like tech stocks did in the 1990s, when the hot money was chasing returns and the cool heads were preaching diversification as the internet bubble built and then popped at the turn of the century.
Bitcoin and tech stocks are different but investors are universally interested in anything that’s hot and trendy.
Up to now, when average investors have pursued bitcoin, they have entered the realm of traders, technical analysts and sharpies trying to profit based on short, sharp moves; rookies and long-term investors who have waded into those infested waters have mostly wound up being chum for the sharks.
Yet the evolution of crypto and index products like those created by Bitwise and its competitors clearly makes crypto a potential allocation choice.
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The question — best asked now when digital currencies are not in the spotlight based on recent performance — is whether average investors want to go there.
Edelman, who last spoke to me in 1999, refused requests to discuss his investment in Bitwise or his thoughts on crypto allocations as a norm.
If he is right and advisers adopt a crypto allocation, however, it will change a core belief in financial planning. Historically, advisers have been almost universally against letting average investors play currencies, because it’s too easy to get burned on foreign-currency exchanges.
Digital currencies have their own exchanges, but the whole world is foreign to average investors.
Crypto is about technological advancement, and an investor might want to participate by investing in the stocks of companies involved in that technology, called blockchain, rather than in currencies themselves.
Some advisers have suggested crypto is the modern alternative to gold in a portfolio, but many investors like gold precisely because it is a tangible asset. Bitcoin, by comparison, is vapor.
The bigger question may be whether average investors and their advisers can treat bitcoin like an element of allocation, something to hold in all market conditions as a hedge against currency and inflation risks. For all the ups and downs of the last four years, an investor who stuck with bitcoin still has big gains; it’s just hard to believe most investors could ride that horse this long, trading only to rebalance the allocation, culling winnings or buying more based on price movements.
Until now, according to Bob Veres, who runs Inside Information, an influential newsletter for advisers, crypto investing “has been a disaster … and it’s not hard to understand why.
“The ‘investment’ concept is totally unproved, there is nothing backing the various currencies, they are hard to redeem, the costs of a transaction are outrageous and it’s still too easy to pilfer someone’s wallet. So I think we already know what we need to know about bitcoin and its ilk: too much risk, too much uncertainty, and … anyone who says otherwise is giving irresponsible advice.”
Yet that advice will spring back to life during bitcoin’s next gigantic run (and there will be one).
That’s why investors should evaluate crypto and its potential as a long-term allocation now; if you can’t be convinced to buy it when its on-sale relevant to past highs, you won’t be fooled when the numbers are sexy and everybody’s talking bitcoin again.