Making Friends with The Trend: Keeping Up with Client Interest in Cryptocurrency

As a financial advisor, the history you create with each of your clients is surprisingly similar to blockchain technology. Every conversation you have, every strategy you recommend, and the performance of the portfolios you manage are indelible pieces of your personal record book. Just like blockchain, you can’t go back and change what has already transpired and been recorded. For better or worse, your past performance is immutable. It can be scrutinized and assessed forever by the client. As you work to distinguish yourself in the competitive marketplace, however, your record can also serve as powerful marketing material, helping you win future business — if it resonates with what your current and prospective clients are expecting.

Right now, the trends are conspicuous. More and more clients are expecting you to know about blockchain technology — or at least two major cryptocurrencies underpinned by it: Bitcoin (BTC) and Ether(ETH). Both these digital currencies have made big news recently, capturing the attention of a broad swath of investors, and further cementing their rapid integration into mainstream, modern global finance.

2024: Crypto’s Mainstream Breakout

The concept of secure, digital money goes back over 5 decades, but public familiarity with cryptocurrencies really began to strengthen in the latter half of the 2010’s, and it’s just within the last several years that crypto has really called for advisors to sit up and take notice. According to a series of nationally representative surveys by Security.org, less than half of respondents were aware of cryptocurrency in 2021, but by 2023, more than 69% reported familiarity with the technology. Also in 2023, a national survey of 2000+ general population respondents commissioned by Coinbase, found that 20% of Americans — which calculates to over 50 million people — now own at least some crypto.

The financial services industry has swiftly pivoted to accommodate this increasing investor interest:

• On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) approved the launch of several BTC Exchange-Traded Funds (ETFs), which hold BTC as their assets, allowing investors to buy and sell shares of these funds on SEC-regulated exchanges. This was a significant departure from preexisting futures-based ETFs such as ProShares Bitcoin Strategy (BITO) and ProShares Short Bitcoin Strategy (BITI). With this newfound regulatory clarity, both institutional and retail investors now had a bona fide path for gaining exposure to Bitcoin, without the complexities of direct ownership. Over the next three weeks, nearly $7 billion flowed into the Bitcoin ETFs, giving credence to predictions of a total investment flow of over $150 billion in the next 2 to 3 years — by independent financial advisors alone.

• On July 23, 2024, numerous Ether ETFs launched on the CBOE, making them accessible through most online brokerages. On the first day, Ether ETFs attracted a total trading volume of over $1 billion. BlackRock's iShares Ethereum Trust (ETHA) saw the highest volume at $240 million, followed by the Fidelity Ethereum Fund (FETH) at $136 million. While these relatively modest figures underscore the roughly 70% smaller market capitalization ETH currently has compared to BTC, they also signal bona fide interest and the potential for significant future growth.

• On July 29, 2024, BlackRock’s chief investment officer for ETFs, Samara Cohen, predicted crypto-backed ETFs will enter “model portfolios” by late 2024. At the time, Ms. Cohen emphasized the distinct roles of Bitcoin and Ether as “portfolio diversifiers” and suggested that the model portfolio management industry could grow from $4.2 trillion to $10 trillion within the next five years.

• On August 7th, 2024, Morgan Stanley began allowing its roughly 15,000 financial advisors to start pitching certain clients — with a net worth of $1.5 million or more — on two spot Bitcoin ETFs, BlackRock's iShares Bitcoin Trust and Fidelity's Wise Origin Bitcoin Fund. This positioned Morgan Stanley as the first Wall Street “wirehouse” to actively market Bitcoin ETFs to its clients, marking yet another milestone in the ongoing adoption of digital assets into traditional finance.

It is worth noting that the two major U.S. political parties are each making attempts to align their campaigns with the growing power of crypto as well — and, of course, the voters enamored with it. Ideas around deregulation, improved government relations, and even a new National Strategic Bitcoin Reserve have made center stage. Likewise, the crypto industry is now of such stature and power that it is able to engage in serious efforts to influence national politics via campaign contributions and lobbying on policy decisions.

Taking the Cryptic out of Crypto: How Advisors Can Help Clients

It is never advisable for an advisor to fall behind a market’s evolution — or get out of touch with the shifting expectations of clients. As crypto continues to gain mainstream traction, the advisor’s job will be to stay informed about the latest developments, educate clients on inherent risks and opportunities, and — if the client so desires — incorporate these assets into diversified investment strategies that align with clients' goals and risk tolerance.

As the two leading crypto currencies, Bitcoin and Ether have unique technical profiles. However, many of these characteristics and subtleties won’t be critical for the advisor or the client to fully understand. Take, for example, cloud computing. Everyone has heard of it, and it underpins all the emails, social media, streaming services, and online shopping platforms we use each day. Yet very few people can, or need to, describe its computational architecture. Similarly, advisors won’t need to be able to explain blockchain encryption protocols or become a PhD in distributed ledger systems. They will only need to be able to advise on the value proposition and investment thesis for the crypto currency in question.

One way to describe Bitcoin, the most widely recognized crypto currency, is to draw some parallels to investing in gold. Both assets function as a speculative store of value, both are “mined” into existence, and both generally circulate independent of central banks and governments. Moreover, each is considered as a viable option for portfolio diversification and as a potential hedge against inflation. Similar to gold, Bitcoin has a limited and finite supply, but also a unique feature called “halving,” which occurs approximately every four years. Halving reduces the reward for mining Bitcoin, effectively slowing the influx of new Bitcoins to the market. As always, if demand increases more than supply, prices will rise. However, Bitcoin is known for its high relative volatility when compared to equities, bonds, and most other commodities — meaning clients should have adequate financial means and appropriate risk appetites.

Ether, on the other hand, is the native cryptocurrency and tradeable asset of the Ethereum network, a blockchain technology platform that supports many diverse applications and functions. Ether can be used in a variety of ways, including being bought as an investment, used to purchase goods and services, and used to pay the costs of making transactions on the Ethereum network. There is considerable excitement surrounding the larger Ethereum network, as it enables “smart contracts,” which codify the precise conditions under which Ether is transferred. The investment thesis for Ether is complicated, but the primary rationales include expected increases in the utilization of the Ethereum network and the resulting increased demand for Ether. There is also the possibility of earning yields via a process called “staking.” Staking is not unlike putting money in a savings account that pays interest, but instead of a bank, the cryptocurrency is vested back into the blockchain network it belongs to, which helps that network function better for other users, and therefore earns the crypto owner compensation.

While recent events seem to offer an unambiguous signal to forward thinking advisors — it’s probably best if you become knowledgeable about all of this right now — the increasing number of ETFs available for Bitcoin (BTC) and Ether (ETH) also promise a low-bar, liquid, and completely adequate entry point for many clients interested in cryptocurrency. Meanwhile, direct purchase of Bitcoin, Ether, and other coins rising in prominence, may be more interesting to a select few. Either way, it seems almost certain that the popular advisor strategy of ignoring crypto has become a poor value proposition for your practice.

Investments & Wealth Institute and Cryptocurrency Educational Resources

On August 20, 2024, Investments & Wealth Institute is pleased to present "Bringing Clarity to Crypto: New Insights for the Modern Advisor,” a 1-hour educational webinar featuring the renowned Ric Edelman. Topics will include the latest trends in the cryptocurrency and blockchain space, including regulatory updates, market dynamics, and further insights into the Ethereum ETFs. Advisors who sign up and attend will learn practical strategies for advising clients and gain critical knowledge for staying ahead in this rapidly evolving field and be eligible for 1 continuing education (CE) credit hour for CIMA®, CPWA®, and RMA® certifications.

The Institute also offers three standing crypto-focused microcourses through the Academy, our industry-leading online learning platform. "Explaining Blockchain and Digital Assets to Clients and Prospects" provides a foundational understanding of how blockchain and digital assets work, empowering advisors to engage in meaningful, informed conversations with clients and prospects. Academy also offers a two-part series on the tax implications for digital assets — Taxation of Cryptocurrency and Digital Assets Part 1 and Taxation of Cryptocurrency and Digital Assets Part 2. This series provides foundational knowledge on acquiring, receiving, earning, and mining digital assets, as well as how digital asset loans are taxed. All these microcourses qualify for CE credit, with registration fee discounts available for Institute Signature Members and complimentary access for Institute Elite Members.