Advisors, Don’t Let Crypto Optimism Override Practical Thinking
by THOR Financial Technologies on November 15, 2023
Crypto’s future is bright, but clients still need practical steps and insights.
Learning to talk crypto to clients is one thing – figuring out how to rationally discuss an incredibly volatile asset class undergoing a major swoon is yet another.
Journalists and investors focus a lot on crypto prices because, well, they’re easy numbers to understand, and they’re everywhere. We can’t ignore that bitcoin (BTC) and alternative cryptocurrencies (altcoins) lost 60% or more of their value this year.
“We’re definitely in a down cycle,” said Michael O’Rourke, CEO of Pocket Network. Pocket is a protocol that coordinates infrastructure for blockchain developers and end users around the world. At the same time, he’s optimistic: “Even with the down cycle, I’ve never seen more opportunities and more potential for growth given how many developers are actually coming in.”
O’Rourke, whose role at Pocket allows him to track new developers and participants in blockchain ecosystems firsthand, is able to paint an optimistic picture of the course of crypto and decentralized finance projects.
“The number of participants is growing. More blockchains are being launched,” he said. “If anything, the actual growth of crypto and blockchain has actually accelerated, and the best part is that markets like these bring in people who build things the right way and for the right reasons.”
O’Rourke speaks about blockchain technology’s future as a major human coordination mechanism on the level of government, religion and corporations – thus his outlook for the space is incredibly optimistic.
But that messaging clashes with what investors – and your clients – are seeing with their own eyes: the failure of some projects, bankruptcies among some exchanges and falling portfolio values.
What should advisors do?
Err on the side of caution
The first step is to help the client secure their assets, according to Brad Roth, chief investment officer at Thor Financial Technologies, a digital turnkey asset manager.
“Advisors need to educate themselves and partner with the right people to help clients get their crypto assets into a safe place – that has to be first,” Roth said. “Ideally, that means off of exchanges and into cold storage, because what makes me most nervous is clients using random exchanges to try to be day traders of crypto.”
Assets are vulnerable on digital exchanges, which lack liability protection. But cold storage requires that investors take assets out of their hot wallet and move them offline completely. There they cannot be hacked or lost.
However, cold storage also means that clients literally hold the digital keys to their own crypto – so if an advisor’s aging client has difficulty keeping track of things like passwords or physical keys, advisors should suggest other options.
The good news is that investors can still gain many of the benefits of owning crypto through alternatives that don’t require holding assets in cold storage.
One alternative is for clients to have their crypto assets secured and held in institutional-grade cold storage.
“Advisors can look into getting [clients] with institutionalized custody,” Roth said. “At Thor, we have custody arrangements with Eaglebrook and others. They really give you safer access to crypto than you would get from trusting some website and hoping you can get to your crypto when you go to do a withdrawal.”
Other options for advisors can be found in certain private placement products like the Grayscale Bitcoin Trust (GBTC), which is traded publicly on the OTCQX, an over-the-counter market. (Grayscale is owned by Digital Currency Group, which also owns CoinDesk.)
GBTC is a bitcoin investment product that clients can buy and hold within their regular brokerage accounts. Although it does not allow them to own bitcoin directly, it mirrors the performance of bitcoin and can allow them to derive similar financial returns.
Encourage investing, not trading
One drawback to having clients invested in crypto is the tendency to treat the asset class the way early investors treated it – as a high-growth speculative play.
“People really have to think through this asset class,” said CK Zheng, co-founder at ZX Squared, a crypto hedge fund. “If they, like me, believe this asset class is long-term investible, they need a long-term plan. They can’t day trade or just look at the next six months or the next three months.”
Frequently trading crypto makes it difficult to find places to safely store crypto and maintain custody, according to Zheng. It also increases the likelihood that the investor locks in losses. Advisors should instead encourage clients to become long-term investors, or “HODLers,” of crypto.
Roth says that advisors need to do more to encourage their clients to vent about their crypto holdings: “Advisors also need to talk to clients. Investors are very emotional. In a volatile asset class like bitcoin or ethereum, investors need to be able to keep their emotions in check to succeed.”
Recommend a consistent strategy
Roth and Zheng admit their investing products won’t necessarily be embraced by every investor curious about crypto.
Instead, most investors will choose a self-directed investing approach that enables them to buy and hold crypto assets directly.
In fact, one of the biggest draws of digital assets is that they proliferated first in the self-directed space as innovations created by technologists, not major financial institutions.
Having a simple, repeatable process for investing in crypto can help control emotions and avoid poor decisions, according to Roth.
“I think people need a process for investing into crypto,” he said. “It could be as simple as dollar-cost-averaging and buying-and-holding. Whatever it is, it will help take emotion out of investing in these.”
Provide reasons for optimism
Futurists love blockchain and crypto, and enthusiasts love to proselytize their ideas on how it will continue to be applied to more areas of life, culture and society. However, advisors speaking to skeptical investors will need to offer more conventional, concrete answers.
Advisors could share three such reasons for optimism about the future of crypto, though.
First, crypto will likely be part of a long-term digitization trend in which most financial processes will involve blockchain technology. Eventually, almost any financial asset may be tokenized. This should help increase the long-term value of crypto.
Second, regulation could help, not hinder, the prospects of crypto. “Thus far, we don’t have many regulations in place,” Zheng said. “We’re nowhere near finalized and people can’t really see where we can go in terms of regulation. This bear market has exposed so many of the issues in the space, which will clearly play into future regulation. More certainty in regulation will be bullish for the industry.”
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