With an advising firm centered in Silicon Valley, Ryan Cole is hearingfrom plenty of clients who are interested in cryptocurrency and other digital assets.
Like so many of his colleagues, the managing director of Lafayette, California-based Citrine Capital is at pains to say the collapse of crypto exchange FTX really hasn't changed much. There were always going to be risks in an asset class so new as cryptocurrency. The disaster has merely shown at least some of the misgivings were warranted; and it will eventually reveal where the sounder parts of the industry are, Cole said.
Most importantly, most investors should have no more in crypto than they could stomach seeing greatly diminished or even eliminated should the industry continue to take a turn for the worse.
"We are still recommending a very small percentage of bitcoin for people's portfolios," said Cole, whose firm helps manage the finances of about 130 households. "It's usually 2%. But it could be higher, depending on someone's position and net worth."
Many advisors attest to fielding questions from clients anxious about crypto following FTX's declaration of bankruptcy on Nov. 11.
But as the firm's many connections to other players in the crypto industry are revealed, some are worried that the contagion of falling digital asset prices could lead to losses at other companies. Cryptolender BlockFi is exploring bankruptcy,
Cole said one of the first lessons advisors can draw from the debacle is to recommend clients either hold digital assets in a U.S.-registered exchange like Coinbase or in so-called "cold storage" — on hardware not connected to the Internet. The fact that so much of FTX's business was based in the Bahamas was a warning sign that too many investors ignored, Cole said.
Another thing to look for from exchanges are proofs of reserves. These are accountant-tested statements showing that an exchange has money on hand to cover losses should a run like the one that felled FTX occur.
Cole said the most he'll usually recommend anyone invest in crypto is 10% of their portfolio. For that reason, he's found that people who are really interested in digital assets tend to steer clear of financial advisors and others with fiduciary duties. He's even turned away a client who he thought was going too deep into the crypto world.
"They had a very high position in these altcoins," Cole said. "They were being irresponsible, and we don't want to manage any sinking ships."
Ric Edelman, the founder of Edelman Financial Services and the author of the 2022 book "The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets," said advisors have a distinct role to play in helping clients interested in crypto sort out good bets from likely bad ones. Like other crypto investors, he was quick to point out that digital assets are far from the only industry to be rocked by scandal in recent decades. Bernie Madoff's nearly $65 billion Ponzi scheme happened right under the nose of U.S. regulators.
"There have been many crypto frauds, and FTX is merely the latest; it won't be the last," said Edelman, who founded the Digital Assets Council of Financial Professionals, a research and educational organization in which advisors can earn an online certificate in blockchain and digital assets. "But to say that the existence of crypto scams means you shouldn't invest in crypto is like saying stock market scams should prevent you from investing in stocks."
Edelman said investors who have looked on crypto as a good investment from the beginning could view the recent collapse in the price of bitcoin and other assets as a rare opportunity to buy at cheap prices. He called on advisors to remind clients, "why they invested, and reinforce the fact that that premise remains valid." He also said "that the bitcoin and Ethereum blockchains are alive and well, and that development in this tech is proceeding at a rapid pace."
Greg Johnson, a founder and the CEO of Rubicon Crypto — which works with advisors on crypto investing strategies — said it's easy to forget that amid all the headlines that FTX and its colorful founder, Sam Bankman-Fried, are not representatives of the entire industry.
"Although this story obviously does involve a big crypto component, it's also straight out of central casting for a movie on Wall Street bad behavior," Johnson said.
In addition to the Madoff scandal, Johnson cited the $63.4 billion bankruptcy of energy company Enron in 2001.
"This is something we have seen over and over again in traditional finance," he said.
Still, Johnson said heightened caution about crypto is certainly warranted. One big question investors should have been asking about FTX, he said, is why the venture-capital firm Sequoia Capital didn't insist on having a seat on the firm's board after
Johnson acknowledged that there are still likely to be more bankruptcies tied to FTX's collapse. But he said he does not think the industry is in for a "Lehman moment" — referring to the bankruptcy of the storied investment banking firm Lehman Brothers amid the 2008 global housing crash. If anything, he said, the increased scrutiny of crypto brought on by FTX will result in further regulation. That, in turn, will help promote stability.
"This will not be the end of the entire global financial crypto universe," Johnson said.
Ben Cruikshank, president of the financial tech firm Flourish — which offers a crypto-investing system for financial advisors — said the collapse of FTX presents advisors with an opportunity to learn a bit more about clients' interest and even holdings in crypto. It's not uncommon, he said, for clients to have squirreled away digital assets that they haven't had occasion to mention before.
"From industry data and our own firsthand experience, far more clients invested in crypto on their own than many advisors think — and many of these clients might be scared or embarrassed, potentially sitting on significant losses," he said in an email statement.
Mike Zeiter, owner of Foundations Financial Planning in Carthage, Missouri, said he has one client who has been hurt by the FTX debacle. But rather than being an investor that Zeiter steered toward FTX, this client was someone who already had assets on the exchange and needed help working out the tax implications. A certified public accountant as well as a certified financial planner, Zeiter said he is among a small group of financial professionals with tax expertise on crypto investments.
Zeiter said much of his work with these clients consists of finding ways to convert their crypto assets into less-risky holdings. He said he's not comfortable recommending clients have any more than 10% of their portfolios in digital assets. His client with FTX holdings was able to get most of his money out before the exchange collapsed, although not all of it.
"He's steaming about it," Zeiter said. "But it could have been a lot worse."
As far as investing in crypto, Zeller said advisors and clients should always be wary of deals that appear too good to be true.
"If I'm earning 8% on crypto keeping it on a certain online exchange, then I should be asking: Why is it 8% here and only 0.8% there," he said, "because should not be that big a discrepancy in a perfect market."
