Brett Bernstein has a simple question for clients who come to him with curiosity about
"If you were to go with me to Las Vegas for the weekend, how much would you be willing to put on one number and one color at the roulette wheel?" said
With the Securities and Exchange Commission's historic
Let's have some fund
For many advisors, exchanged-traded funds are one of their clients' best friends. ETFs tracking broad market indexes like the S&P 500 offer investors exposure to a vast array of stocks. And because the funds are bought and sold on public exchanges just like equities and bonds, they also make it easy for clients to pull money out as needed.
But the new bitcoin ETFs are a
The most widely known cryptocurrency now trades at around $40,000 and, in the past three or so years, has seen its price
Such fluctuation is reason enough for many advisors to be skeptical. Bernstein said he does not rule out cryptocurrencies, especially for clients who have enough money to shoulder losses and enough appetite for risk to try something outside the norm.
But he does caution them to not put down anything they can't afford to lose. The new ETFs may have made it easier to invest in bitcoin, Bernstein said, "but we as a firm have not changed."
"It's still a very speculative investment," he added. "And I think it's inappropriate for a lot of clients."
Flowing in
The 11 new bitcoin ETFs have proved popular to investors, drawing in about $4 billion within a week of their approval.
She said even some of the large and mid-sized institutional investors her firm works with have begun to ask about digital assets, whereas in the past they had "zero interest in even talking about this." Van Dusen said some of her clients — who tend to be high net worth and ultrahigh net worth — like to buy gold as a hedge against the possibility that the U.S. dollar will plummet in value amid ballooning federal deficits.
Some now think bitcoin and similar assets can serve a similar purpose. Others, Van Dusen said, look at cryptocurrencies as offering them an opportunity to be a venture investor supporting one of the next great leaps in technological innovation.
An advisors' chief responsibility in all of this, she said, is to help clients gauge how much they can afford to put into crypto with the understanding that "you could lose everything."
As a rule of thumb, Van Dusen said she thinks no investor should have more than 5% of a portfolio in digital assets, a figure that of course should be adjusted down depending on individual circumstances. Van Dusen said she herself has invested in bitcoin — partly as a hedge against the U.S. dollar — and has "done pretty well."
Regulatory mixed blessing
Although the funds have received the government's official sanction, many regulators still view them with skepticism. SEC Commissioner Gary Gensler backed approval for the ETFs only after his initial attempt at blocking them was
Regulators have also been urging financial advisors to take care in their discussions of bitcoin and other digital assets with clients.
Looking at 500 communications that firms had with their clients on digital assets and similar topics, FINRA discovered possible violations in 70% of them. Among other red flags, some brokerages were found to be implying the crypto assets can act like cash or cash equivalents.
Almost all advisors agree that caution is due with digital assets. But some take a slightly more favorable view than others.
Many investors already have it
Ric Edelman, the founder of the
He said DACFP, which offers financial planners an online certificate in blockchain and digital assets, has seen a sharp increase in the number of advisors who are reaching out for help understanding bitcoin ETFs. In response, it released an
In keeping with his belief that more investors could benefit from putting money in digital assets, Edelman cheered the arrival of bitcoin ETFs. Giving the usual caveat about every investor's circumstances being different, Edelman said, "Bitcoin is still a very risky investment, so a 1% to 5% allocation would not interfere with a client's ability to retire in financial comfort if it were to become worthless. Meanwhile, a 1% to 5% allocation can materially improve the overall return of the portfolio if bitcoin performs as well as many predict."
You can always walk away
Others remain skeptical.
Kenny agreed that anyone committing part of a portfolio to digital assets should take care to keep the allocation small. Even then, his preference is to guide clients to long-term investments in well-understood assets like quality stocks and bonds.
The trouble with cryptocurrencies, he said, is not only in their volatility.
"It doesn't produce earnings or dividends, making it difficult to assign any intrinsic value to it," he said. "Those things combined don't line up with our investment philosophy."
Bernstein of XML Financial Group said advisors of course can't be forced into doing something that they firmly believe would go against their clients' best interest. If an investor insists on putting an unreasonably large sum of money into cryptocurrencies or other unusually risky assets, sometimes the best response is to walk away.
"If someone comes to me and says, 'I want you to put 65% of my portfolio into bitcoin,' I'm going to say, 'I think you are committing financial malpractice and potentially financial suicidal,'" Bernstein said. "And if they insist, I'm going to say they need to take their business elsewhere, because I have a responsibility not to allow clients to do something that would potentially cause them serious harm."