Advisors generally believe that if an investor is not over-allocated in cryptocurrencies, the volatility of the asset class won’t cause too much financial harm.
‘Big Short’ investor Michael Burry sounded the alarm over cryptocurrencies this month, warning of the impending “mother of all crashes” shortly before Bitcoin’s dip beneath $30,000 June 22. Many advisors disagree on whether this volatility is a risk to investors. Regardless, advisors have strategies to protect their clients from more dire cryptocurrency crashes in the future.
“I would say investors should be worried, and the evidence I would cite is that it’s already happened,” says Donald Calcagni of Mercer Advisors, based in Denver, Colorado. “Investors should be worried about a violent crash in all cryptocurrencies, not just Bitcoin.”
Bitcoin’s price has oscillated from $9,200 in June 2020 to a high of $65,000 April 13 to $33,700 June 23 after its dip below $30,000 a day prior. The cryptocurrency’s volatility is often cited as proof that it’s an unsuitable asset class for all but the most risk-tolerant, long-investment-horizon clients.
Referring to the Great Recession, Burry said in a tweet, "People say I didn't warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned."
Another tweet of Burry’s reads, “When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed.”
Calcagni is wary of calling Bitcoin an asset, citing that “in most jurisdictions, it is not legal tender for transaction in business or for paying taxes,” “China is basically banning it” and it “earns no cash flows.” Instead, he calls it a “highly volatile vehicle.”
How to get ready for a crash
Helping clients “understand three things,” Calcagni says, will prepare them for a cryptocurrency crash. “Their capacity financially for taking on risk, their appetite for risk and what their need is for taking on risk.” Calcagni believes that not everyone needs to take risks with cryptocurrency investments to achieve their financial goals.
“It is incumbent upon advisors to understand the highly speculative nature of cryptos, and if they still decide to move forward, they should prudently size that position,” Calcagni says.
His message to younger investors is “be careful.” Calcagni says, “The financial markets are a very expensive place to earn a financial education.” If investors find they are overallocated in cryptocurrencies, Calcagni advises them to “diversify your position as quickly as possible.”
Tyrone Ross of Onramp Invest, a cryptocurrency fintech startup for advisors based in San Diego, California, echoes Calcagni’s concerns. “I think crypto is a momentum-driven market. It gets a lot of momentum going up, and it gets a lot of momentum going down,” Ross says.
Ross believes investors “should be worried, and they should be preparing now accordingly.” His strategy to prepare clients is to look at their financial plan and see if their estate planning is affected, and if it is impacted by bitcoin, “you have a problem,” Ross says. Helping clients “understand blockchain and the difference between bitcoin and ethereum” is also critical.
Research from the FPA found a sharp uptick in planners using and recommending digital assets.
Samuel Deane of Deane Wealth Management, based in Atlanta, Georgia, has multiple clients who work at Coinbase. None of them have contacted him with concerns about Bitcoin’s fall.
Deane says his clients “understand the volatility and the risk-reward factor” associated with cryptocurrencies. “They all have a long-term view on cryptocurrency, and they believe in the asset class and the advantages long-term,” Deane says.
Or maybe there’s nothing to worry about
Some advisors think cryptocurrencies actually have not crashed at all. “Crypto is pretty volatile and still the subject of regulatory scrutiny here and internationally. Therefore, there is volatility, a pullback,” says Adam Blumberg of Interaxis, based in Houston, Texas, in an email. “And then there is a complete crash, which in my mind means most cryptos go to zero and are worthless.”
Blumberg thinks investors should only be worried if they are over-allocated based on their risk profile and financial situation. “If they need the funds in the next few months, they should always be worried about the volatility since the value might be way down when they need to sell and use the money,” Blumberg says.
In the event of a cryptocurrency crash, “advisors can prepare by first learning about crypto so they can set expectations with clients,” Blumberg says. “They can then help develop the overall investment strategies based on their risk, goals and financial situations.”
Blumberg believes that choosing a “proper allocation and setting proper expectations should alleviate” the worries of clients. It is normal, he says, that clients are slightly concerned after “a pullback like we’ve seen recently.”
“The key will be for advisors to understand some of the reasoning for the pullback,” Blumberg says, “and be able to have conversations with clients about why it is happening, how it affects their portfolio and what they can do.”
