Saying that crypto is a volatile asset class is akin to saying that water is wet. As I’m writing this, Bitcoin is down about 40% from its all-time high on Nov. 8, 2021. And, like all asset classes, it’s going to go up again and
In fact, over the course of its 13-year history, Bitcoin has been no stranger to eye-popping pullbacks. If we look back to 2013,
Fast forward to 2016 and we saw a similar pattern play out. From May 2016 to December 2017, Bitcoin grew 4,443%, peaking at $19,800. And again during that period there were six falls of greater than 20% prior to reaching its peak.
As the above data indicates, we have been here before. But major volatility in Bitcoin can understandably lead to clients feeling concerned over their cryptoasset investments when they don’t have that context — and sometimes even if they do.
To help clients avoid making investing decisions from a place of fear, it is essential that their financial advisors are equipped to guide them through times of uncertainty and convey the inherent volatility of this asset class. It is important to make sure that they — and you — are clear about the underlying characteristics of cryptoassets and what goes along with investing in them.
To accomplish this, I’d like to focus on two important elements of having effective conversations with clients when the crypto price tanks — proactive preparation and effective reaction.
Taking action before volatility
Prevention being the best cure feels like an appropriate mantra here. To support clients during bitcoin price falls, advisors first need to deeply understand the asset class themselves in a way that enables them to have conversations with their clients that take place before downside volatility happens — and not just with cryptoassets, but all investments.
Talking to clients about the characteristics of various investment options, having open discussions around the historical swings we’ve seen in the cryptoasset markets, and preparing them for volatility and the material risks associated with this emerging ecosystem are all ways advisors can support their clients. Understanding the cryptoasset space will provide the confidence you need to be the voice of reason for your clients regardless of market environment and to offer advice you feel assured is in their best interest. Although historical performance isn't indicative of future outcomes, it’s good to remain cautious and learn about the dynamics of the asset class to better serve clients.
Advisors should handle downside volatility in the crypto markets just as they would in traditional markets. When things go south, don’t wait for your clients to reach out to you. Be proactive and approach them with information that helps them assess and understand what’s going on. Most importantly, bring their focus back to the financial plan that you’ve crafted to help them achieve their long-term goals. Lean on your understanding of the markets to assuage concerns and help them to make the best decisions for the long run rather than making emotionally driven decisions.
Reacting during volatility
Advisors can add a tremendous amount of value in market downturns and other times of turbulence. Clients are human, after all, and thus full of uncertainty and doubt. As a result, they don’t always know what questions to ask in order to make informed financial decisions. It is incumbent upon advisors during these times to answer the questions their clients don’t think to ask.
Like death and taxes, market fluctuations are an inevitable truth. Clients benefit greatly from an advisor’s financial knowledge, sound guidance and their ability to zoom out when others are being shortsighted. Again, discuss what matters most to clients: their long-term goals and the plan you collaborated on. Reaffirm and provide confidence by reassuring your clients of why and where crypto fits in their plans (if at all); how the volatility has been modeled into their financial plans; and any other supporting information you have to help tell the story of how crypto can help them achieve their goals.
To simplify things, think about it in terms of the “Core Four”:
- Risk tolerance
- Investment policy statement
- Estate plan
- Overall financial plan
In each of these areas, bring it back to the client’s long-term goals and the game plan for achieving them.
At the end of the day, advisors shouldn’t miss a chance to provide value to their clients. Volatility to the downside gives advisors the opportunity to rebalance, harvest losses and put cash to work that had previously been on the sidelines. Putting dollars and cents aside, advisors need to remember that the topic of money is incredibly emotional. By taking note of client behavior and sentiment during these conversations, valuable information can be gathered and used when markets recover to adjust allocations and other planning considerations, if needed.
If clients are managing their crypto on their own, discuss whether they should take action based on whether they are actively or passively investing. In addition, to the extent your clients are interacting in the crypto economy, you may be able to show them how to leverage their portfolio through yield farming, lending, options and in other ways that they were not aware of.
It is the responsibility of a fiduciary to be an interpreter of news that has implications for a client's investments and to filter out the noise. Be a resource for your clients to make sense of the headlines and the doom-and-gloom news they will inevitably hear, read and watch.
Finally, if you’ve been looking for the right time to start a conversation with your clients about cryptoassets, downside volatility could present the right opportunity to educate and plan.
