Cryptocurrencies: should they still be viewed as uninvestable?

Once the pre­serve of hard­core ear­ly adopters, cryp­tocur­ren­cies are break­ing into the finan­cial main­stream and attract­ing the inter­est of invest­ment giants in the process. 

Mor­gan Stan­ley recent­ly became the first major US invest­ment bank to offer clients with at least $2 mil­lion in assets access to bit­coin funds. Soon after Mor­gan Stanley’s entry into bit­coin, rival Gold­man Sachs announced they will short­ly pro­vide ways for clients of their pri­vate wealth man­age­ment divi­sion to invest in a range of cryp­tocur­ren­cies.

A hand­ful of finan­cial insti­tu­tions may be slow­ly warm­ing to dig­i­tal cur­ren­cies, but the chal­lenges for pro­fes­sion­al advis­ers in offer­ing clients access to, and advis­ing on, cryp­tocur­ren­cies are con­sid­er­able. From dif­fi­cul­ties in valu­ing cryp­tocur­ren­cies to cus­tody con­cerns and a lack of under­stand­ing of dig­i­tal cur­ren­cies, many finan­cial advis­ers are find­ing it hard to embrace these cur­ren­cies.

Robert Mac­Don­ald, finan­cial plan­ner at Suc­ces­sion Wealth, an inde­pen­dent wealth man­age­ment and finan­cial plan­ning busi­ness with £8 bil­lion of assets under man­age­ment, believes the main issue with cryp­tocur­ren­cies is their unreg­u­lat­ed nature. 

“The Finan­cial Con­duct Author­i­ty is unlike­ly to get involved in this asset class due to the lack of track­ing abil­i­ty, poten­tial prospects of theft, fraud and vio­lence sur­round­ing the coins,” says Mac­Don­ald.

“In essence, cryp­tocur­ren­cies are just ‘bets’ and not incom­ing-pro­duc­ing assets. As such, wealth man­agers are like­ly to avoid putting cryp­tocur­ren­cies in front of their clients as an option.”

Rising investor demand for bitcoin

Many wealth man­agers and finan­cial advis­ers may view cryp­tocur­ren­cies as unin­vestable, but inter­est from UK investors in dig­i­tal cur­ren­cies is reach­ing fever pitch. Six­ty-three per cent of investors in the UK are plan­ning to pur­chase bit­coin for the first time or increase their hold­ing dur­ing 2021, accord­ing to a sur­vey by UK finan­cial mar­kets plat­form Investing.com.

It’s not dif­fi­cult to see the attrac­tion of a cryp­tocur­ren­cy like bit­coin that has a his­to­ry of rapid price growth to investors with an out­sized risk tol­er­ance, with a sin­gle bit­coin increas­ing its val­ue from under £3,000 at the start of 2019 to hit­ting highs of more than £43,000 this year. Yet, as Richard Jones, senior part­ner at Oun­dle Wealth Man­age­ment, points out, the volatil­i­ty of cryp­tocur­ren­cies is well doc­u­ment­ed.

“While some peo­ple have made tremen­dous returns from bit­coin and oth­er cryp­tocur­ren­cies, there is noth­ing to guide us as to what future returns may look like,” says Jones.

When he speaks to clients about cryp­tocur­ren­cies, the pri­ma­ry dri­ver for con­sid­er­ing these invest­ments is the fear of miss­ing out. “Typ­i­cal­ly these tend to be clients who are oth­er­wise not high risk tak­ers and have sim­ply heard sto­ries of oth­ers get­ting rich quick­ly,” says Jones, whose firm is a part­ner prac­tice of St. James’s Place Wealth Man­age­ment, which man­ages client funds of more than £129 bil­lion.

Although not want­i­ng to miss the chance to take part in a seem­ing­ly boom­ing invest­ment can be a pow­er­ful rea­son for some ambi­tious investors to try out cryp­tocur­ren­cies, fear of miss­ing out is not exact­ly a new con­cept. “I often point clients towards the exam­ple of tulips in 17th-cen­tu­ry Hol­land to remind them of how mar­kets can over­re­act,” Jones adds.

Growing adviser appetite for crypto

The num­ber of advis­ers allo­cat­ing to cryp­to in client port­fo­lios increased by 49 per cent in 2020, grow­ing from 6.3 to 9.4 per cent, accord­ing to a recent sur­vey of finan­cial advis­ers by Bitwise/ETF. Advis­ers that respond­ed to the sur­vey report­ed ris­ing client demand, infla­tion hedg­ing and high poten­tial returns as key rea­sons for adding cryp­to expo­sure to client port­fo­lios.

As one of the small but grow­ing num­ber of advis­ers who have embraced cryp­to, James Ver­mil­lion believes cryp­tocur­ren­cies will play a cen­tral role in the future of finance.

“I view cryp­to as the first total­ly new asset class in my life­time and we’re like­ly in the infan­cy of how these tech­nolo­gies will impact the world. Like any new tech­nol­o­gy, time, a matur­ing mar­ket and edu­ca­tion will widen the appeal to advis­ers and wealth man­agers,” says Ver­mil­lion, founder of inde­pen­dent finan­cial plan­ning and invest­ment man­age­ment firm Ver­mil­lion Pri­vate Wealth.

Soft­en­ing anti-cryp­to rhetoric from some insti­tu­tions and well-known busi­ness lead­ers, as well as a num­ber of com­pa­nies adding bit­coin to their bal­ance sheets, are a few of the fac­tors Ver­mil­lion attrib­ut­es to prompt­ing some advis­ers to wel­come bit­coin and oth­er cryp­tocur­ren­cies.

Despite the grow­ing main­stream accep­tance of cryp­tocur­ren­cies and asso­ci­at­ed tech­nolo­gies, he is acute­ly aware of the bar­ri­ers stop­ping these inno­va­tions from reach­ing wide­spread usage by advis­ers.

“One of the chal­lenges at the moment is the unclear reg­u­la­to­ry envi­ron­ment and lim­it­ed plat­forms for advis­ers to imple­ment hold­ing cryp­tocur­ren­cies in client port­fo­lios. This will sure­ly change as cryp­to matures as an asset class and reg­u­la­tors adapt. In the mean­time, there are oth­er ways to get cryp­to expo­sure, but none of them are a replace­ment for hold­ing the assets and come with var­i­ous oth­er risks,” says Ver­mil­lion.

Attracting millennial clients

Every advis­er has their own moti­va­tions for back­ing cryp­tocur­ren­cies. Some view this as an ear­ly oppor­tu­ni­ty to invest in inno­v­a­tive tech­nol­o­gy, akin to the oppor­tu­ni­ties found in the dot com era, accord­ing to Dan Eyre, chief exec­u­tive of Blockchange, a dig­i­tal asset invest­ing plat­form for pro­fes­sion­al wealth man­agers.

“Oth­ers see it as an oppor­tu­ni­ty to diver­si­fy into an asset class that appears to be eat­ing port­fo­lio allo­ca­tions across gold, cash and fixed income,” he adds.

A per­haps sur­pris­ing ben­e­fit advis­ers can gain from advis­ing on cryp­tocur­ren­cies is the abil­i­ty to attract hard-to-reach mil­len­ni­al clients, as younger investors are dri­ving the increase in bit­coin adop­tion. Only 1 per cent of over-65s own bit­coin, com­pared to 18 per cent of 18 to 34 year olds, accord­ing to a Blockchain Cap­i­tal sur­vey.

Eyre con­cludes: “Near­ly all firms that engage with this asset class under­stand by par­tic­i­pat­ing they’re send­ing a clear mes­sage to the mar­ket they’re pay­ing atten­tion and are will­ing to adapt to the desires of a shift­ing demo­graph­ic dur­ing the largest gen­er­a­tional wealth trans­fer in his­to­ry.”