Crypto Thaw May Be Premature but Advisors Should Prepare for Winter’s End
The days are slowly getting longer, the birds are singing outside my window and the price of bitcoin hit $23,000 for the first time in months. Could it portend the end of the crypto winter?
As someone who has spent many years of my life living in northern climes, I have a healthy skepticism of early signs of the end of winter. Just when you think winter is over, a big storm blows in and snows the town into submission for a day. Still, there are few financial assets outperforming the 25% or so rise enjoyed by most crypto tokens in recent weeks, and the speculative zeal is starting to return.
For advisors, that most likely means that even more client questions about cryptocurrencies are coming, according to Steve Goeke, chief operating officer of Khelp Financial.
“If an RIA doesn’t have a strategy in place, the advisor will end up telling clients to go to some place like Coinbase to invest their assets themselves,” said Goeke. “As a fiduciary, that’s not good enough. We can’t just tell people to throw their money blindly over here or over there. We should be giving them a couple of alternatives.”
Khelp Financial is an RIA founded as an outsourced crypto solution for financial advisors. The concept is founded on the fact that the fast-evolving, deep and broad digital assets space can be too much for all advisors to learn about and advise on in the near term. Therefore, Khelp plans for its model to become the advisor for the 1% to 5% of client portfolios allocated to cryptocurrencies.
Why 1% to 5%?
There are many different views on what percentage of an investment portfolio one should allocate to crypto, but safety is important.
“Sometimes volatility makes sense in a low percentage of the portfolio allocation,” Goeke said. “I don’t think having more than 5% of a portfolio in this asset class makes sense.”
Read more: How Much Crypto Should Be in a Portfolio?
Keep in mind that global wealth management industry assets crossed the $112 trillion mark in 2021, according to a report last year by Boston Consulting Group – which means wealth management potentially brings $5 trillion or more to digital assets.
Khelp offers crypto investment solutions in the form of separately managed accounts (SMA) and a crypto hedge fund.
“Everything is actively managed,” said Goeke. “The market dynamic has changed slightly since the failures of Celsius, Voyager and FTX, but we think there will still be a market. We don’t think the asset class is going away.”
Goeke points out that with one exception, Terra, all of the digital assets failures of the past year have occurred in the realm of centralized players like Celsius Network, Voyager Digital and FTX.
“The blockchain hasn’t failed,” he said. “All those contracts were still working efficiently and the technology behind all of these assets has been effective – but the failures of centralized entities can impact the prices of these assets with there being no issue with the technology that’s driving them.”
But traditional finance, including the wealth management industry, suffers from a knowledge gap when it comes to digital assets. Investors – especially younger, newer investors – often come into an advisory relationship knowing far more about cryptocurrencies and even non-fungible tokens (NFT) than their financial advisor.
“I think that investors learn the terminology, but most people do not really understand a lot of the technology they are investing in, they just understand the end thing,” said Goeke.
For example, an advisor or client might stumble upon a token supporting a new blockchain-based payment method that clears in 10 seconds, much faster than the two-day average for credit cards. While it’s easy to understand the value in faster payment settlement, it’s unnecessary to understand how exactly the blockchain works.
But how much, exactly, does a financial advisor need to know?
At a bare minimum, advisors need to be able to explain why 1% to 5% of a client portfolio should be in digital assets, according to Goeke, and how those assets can be held with the advisor through a separately managed account (SMA) or with an outsourced service like Khelp Financial.
“We still want advisors – who are our clients – to at least understand how to talk about it,” Goeke said. “We don’t even pretend to be full-blown experts. It’s important, though, because if you have a client and they are on the younger side, they’re likely going to have crypto somewhere in their portfolio whether the advisor has sold them on it or not.”
Utility and value
Another important consideration is that advisors need to emphasize the long-term viability of blockchain technology and cryptocurrencies themselves.
Though the market is still highly speculative, and there are a handful of coins with no real-world value that grab a lot of headlines, digital assets should be taken seriously as investment opportunities.
“We sometimes take a B2C approach,” said Goeke. “I have a client investing directly in a company building something on a blockchain. Because they are making a traditional, direct investment, their capital is going to be locked up for five to seven years. However, you can take the same kind of investment approach with a coin or token, but end up with similar investment characteristics with a lot more liquidity.”