“Do you tell clients to buy crypto?”

I’m writing this article as a reference for the future, because I get some version of this question a lot. It’s not always about what I ask clients to do, sometimes it’s about if I own crypto or what my thoughts on crypto are. The short answer is no, to all of it.

The long answer is…

Evaluating Investments

The first important thing to do is to evaluate the purpose of an investment that I might be making. Is our goal to one day retire off of this money? Is our goal to one day purchase a home with this money? Or is our goal just to accumulate wealth for a non-specific future fund, allowing for flexibility? All of these are worthwhile pursuits.

Once we’ve established our purpose, we look at the investment’s characteristics to see how the potential rewards might line up with that purpose. We also have to look at the potential risks. Not every situation plays out ideally, as even investment professionals learn time and time again.

The Pro

The upside of cryptocurrency investments is simple: Growth. Speculative growth. In fact, inevitably when I’m facing more of the questions from potential clients, friends, or family about cryptocurrency it’s because crypto is up right now. It has done great returns recently and in near-term history overall. As every early investor or social media influencer in the crypto space will tell you, if you invested in Bitcoin back in 2010 your single dollar of investment would be worth hundreds of thousands! (Source: Investopedia)

That greed is always tempting. It’s why phrases like that are repeated often, as in the case of early investors in Apple or Microsoft, who also have benefited greatly from their original investments. Some people have amassed considerable fortunes by taking big bets on individual investments way before the market recognized the potential for growth.

The Cons

That is a tempting narrative, but rarely the whole story. If you look at the price graph of Bitcoin, for example, you will see the first major con. While the investment has grown considerably, you would notice incredible volatility along the way. Some points see your investments grow unbelievably, while others see it fall by 50% or more in value. This is called volatility in investment jargon. Volatility is the main reason that most investors don’t end up with the same story as those early investors referenced above. At some point, almost everyone needs to sell or wants to sell. What will the value of the investment actually BE at the time YOU need to sell? It’s difficult to answer this question with Bitcoin, and it’s difficult to answer this question with any individual stock as well. That’s why us financial planners are always preaching diversification.

The next major con is the lack of regulation. To many cryptocurrency enthusiasts, this is a good thing. To me, a financial planner whose goal is to provide clients with a degree of planning and clarity about their future, it is not. No matter how attractive the concept of a decentralized currency seems, it does not offer the security of an FDIC guarantee and may evaporate if the operators of an exchange prove less-than-scrupulous. This is the primary reason, I believe, that North Carolina’s Securities Division won’t even allow firms registered in their state to recommend cryptocurrency to their clients if they hold themselves out as a fiduciary (all investment advisors and financial planners.) And at the time of writing, I very much agree with that stance.

The final major con I’ll talk about in this post is that there is no guarantee of liquidity. Converting cryptocurrencies back into spendable (“fiat”) currency often comes with significant fees and other challenges. As with all investments, you must find a buyer in order to sell out, but some of the cryptocurrencies out there are extremely niche investments traded at incredibly low volume. Even with high volume cryptocurrencies when we examine cases where investors desperately wanted to cash out there are often incredible barriers to conversion back to cash. ETFs and mutual funds rarely face this exact barrier, as significant volumes of trading in the underlying securities provide a theoretical safety net for investors to exit and regulations require these funds to make such exits possible. There are also investor protections in place that all of the major custodians have to abide by, like cash reserves. So while market runs and difficulties cashing out can exist in any investment, you can almost always get some value of cash out shortly and with low (or non-existent these days) transaction fees. This is not true of the current cryptocurrency environment.

There are other cons from my perspective, such as the incredible amount of energy use to run cryptocurrencies while they still only make up a small percentage of the global transaction volume. But similar debates about environmental impact, energy use, and technical issues are beyond my scope as a financial planner. Therefore, they are also beyond the scope of this article.

Conclusion

While there will always be temptation to purchase speculative investments when they show incredible gains, there are plenty of reasons not to purchase them as well. As a financial planner who has to evaluate risks in addition to potential rewards, crypto still isn’t an asset class that is comfortable. It doesn’t have the sense of relative safety a diversified index fund does over a 30 year time horizon to prepare a client for retirement. Crypto doesn’t have the stability to rely on the gains over 5 years to get some generalized return in a client portfolio before they put a down payment on a house. It just doesn’t meet my needs.

You may come to a different conclusion right now. I may even come to a different conclusion in a decade or so. I am not going to say I can predict the future of a currently speculative investment class, because that’s not what I do. Until then, crypto feels like a gamble and I’m not the house.

The TL;DR is that while Bitcoin and other cryptocurrency is a speculative investment that could return incredible growth for you, cryptocurrency has extremely high volatility, insufficient regulation, and lacks liquidity at this point in time.

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