Bitcoin has reached a state of frenzy. On Thursday, its ticker was given its own designated space on cable news as the price surged past $16,000, and then past $17,000 only few hours later. Coinbase, one of the most popular digital currency exchanges, crashed Friday morning after it became the top free app in Apple’s U.S. App Store.
Many early buyers of bitcoin have become fantastically wealthy in recent months. Tyler and Cameron Winklevoss said they purchased $11 million in bitcoin in 2013 and their holdings are now reportedly worth more than $1 billion.
But an executive at Abbot Downing, a Wells Fargo wealth management business that caters to the ultra-high-net-worth and oversees $41 billion in client assets, isn’t sold on bitcoin and other digital currencies.
Carol Schleif, the deputy chief investment officer at Abbot Downing, called the rising interest in bitcoin “a classic lesson in behavioral finance,” and questioned whether or not it is actually a store of value at this point.
Schleif said the mania feels familiar. In the late 1990s, when internet stocks were skyrocketing in value toward an eventual bubble, Schleif said the firm felt pressure from clients wanting to capitalize on the gains that were handedly beating the indexes. She said they tried to keep investors focused on the longer-term outcomes.
She said there is value in bitcoin’s underlying blockchain technology but buying digital currencies themselves is speculative and like gambling in a casino. “Realistically, the words investing and bitcoin shouldn’t be used in the same sentence.”
However, the wealth manager doesn’t tell clients they can’t gamble; it only advises them on what they should do with their money in the context of their goals. There might be some wiggle room for a client who feels they are missing out.
Clients often have their own “play money” that they still consult Abbot Downing on, Schleif said. What they spend that on is their decision, whether it’s stocks, watches, art, real estate or something like bitcoin. The only real guidelines? Try not to invest what you can’t afford to lose to meet your larger financial goals.
Frequently executives and entrepreneurs still want to dabble in the stocks of the industry that they came from, so they run a concentrated side portfolio in which they call the shots.
Abbot Downing keeps tabs on the side investments, Schleif said, for a number of reasons. Beyond theoretical risks to a portfolio, or side-portfolio, the wealth manager wants to make sure clients aren’t risking other buckets of assets for other purposes so that they can sleep well at night knowing the risks they are taking. Even if it’s not jeopardizing your retirement income, a more risky investment shouldn’t cause unnecessary anxiety or distract someone from more important things.
For clients that have an appetite for risk, there are ways the wealth manager can “scratch that itch” outside of bitcoin too. Schleif said Abbot Downing has an extensive private capital program that helps clients invest money in all kinds of niches, including the credit markets.
“There are ways to infuse that portfolio with where [a client’s] passions are, because at the end of the day it’s their money, not ours,” Schleif. “They hire us to give them our best thinking.”