A survey conducted by global market research company CoreData found 7 in 10 advisors believe there will be more cryptocurrency failures in 2023 than last year and more than a quarter (26%) expect to see the asset class collapse on a greater scale than was caused by FTX and Sam Bankman-Fried in November 2022.
“These findings show advisors are approaching cryptocurrencies with the utmost caution in the wake of the collapse of the FTX exchange and amid expectations of further failures,” CoreData founder and principal Andrew Inwood said in a statement.
The study polled 250 advisors in February: 84 wirehouse advisors, 126 independent broker/dealers and 40 registered investment advisors.
Advisors at the wirehouses expressed more pessimism regarding the potential for a larger crash in 2023—one-third of wirehouse respondents believe it will occur, compared with just 18% of RIAs.
“I don’t know if there will be anything as large and centralized as the fallout from FTX, although Binance hasn’t fallen yet and was the biggest competition to FTX,” said Saira Rahman, VP of new investor initiatives for Fundrise, an online alternative investment platform.
While they may be less concerned about a bigger collapse, RIAs also see less utility for crypto in portfolio construction. Just 6% of all respondents agree the asset class has a role to play in client portfolios, dropping to 3% for RIAs and climbing to 10% for wirehouse advisors. Meanwhile, 68% of all advisors said they disagree. Only 5% see cryptocurrency as an effective inflation hedge, while 72% do not.
"Citrine is of the belief that crypto can play a small role as a hedge in a portfolio but only when using well-established cryptocurrencies—such as bitcoin—at this time," said Kiersten Peshek, lead wealth advisor at Citrine Capital, a San Francisco–based RIA with $167.5 million in assets. "As a firm, we are very focused on ESG and doing right by people/the planet so our founder wrote an article last year making a case for the ESG side of bitcoin that discusses that side of crypto."
A majority of all advisors—69%—agree the FTX debacle reduced client appetite for cryptocurrency investments. On average, advisors reported that just 4% of their clients are currently invested in crypto. This ticks up to 5% for wirehouse advisors but falls to 1% for RIAs.
Only 12% of all advisors are seeing increased client interest in cryptocurrencies.
“I would agree that the circumstances surrounding FTX have led to a decline in demand and a reduced excitement for digital assets, including cryptocurrencies,” said Kristian Mtetwa, associate VP and private wealth advisor at 49 Financial, an Austin, Texas–based RIA with around $230 million in client assets.
Noting his client base largely comprises young and entrepreneurial investors, Mtetwa estimated around 35% are invested in a cryptocurrency. He said inflationary pressures were driving those investors to move crypto assets to “cold storage” wallets kept off mainstream exchanges even before FTX hit the headlines.
“Because of this, many of the crypto bulls have not changed their sentiments regarding the long-term viability and opportunity surrounding cryptocurrencies, specifically Bitcoin,” he said.
Among all surveyed advisors, less than a fifth (18%) believe cryptocurrencies will become more attractive when interest rates retreat.
Only 1 in 10 think the asset class will outperform the S&P 500 benchmark index in 2023 and just 8% believe the “crypto winter” of 2022 is over. Conversely, more than a third (37%) of advisors say the crypto bull market of 2021 will never be repeated.
Advisor respondents are also skeptical that digital currencies will gain wide acceptance in the near term, with only 9% believing they will become mainstream within the next five years.
“There is a case to be made for the expectation of future rallies in that market due to the unique utility and finite nature of some of these digital assets,” said Mtetwa. “It would be naive of us to write off cryptocurrencies and other digital assets as relevant five-plus years from now. They certainly have a role to play in the future of our economy and for our clients.
“At this time, though, we limit our advice to areas in which we have a deep level of confidence based on academic and historical data,” he added.
“My experience with the crypto market is that every few years something resurrects its popularity,” said Fundrise's Rahman. “In 2021, it was NFTs; in 2020, it was bitcoin; in 2017/2018, it was ICOs; in 2015/2016, it was Coinbase, and there will be more as time goes on. Just depends on how the tech transforms.”
While 37% of respondents see the prospect of high returns as the biggest potential benefit, 31% identified fraud and scams as the biggest risk to investing in crypto and 7 in 10 said they won’t recommend it due to increased regulatory scrutiny.
But insufficient regulation can also be a deterrent, according to Devon Drew, a former Vanguard broker/dealer-turned-CEO of AI-based distribution platform Diligence Fund Distributors.
“They are still considered a relatively new and untested investment,” Drew said. “Financial advisors may be hesitant to recommend cryptocurrencies as an investment due to their volatility and lack of regulation.”
At the end of the day, the same number of advisors who believe a larger collapse will occur in 2023 (26%) said they don’t understand cryptocurrencies well enough to allocate assets to them. A number of advisors contacted for this story declined to comment, saying they "steer clear" due to both insufficient knowledge and lack of client interest.
“There are financial advisors who do recommend cryptocurrencies as part of a diversified portfolio, as they can provide opportunities for growth and potentially higher returns,” said Drew. “However, it's important to note that investing in cryptocurrencies comes with significant risks and should only be done after careful consideration and research.”
“The first few months of 2023 aptly illustrate the roller coaster–like volatility of crypto and serve as a timely reminder that investing in the sector represents a high-risk bet,” said CoreData's Inwood.