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How to Talk to Clients About Investing in Cryptocurrency

Dismissing client questions about crypto investing out of hand won't make their interest go away.

Cryptocurrencies like Bitcoin and Ethereum are growing in popularity and capturing the imagination of investors nationwide. Some clients may have a fear of missing out—after hearing about big gains and steep run-ups in the value of some cryptocurrencies. Given all the publicity, there’s a good chance some of your clients have asked you about these new digital assets. How should you respond when clients ask you about investing in cryptocurrencies?

Don’t just dismiss questions about crypto investing

Your first reaction might be to dismiss cryptocurrency investing as a passing fad and discourage clients from getting into it as too risky and not appropriate for their portfolios. But dismissing it out of hand may not suffice—this isn’t going to make their interest go away. Some clients will still want to invest in crypto or fear they are missing out and should be investing in it.

In fact, up to 43% of investors already own at least some cryptocurrency, and there are currently almost 100 million Coinbase accounts. It’s prudent to know how to field clients’ questions about cryptocurrency investing and offer a thoughtful response. If nothing else, you don’t want to be left out of the conversation.

The first step is to educate yourself so you understand the basics of what cryptocurrency investing is, how it works and how to invest. Second, when clients inquire about crypto investing, ask them open-ended questions about it. You want to find out what’s behind their interest; for example, are they simply curious or do they have a serious interest in investing? What is their knowledge of crypto investing and do they understand the risks involved?

Here are a few suggestions for how you can talk to your clients when they ask you about cryptocurrency investing:

1. Explain the risks of investing in cryptocurrency.

Cryptocurrency poses many unique risks that aren’t present with traditional types of investments. One of the biggest is the fact that cryptocurrencies aren’t traditional businesses that make tangible products or deliver services people are asking for. So you can’t research and analyze them like you would a public company listed on a stock exchange.

The value of cryptocurrency is driven by supply and demand among market participants. Put another way, they rise in value only when new investors pay more than previous investors did, not when sales and profits rise. This presents a good opportunity to discuss overall risk tolerance with your clients and make sure they understand what their true risk tolerance is. If a client is risk-averse, you may want to advise them to steer clear of crypto investing.

As always, you should stress to your clients that past performance is no guarantee of future results.

2. Stress how volatile cryptocurrencies can be.

Recent news headlines have touted the extreme volatility of cryptocurrencies. Between November 2020 and 2021, the overall crypto market soared from $500 billion to $2.9 trillion. Then during the six months between November 2021 and May 2022, crypto losses topped $1 trillion.

The history of Bitcoin illustrates this volatility. The value of one bitcoin shot up from around $2,000 in July 2017 to almost $20,000 by the end of the year, only to fall below $10,000 in early 2018. Starting in September 2020 it soared to more than $61,000 in just six months, only to lose half its value over the next four months before rebounding to top $64,000 by late 2021. Bitcoin then plunged in the first half of 2022 as financial markets grappled with inflation, falling below $30,000 in mid-May.

Not every client is equipped to handle this kind of extreme volatility. For some, it can lead to high anxiety and sleepless nights, so make sure clients know what they’re getting into before investing in cryptocurrency.

3. Explain the lack of current cryptocurrency regulation and potential risks of future government regulation.

The U.S. government has been slow to regulate cryptocurrency so far, at least compared with fiat currency. Developments that occurred in May 2022 revealed what this lack of crypto regulation can lead to. TerraUSD, a so-called stablecoin that was supposed to maintain a value of $1 per coin, fell to 36 cents on May 12. This resulted in $200 billion in losses for cryptocurrency investors practically overnight.

Fiat currencies like the U.S. dollar are backed by the full faith and credit of the U.S. government, but cryptocurrencies are only backed by faith in their developers. The collapse of TerraUSD presents the risk that investors will lose faith in other virtual currencies, creating what some analysts have called a “market contagion.”

One positive development is the issuance of a cryptocurrency executive order by President Biden in March 2022. This is intended to begin the process of regulating cryptocurrencies and bringing them closer to the mainstream. There’s a fair amount of uncertainty about the future and how potential future regulation might impact the value of cryptocurrencies.

4. Suggest that clients limit their cryptocurrency exposure.

Position Bitcoin and other cryptocurrencies to your clients as speculative investments so they need to be prepared for loss. Help clients understand that it wouldn’t be prudent to rely on them for their core retirement assets or their overall financial strategy. Another way to put it is to tell clients they should invest no more in cryptocurrency than they’re prepared to lose.

Like any particular asset class, there should be a limit to how much cryptocurrency is held in each client’s portfolio. This limit will vary from one client to the next depending on factors such as their goals, risk tolerance and investing time horizon.

As far as using cryptocurrency as a hedge against equities, this hasn’t been an effective strategy so far. You may have to educate clients on this fact. For example, there was a spike in correlation between Bitcoin and the S&P 500 Index during the bear market of February–March 2020 when the prices of both fell and then rebounded before a big run-up. It’s still unclear whether cryptocurrencies can act as a hedge to help protect investors from steep stock market drops.

5. Take a balanced approach in your conversations.

Discuss both the pros and cons of investing in cryptocurrency with your clients. One way to do this is refer to respected opinions on both sides of the conversation. For example, you could tell clients, “Don’t just take my word for it … here is what (fill in the blank) has to say about crypto investing.” This way, you can offer clients perspective from both sides of the aisle — cryptocurrency bulls and bears.

Consider the perspective and context of the expert opinions you share with clients. For example, are they discussing crypto investing in the context of investing for themselves, their fund, their clients or some other entity? What do they have to gain or lose from their advice? Institutions will have a different perspective on crypto investing than fund managers and individual investors.

Finally, warn clients to beware of cryptocurrency scams. Investors lost $14 billion to cryptocurrency scams in 2021, according to Blockchain analytics firm ChainAnalysis. If they do look into investing in cryptocurrency, they may want to stick to established players like Bitcoin and Ethereum.

High risk, high potential reward

We’re still in the early stages of cryptocurrency, so there are a lot of unknowns. This makes cryptocurrency investing highly risky but also potentially rewarding for clients who have the right risk profile.

Talk openly and honestly with your clients who are interested in crypto investing, sharing both the pros and cons. Then clients can decide on their best approach based on their risk appetite, investing time  frame, and overall goals and objectives.

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