Although cryptocurrencies have been in existence for nearly a decade, it is only in the recent past that they have come to dominate conversations among investors. Digital currencies have experienced a boom in interest and value previously unseen in the area. Now, hundreds of cryptocurrencies have followed in the footsteps of early leaders like Bitcoin (BTC), and there are a similarly staggering number of new applications and projects making use of blockchain technology as well.
While digital currencies are undoubtedly incredibly popular, they remain a mystery in many ways. Of primary concern to many investors, analysts, and advisors is the extreme volatility that the digital currency world as a whole has already exhibited.
Take Bitcoin as an example, the world’s leading digital currency by market cap, which traded at around $47,500 as of December 31, 2021, after briefly trading at record highs above $69,000 earlier in 2021. With cryptocurrency becoming a bigger part of the investing picture, where the total market value of all cryptocurrencies is $2.35 trillion, do financial advisors have a fiduciary duty to consider digital currencies as an investable asset?
Big Brokerages Shy Away
In the past, many of the major brokerages, such as JPMorgan Chase, Wells Fargo, Morgan Stanley, and Merrill Lynch have asked their advisors to not offer recommendations on cryptocurrencies.
For its part, Wells Fargo has issued research primers on digital currencies, and it also lets its advisors present these documents to their clients. However, it stops there, not allowing advisors to make specific recommendations on account of the complexity and volatility of the space.
The biggest reason advisors may shun cryptocurrencies is that they remain largely unregulated. The actual infrastructure for holding these assets (custody) is also in the early stages, as is reporting on buying and selling.
Reasons for Recommending
The lack of regulation hasn’t stopped investors from inquiring with their advisors. This comes as many large institutions are also looking for ways to embrace Bitcoin. Fidelity Investments allows customers to post bitcoin as collateral for loans, while PayPal allows customers to buy and sell the digital asset.
A fiduciary duty requires that one party (the advisor) act in the best interest of the other (the client).
An advisor’s fiduciary duty means they cannot act negligently, make unnecessary trades, or misrepresent a transaction. Other than that, many advisors have a lot of discretion about what is and is not in the best interest of their client.
That said, some advisors are embracing crypto for more risk-tolerant clients. A Bitwise Asset Management and ETF Trends survey from 2020 found that 6% of advisors were allocating a portion of assets to cryptocurrency. The majority of those investing in digital assets are doing so for the high potential returns, the survey found.
A useful rule of thumb has been to invest a small percentage of assets into cryptocurrencies, where it won’t be detrimental if it becomes worthless, but can have a meaningful impact if it gains traction.
So while many advisors may still be hesitant to offer recommendations on these digital assets, as they don’t have a fiduciary duty to offer them, they may soon lose business to the competition if they don’t embrace them. The other side of things is that many clients may invest in cryptocurrency without telling their advisors.
With that, advisors may consider at least educating clients about cryptocurrency and the “safer” ways of investing in the asset. Questions about crypto will undoubtedly rise, and being educated on how to access it and the risks could be useful for advisors as they guide clients.