Bullish on Bitcoin or not, the price volatility is not a logical reason to avoid the asset class. Instead, it's a signal that it’s an adviser’s fiduciary responsibility to educate themselves on Bitcoin and adopt best practices for allocating the asset into a client’s portfolio, said panelists during the InvestmentNews Fintech Virtual Summit Tuesday.
Advisers have historically shied away because of Bitcoin’s price volatility, calling it too murky. Still, demand from both retail and institutional investors is expected to propel the asset class to even further gains, according to experts.
Bitcoin and its underlying technology — the blockchain — should be looked to as technologies that are worth investing in depending on a client’s profile versus a fluctuating asset based on price, panelists said.
Blockchain, too, is sustainable for being able to give underserved markets all over the world financial access, according to Tyrone Ross, CEO at Onramp Invest. “The price, who cares? That's just reflective of its ability to give people financial access, and that's what's most important, the big ‘B’ for Blockchain, not the little ‘b’ for bitcoin price.”
In fact, Bitcoin’s price is likely to be extremely volatile for the foreseeable future, which just means sizing is important, said Kianga Daverington, managing partner and chief investment officer at Acre of America Partners LP.
Advisers should be ready to ask clients: “What’s the amount of money you can lose and still sleep at night if the price does drop by 80%?” Daverington said. “An investment adviser can’t afford to ignore Bitcoin, it’s a career opportunity and now becoming a career risk if you are not educated about this space.”
Education is the first step, especially given Bitcoin and blockchain is still in its early stages in terms of use cases and adoption, said Daverington. “There's a long runway here,” she said. “The time that it takes to start to understand this asset is considerable.”
Ross encourages advisers to "gather round the campfire" to come together and understand, yes — Bitcoin is volatile. What that means is it’s up to advisers to profile their clients and bring risk tolerance back to the beginning of the conversation when clients ask about Bitcoin or Dogecoin.
“Your job is to walk them through not only the volatility of Bitcoin, but of life — the volatility of circumstances like job changes, and Bitcoin is no different,” Ross said. “So don't run from the volatility, embrace it, but just use your responsibility to make sure it fits within their financial goals.”
Bitcoin’s current status is equivalent to “an awkward teenage” phase where it's evolving from a retail asset to a true institutional asset that’s either going to be sustainably higher or lower, said Bitwise Asset Management Chief Investment Officer Matt Hougan.
Bitcoin’s rally, too, has put the pressure on Wall Street banks and larger institutions to consider getting involved with the thriving crypto market, which has a market cap at $1.7 trillion, according to CoinMarketCap. Bitcoin’s price has topped $55,000 this week. In the past year alone, Bitcoin experienced a fivefold surge.
Either way, the biggest risk with digital assets is behavioral, Hougan said. “The fact we’re talking about volatility is important,” he said. “The single biggest mistake is selling or buying at the wrong time.”
Accepting that Bitcoin is a volatile asset is a critical step to understanding that digital assets have to be treated just like any other asset, Hougan said.
“That means it's appropriately sized and rebalanced. Any asset that's the best performing asset in the world for years is going to have some volatility, and you're not going to get an asset that's up 100% year to date, and goes up in a straight line — those are called Ponzi schemes. They don't work out well.”
Advisers can start by allocating 2.5% to 5% of a client’s portfolio to Bitcoin, that’s the “magic number,” said Hougan. “I’m not usually so precise, but 1% is not a serious allocation. Also, how many advisers have time to put 1% allocations into portfolios?”
Moreover, if a 1% allocation is all an adviser is comfortable with, it might be better to go back to learning, first, said Ross. “If you are not comfortable moving in some meaningful size, the best investment you can make right now is your education on the asset,” he said.
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