Crypto Assets and Financial Planning: Listen, Learn, and Lead

It’s easy to write about a topic during peak excitement when fans are clamoring for content. That was bitcoin and cryptocurrency just a few weeks ago. Today, #cryptocrash is trending on Twitter, and the bashers are smugly declaring victory. That’s how polarizing crypto assets are and a testament to the volatility; we’ll get to that later. But not everyone is a “crypto hippie” or a full-blown hater, most people fall somewhere in the middle, and that’s a healthy place to be. 

I recognize crypto assets to be the first entirely new asset class in a long time. Thus, a healthy dose of skepticism is understandable and advisable. That said, it's lazy to dismiss an entire asset class without attempting to understand it, consider its uses, and ponder its potential impact on the future. Remember, Bitcoin is only 12 years old, not even a teenager, and many other cryptocurrencies are in their infancy. Many will fail, some will survive, and a few could change the global financial system. 

Before I meander down the crypto rabbit hole, I think it’s important to clarify where I come from as a financial advisor regarding space as a possible allocation option for my clients. I like Tyrone Ross’ “three L” approach:

 I’m LISTENING. Clients and prospective clients have questions about bitcoin and other crypto assets. This is expected considering the rapid growth in the space, widespread media attention, and extreme volatility. It would be careless of me to ignore these questions. Instead, I’m listening to these questions so I can be prepared to guide my clients.

I’m LEARNING. To answer these questions, I need an elementary understanding and base knowledge of the subject (at a bare minimum). I don’t take allocating other people’s assets lightly, and I’m actively seeking to understand the uses and the technological framework behind crypto. Understanding the benefits and risks is paramount, and there are many nuances, so learning will be an ongoing but essential step in my journey to serve my clients and future clients better. 

I’m LEADING. I suspect most investors and asset managers will one day include crypto-asset exposure in most portfolios. Whether a hedge against currency debasement, providing diversification or fulfilling some other role, I don’t see crypto assets going away anytime soon. I prefer to be on the forward edge of technology, not a change denier, so I’m working with others in the space to ensure I can be out front rather than the last to arrive. 

As I spoke to Onramp Invest CEO Tyrone Ross on a recent episode of my podcast, Bulls, Bears, and Bourbon, a topic recurred throughout our discussion; it's early! Living in this meme-fueled FOMO world, it’s easy to feel rushed and fear you’re missing out. 

But it’s early!

It’s more important to take your time and educate yourself than jump into something while lacking knowledge. If you’re allocating to any asset because of hype and envy, you should rethink how you choose your investments. 

Now that that’s out of the way, I’d like to address the elephant in the room:

Volatility.

Right now, crypto assets are volatile. You must understand this. Will they always be so volatile? Probably not, but investors must consider this volatility before initiating even a modest allocation. If you are holding crypto assets, you will likely experience significant pullbacks and powerful price surges. I’ve written about loss aversion bias before, but its impact on the investor psyche cannot be understated. The retreats will create stronger emotions than the price increases, and if you cave during intense moments, you might make regrettable decisions. 

It’s also important to look at volatility beyond days, weeks, or even months. I was surprised to learn that since 2012, bitcoin only experienced one year with a lower low than the year prior. While steep pullbacks may be commonplace, it’s important to consider longer-term trends as well. 

There’s much more than volatility to consider before incorporating digital assets into a financial plan or portfolio. Tax impacts, estate planning, custody, security, and more; all of these areas should be reviewed, understood, and considered before deciding to purchase any digital asset. I’ll be covering these topics and more in future blog posts.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.