Despite a steady buzz around Bitcoin and other digital currencies, financial advisors have been reluctant to add them to client portfolios. In fact, a survey conducted by the Financial Planning Association in 2018 found that only 1% of advisors were currently using or recommending digital currencies to their clients and only 2% planned to increase their usage or recommendation of digital currencies over the next 12 months.
However, more than half of the advisors surveyed in the same FPA research indicated that their clients had inquired about cryptocurrencies within the last six months. So, why aren’t more advisors taking a closer look?
As digital currencies become more mainstream and more clients express an interest in allocating to this growing asset class, advisors should take the opportunity to better understand it for their clients.
For those skeptical about digital currencies, below are answers to three common questions about its suitability for client portfolios:
1. Are digital currencies a legitimate asset class?
Digital currencies like Bitcoin are often characterized as the emerging “Wild West” of investments. Certainly, Bitcoin’s decade-long tenure doesn’t compare to many traditional assets’ histories; however, there are some key validators that lend to its legitimacy and potential staying power.
Digital currencies are now recognized by regulators and agencies all around the world, as well as by some of the biggest names in finance including Fidelity, NYSE and CME Group, who are all active participants in the space. Facebook’s recent foray into digital currency is yet another example of mainstream interest in the sector. Growing institutional recognition of and commitment to digital currencies will bring further understanding and adoption of this technology on a global level.
Additionally, liquidity in digital currencies like Bitcoin continues to deepen, an important factor for many investors as they evaluate potential investments. At the time of this writing, the top five digital currencies have a combined market capitalization of more than $230 billion — we would expect that to grow along with greater awareness and investment into infrastructure for the asset class. As noted by pensions and endowments consultant firm Cambridge Associates to Bloomberg, “it is worthwhile for investors to begin exploring this area today with an eye toward the long term.”
Dollars continue to flow into this asset class. At Grayscale Investments, we saw more than $30 million of inflows in Q4 2018, bringing total inflows for 2018 to nearly $360 million. This trend continued into 2019, with flows increasing quarter-over-quarter in 2019. And recent research from Fidelity found that 4 in 10 institutional investor respondents say they were open to future investments in digital currencies over the next five years.