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5 Reasons Advisors Can’t Ignore Crypto: Morningstar Panel

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What You Need to Know

  • Coinbase has more users than Schwab, E-Trade and TD Ameritrade combined.
  • There are regulated investment products and custody options for investors and advisors interested in crypto assets.
  • Cryptocurrencies have more in common with stocks than with currencies like the dollar or yen, CEO Matt Hougan of Bitwise says.

There are many reasons why financial advisors may be wary of investing client funds in cryptocurrencies, including crypto’s now historic volatility and their lack of knowledge about the asset class, but they can’t afford to ignore this growing market, according to a panel of crypto experts at Morningstar’s annual conference this week in Chicago.

There are multiple reasons for this, according to Matt Hougan, chief investment officer of Bitwise Asset Management; Tyrone Ross Jr., CEO of Onramp Invest; and Annemarie Tierney, founder and principal of Liquid Advisors. All three are active in the crypto asset industry, which they discussed in a panel moderated by Ben Johnson, director of global exchange-traded fund research for Morningstar.

Here are some of their reasons for why advisors can’t ignore cryptocurrencies.

1. Your clients may be already investing in crypto. Coinbase, the largest U.S. exchange to trade cryptocurrencies, has more than 68 million users globally. That’s more than the number of users of Schwab, E-Trade and TD Ameritrade combined, Hougan said.

2. Bitcoin has been the best performing asset over three, five and 10 years, Hougan said. Its price has soared from 8 cents in July 2010 to close to $45,000 today, but the swings along the way have been wild. Five months ago, Bitcoin’s price was about 50% higher than it is today.

3. The custody of crypto assets has come a long way and includes regulated, insured custodians, Coinbase and others, Hougan said. He recommended that advisors choose a high-quality crypto custodian for clients’ crypto assets.

Advisors need to understand the Securities and Exchange Commission’s guidance on custody of crypto assets in order to make their custody choices, Ross said. They should know there are currently three nationally chartered crypto banks that provide custody, as well as state-chartered crypto banks. There are also special-purpose broker-dealers that under SEC rules can provide custody of crypto assets and qualify for safe harbor from enforcement actions for five years, so long as they provide custody for only crypto assets and comply with the SEC’s customer protection Rule 15c3-3, Ross said.

4. The market is growing for crypto assets and includes multiple products available to retail investors, including Grayscale Bitcoin Trust (GBTC), Bitwise 10 Crypto Index Fund, and private placements for accredited investors.

There’s no crypto ETF, but that will change, Hougan says, adding that Bitcoin futures ETFs could come to market this year following SEC approval and a Bitcoin ETF possibly within a year. A Bitcoin ETF could “seamlessly” fit in with the way advisors work and would be “a game changer,” Hougan said.

He speculated that the reason the SEC hasn’t approved one yet has much to do with the origins of crypto — used by fraudsters and criminals. “Crypto is held to a higher standard because of the focus on where crypto came from,” he said.

5. Taxation of crypto assets is not complex. Crypto assets are subject to capital gains if sold, like any other asset that investors sell, Hougan says.

What Advisors Need to Learn

In the meantime, advisors should learn about crypto so they can work with clients who already own those assets in their portfolios, or who want to add them or learn about them, according to the Morningstar panel.

“You have to be willing to learn about this asset class, put the time in,” Tierney said. “Understand your client’s risk tolerance.”

“Invest in being conversant” with crypto, Ross said.

“Ask your clients if they’re investing in crypto,” Hougan said. “They may not be managing it well … Integrate it in their financial plans.”

Advisors should also abandon the idea that crypto assets are cryptocurrencies, according to Hougan. “You need to start thinking about them as technologies that enable us to do new things… Bitcoin and Ether are less like the dollar and yen than they are like Microsoft and Salesforce.”

He described the blockchain on which Bitcoin it is built as a “primitive piece of software that can only do a few things,” but which is the most secure because of that simplicity, and Bitcoin as the most valuable cryptocurrency because it has penetrated more than other crypto assets, which haven’t been around as long.

Ethereum, developed in response to Bitcoin, can be programmed to do anything, including hosting digital art, but it hasn’t penetrated the market as much.

Pictured, left to right: Ben Johnson of Morningstar, Matt Hougan of Bitwise, Tyrone Ross Jr. of Onramp and Annemarie Tierney of Liquid Advisors. (Photo: Matthew Gilson Photography)