What You Need to Know
- Kitces' concerns include a questionable investment thesis, holding and storage difficulties and liability risks.
- He also noted questions about costs and billing and the time needed for advisors to get educated about crypto.
- He's not “sold” on crypto yet but keeps an open mind.
Despite a $2 trillion market capitalization and a growing number of cryptocurrencies and digital tokens, most financial advisors remain wary of crypto assets, often for very practical reasons, according to financial planner and blogger Michael Kitces.
In a conversation with Tyrone Ross, the CEO of Onramp Invest, which provides RIAs direct access to crypto assets as well as educational materials, Kitces laid out some of the “blocking points” and other concerns that make advisors including himself wary of engaging in the crypto market.
Kitces and Ross also discussed why advisors need to get educated about crypto. The conversation was part of the 2021 Bitcoin for Advisors online conference sponsored by CoinDesk, which is owned by the Digital Currency Group, the parent company of Grayscale Investments.
A Questionable Investment Thesis
Kitces said he hasn’t yet found why crypto assets have economic value in the long run beyond the idea that they will be worth more because everyone else is buying them too. That worked during the dot-com rally in early 2000 and a few years later during the real estate boom — until it didn’t, he explained.
Kitces also questioned the long-run fundamental investment thesis for cryptocurrency coins, which are “infinitely splittable and infinitely forkable,” meaning there is no fixed limit to them because anyone can launch one and attract assets away from existing cryptocurrencies. Dogecoin, which started as a joke based on a meme of a Shiba Inu dog, is an example of such a launch. Its market market cap skyrocketed to over $70 billion earlier this year but is now about half that.
The Difficult Mechanics of Holding and Storing Crypto
“All of the dynamics of what it takes to own and hold cryptocurrencies” are difficult for advisors, Kitces said. It usually involves going off platform and different individual wallets for different clients, many worried about whether their money is safe.
“We don’t even like changing custodians because we might have to ask clients to go from a Schwab login to a Fidelity login. We would rather have a whole relationship with a second custodian.”
Kitces acknowledged that some of these concerns are being addressed now with platforms such as Coinbase being built and solutions from firms such as Onramp, but the difficulties have not yet been resolved. In the meantime, clients are concerned about whether their money is safe and, according to a Fidelity study cited by Kitces, 58% of clients surveyed said they would drop their advisor if there were a security breach in any client account at their advisor’s firm.
Fear of Lawsuits Due to Extreme Volatility
Kitces said there was “a very real liability risk” for advisors whose clients’ assets are invested in an extremely volatile market like the crypto coin market, which can plummet 50%, 60%, even 70% in a year, a month or less. “Every time there’s a bear market, lawsuits against advisors spike … and that’s for markets that go down 30% a year,” Kitces said.
Going through the due diligence of providing clients a validated risk tolerance questionnaire doesn’t prevent lawsuits from which advisors must defend themselves, according to Kitces.