7 Things Advisors Need to Know About Crypto

Cryptocurrency is all over the news and social media. Many of your clients may be curious about it and interested in adding crypto to their investment portfolios. They will look to you to help them determine if crypto is appropriate for them, and if so on how to go about investing in it.

Here are seven things advisors need to know about crypto and digital assets in order to provide solid advice to their clients.

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.

1. Crypto can be risky.

Cryptocurrencies, NFTs and other digital assets can be risky. The recent 52-week high for Bitcoin was $68,991 — its all-time high. The 52-week low was $28,826. The year-to-date return as of April 26 was -15.56%.

While stocks and other investments can certainly fluctuate in value, these fluctuations are high. Over the same period, the S&P 500 has seen 52-week highs and lows ranging from 4,057 to 4,819.

It’s important to be sure that your clients understand the risks of investing in crypto before moving forward.

(Image: Aleksandar Mijatovic/Shutterstock)

2. Taxes on digital assets are complicated.

The tax structure is both similar to and different to those on stocks, ETFs or mutual funds.

On the one hand, gains and losses when selling crypto are taxed as long- or short-term gains or losses, depending upon your client’s holding period. This is essentially the same treatment as most investment securities.

Where crypto taxes get complicated is when your client spends their crypto assets and they have increased in value from when they were first purchased. Some examples of transactions that can trigger taxable events include:

Selling crypto in exchange for a fiat currency such as the U.S. dollar.
Using appreciated cryptocurrencies to purchase goods or services. This will likely become a bigger issue as more types of businesses accept crypto as payment.
Trading different types of cryptocurrencies or digital assets.

The taxation of crypto and digital assets has become a priority of the IRS. It’s important that your clients are able to track their gains or losses from all types of crypto transactions.

(Image: Deemerwha studio/Shutterstock)

3. Crypto correlations vary.

Crypto and other digital assets are considered an alternative to more traditional asset classes such as stocks and bonds. That said, some recent articles have indicated that the recent correlation between Bitcoin and the S&P 500 is higher than it has been in some time.

This isn’t necessarily good or bad, but advisors should discuss this with clients before they invest in crypto assets. It's important to help clients understand how crypto fits into their investing strategy.

(Image: Immersion Imagery/Shutterstock)

4. There are no standardized rules and procedures for holding crypto.

With traditional assets such as stocks, bonds, mutual funds and ETFs, custody is pretty straightforward. These assets are held in a brokerage account or perhaps an IRA. Custodians are governed by various industry regulations.

There is no set of standardized rules and procedures for holding and storing cryptocurrencies and other digital assets. The SEC recently released an opinion that these assets should be reflected as a liability on the balance sheets of traditional brokerage firms, banks and crypto exchanges that hold these assets on behalf of others.

Traditionally, assets such as Bitcoin have been stored in digital wallets. A number of online firms offer trading and storage of crypto assets as well. Increasingly, mainstream brokers and custodians are offering crypto as an option, including storage.

Be sure that you and your client understand where their crypto and other digital assets will be held and that sufficient due diligence on the firm(s) holding these assets has been done.

(Image: alphaspirit.it/Shutterstock)

5. Most traditional custodians do not handle digital assets in retirement accounts — but that may be changing.

In most cases, traditional custodians are not equipped to handle crypto and other digital assets in an IRA, a SEP-IRA or other types of retirement plans. A number of self-directed IRA firms offer the ability to hold crypto in IRAs and other retirement accounts.

This may be changing as Fidelity recently announced that it will allow investments in Bitcoin in the 401(k) plans that it administers. Time will tell how this plays out with the Department of Labor and if other firms follow their lead.

One advantage to using retirement accounts to invest in Bitcoin and other digital assets is that your clients avoid most of the tax issues discussed above. It’s important to decide if crypto is an appropriate investment for your clients and if so, how much is appropriate for IRAs and other retirement accounts.

(Image: Vit-Mar/Shutterstock)

6. There are various ways to invest in crypto and digital assets.

Besides a direct investment in Bitcoin, other cryptocurrencies or digital assets such as NFTs, there are other ways to invest in crypto and digital assets, such as:

Bitcoin futures ETFs.
Crypto trusts.
ETFs with varying degrees of crypto exposure.
Crypto venture capital funds and trusts.

While these can provide exposure to digital assets, they do not represent a direct investment in cryptocurrency. Trusts and venture capital funds will have expenses associated with investing and are usually limited to accredited investors.

Bitcoin futures ETFs invest in futures contracts, not in the actual crypto assets. ETFs that have crypto exposure typically have limited exposure as a percentage of the ETF’s assets. In some of these ETFs, fees can be high.

At this time, there is no spot Bitcoin ETF. Many professionals are hopeful the Securities and Exchange Commission will approve one in the near future.

(Image: pedrosek/Shutterstock)

7. Crypto is here to stay.

Investors, including many of your clients, are increasingly interested in this space.

Advisors need to get up to speed on crypto investing and be a resource for clients who have an interest. It’s fine to discourage clients from investing in crypto if that is the best answer for them, but it’s important to do so from a position of knowledge.

The investing landscape continues to evolve, and advisors need to keep up with these changes. If your clients want to invest in crypto, be sure they make these investments with your guidance.

(Image: Alexey Novikov/Adobe Stock)

7 Things Advisors Need to Know About Crypto

Roger Wohlner

Sen. Warren Presses Fidelity on Bitcoin 401(k) Move

More on this topic

Envestnet Highlights Tech Progress Amid Rumors of Acquisition Talks

How to Pass Down an IRA

Trump Pledges Broad Tax Cuts in Election Push

Tax Bill With 100% Bonus Depreciation Hits Setback

1. Crypto can be risky.

2. Taxes on digital assets are complicated.

3. Crypto correlations vary.

4. There are no standardized rules and procedures for holding crypto.

5. Most traditional custodians do not handle digital assets in retirement accounts — but that may be changing.

6. There are various ways to invest in crypto and digital assets.

7. Crypto is here to stay.

7 Surprising Facts About Giving From Donor-Advised Funds

7 Ways High Inflation Hurts Older Workers and Retirees

12 Worst States for Financial Stability

The 20 Best Stocks to Buy: Morningstar

Featured Resources

Q1 2024: RIA Quarterly Summary

FIA Forecast Credits & FIA Model Allocations: Breakthrough Tools Supporting Smart FIA Decisions

The Business Model Playbook: Mastering Technology for Firm Success

7 Things Advisors Need to Know About Crypto

Share with Email

Thank you for sharing!

More on this topic

1. Crypto can be risky.

2. Taxes on digital assets are complicated.

3. Crypto correlations vary.

4. There are no standardized rules and procedures for holding crypto.

5. Most traditional custodians do not handle digital assets in retirement accounts — but that may be changing.

6. There are various ways to invest in crypto and digital assets.

7. Crypto is here to stay.

Featured Resources

Connect with ThinkAdvisor