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Ric Edelman: What Investors Really Need to Know About Crypto

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“Bitcoin is the most volatile of all assets.”

“Bitcoin is the most profitable asset in history.”

Digital assets “are the most significant new investment opportunity of a lifetime.”

So says crypto expert Ric Edelman, prolific author and founder of the RIA Edelman Financial Engines, in an interview with ThinkAdvisor.

As for the crypto meltdown last week, he argues: “There’s nothing new about this market decline; we’ve seen this happen seven times in Bitcoin’s history. Crypto prices have dropped by more than 50% in the past eight months.”

The rout “will not change anyone’s views,” he said. 

Edelman, with wife Jean, founded Edelman Financial Services in 1986, ultimately turning it into a $300 billion business after merging with Financial Engines.

At the end of 2021, as chairman of financial education and client experience, Edelman walked away from the mega-RIA (“The time is right for us to start our next chapter,” he had said) and reinvented himself as the leading force in educating the industry and consumers about crypto.

Edelman, who Barron’s named the #1 Independent Financial Advisor three times, calls digital assets “the most transformative new asset class since the invention of the internet.” 

His new book — his 11th — “The Truth About Crypto: A Practical, Easy-to-Understand Guide to Blockchain, Bitcoin, NFTs, and other Digital Assets” (Simon and Schuster-May 10), is a user-friendly explainer covering a wide range of digital asset aspects, together with numerous lists of resources. 

It also is complete with a chapter on “The 10 Common Concerns About Crypto,” like “It’s a fad.” “It’s a fraud. “It’s too risky.”

In the interview, Edelman discusses Bitcoin as a hedge against inflation, some approaches to investing in crypto, inherent tax issues and crypto in a retirement account.

Plus, he opines on what he calls “embarrassingly foolish statements about Bitcoin” that, he says, Warren Buffett and Jamie Dimon have made.

Once Edelman decided to leave EFE, he launched seven new companies before exiting. By fall of last year, he’d even hired employees for them in a dozen states.

Perhaps the first enterprise was the Digital Assets Council of Financial Professionals (DACFP), which he founded five years ago.

It offers financial advisors a certificate in Blockchain and Digital Assets with continuing education credit. DACFP recently formed a strategic partnership with the Financial Planning Association. 

Two thousand advisors from eight countries have enrolled in the certification program to date.

Edelman’s other new efforts include a media firm, companies researching Alzheimer’s disease and a fossil park where visitors will be able to “literally dig for dinosaurs,” he enthuses.

ThinkAdvisor interviewed Edelman, based in Northern Virginia, by phone on May 9 and in a follow-up email exchange on May 12.

He notes that though the financial services industry is “behind” in embracing digital assets, it “now recognizes that clients are clamoring for advice in this area, that advisors are engaged and that “many [firms] are racing to develop a crypto strategy.”

Here are highlights of our interview.

THINKADVISOR: What are your thoughts regarding crypto prices’ huge decline over the last few days?

RIC EDELMAN: There’s nothing new about this market decline; we’ve seen this happen seven times in Bitcoin’s history. Crypto prices have dropped by more than 50% in the past eight months.

This [recent rout] will not change anyone’s views: People who hate crypto will use the current decline to prove they are right, while those who understand the technological revolution that crypto is bringing to global commerce will view this decline as a tremendous buying opportunity.

The high risk of digital assets “actually serves as the most important reason you should invest in them,” you write. Why?

Volatility creates opportunity for improving portfolio diversification, lowering the risk of the overall portfolio and improving returns.

Bitcoin is the most volatile of all assets and therefore an excellent contribution to Modern Portfolio Theory, widely accepted as the best investment strategy in the world, and requiring the use of volatile assets.  

What percentage of an investment portfolio should be dedicated to digital assets?

You don’t need to have an outsized exposure. The goal is to improve returns while reducing risk. You can achieve that with a low single-digit allocation.

I recommend a 1% asset allocation. Up to 5% is sufficient to have a material impact on your portfolio.

Are digital assets a good hedge against inflation?

One of the reasons Bitcoin was invented was to provide inflation protection. It has a very strong record of doing that to date. The key reason is that there’s a limited quantity of Bitcoin, unlike dollars, which are constantly being printed.

There’s a fixed supply of Bitcoin; so as demand rises, the price has to rise as well. For that reason, many people believe that Bitcoin is a very effective hedge against inflation.

What should advisors and clients be aware of when investing in digital assets in a retirement account?

If you’re going to place crypto into an IRA, make sure you’re using a qualified IRA custodian. 

This assures you that they’re conforming to all federal and state regulations and complying with the highest level of cybersecurity protection.

What’s the scoop about using digital assets in a 401(k) plan?

The easiest way to invest in crypto in a retirement plan is through Fidelity’s 401(k). They’ve announced that they’re going to allow workers to invest directly in Bitcoin as easily as they invest in other choices within the plan.

That’s great news for investors.

What’s the significance?

Fidelity is the largest 401(k) provider in America, with 23,000 companies using their 401(k) program.

A company decides whether or not to put Bitcoin on their platform. If they do, it’s up to the employee to decide whether they want to buy it.

What income tax issues should advisors and clients be aware of in connection with crypto?

Investing in digital assets has the same tax obligations that investing in other assets have.

When you earn income or generate profit, you have tax-reporting obligations and owe liability to the IRS.

In some cases, the rules are very clear. In others, the IRS has not yet issued rules because elements of crypto are brand-new and unique to the asset class, like staking, mining, airdrops and forks.

Because they’re so new, the IRS hasn’t yet released regulations governing them.

When you use Bitcoin to buy goods or services, are you required to pay income tax on it?

Any time you use Bitcoin to purchase something, you’re generating a capital transaction.

The IRS says that if you’re converting your Bitcoin to dollars and using the dollars to purchase the goods [or services], you must report the realized gain or loss on your tax return.

Isn’t that a drawback to using Bitcoin?

Yes, it’s a drawback to using Bitcoin as a payment mechanism; but it’s not a drawback to using it as a transmittal if, say, you need to send money to another country.

[Usually] it takes five days at an average cost of 6.5% to move money from one country to another. With Bitcoin, you can do it in 10 minutes virtually for free.

I interviewed a financially savvy sex worker who was quite interested in investing in crypto in the future. Apart from that, I wonder: Can crypto be used for her accounts receivable?

Digital money leaves a digital footprint. So if you’re trying to use them in order to be anonymous, you’re not likely to be as successful as you had hoped.

This is why [Russian President Vladimir] Putin hasn’t been able to use Bitcoin to evade the sanctions [against Russia for invading Ukraine].

What are your expectations for the regulation of digital assets?

Innovation always precedes regulation. So it’s no surprise that the crypto marketplace has grown dramatically in advance of regulation. 

Regulation is always playing catch-up, and that’s what’s happening now.

We expect that over the next several years, regulations will be released, and the rules will become clear. 

They’ll be regulations that both foster development and innovation while protecting consumers. 

What role does crypto have in the metaverse?

McKinsey [& Co., management consultants] projects that by 2030, 70% of global GDP will be digital.

In the digital economy, you’ll be using digital assets to conduct financial transactions. They’ll consist of a combination of digital coins, such as Bitcoin and Ethereum, and NFTs [nonfungible tokens].

What are some specific approaches to investing in crypto?

Because Bitcoin is very, very volatile, people sometimes fear investing out of concern that if they invest today, the price will crash tomorrow.

So if you dollar-cost-average — invest small amounts over a long period of time, [say] a year — [like with other investments], you’ll end up with the average low cost, which dramatically reduces your risk and helps ensure your having a profit.

What about using the strategy of rebalancing?

It helps you capture your profits while buying when prices are low.

If you add crypto to a diversified portfolio, due to crypto’s volatility, it will occasionally increase in value beyond your preferred allocation. 

So you sell some to bring your allocation back to your desired percentage: You sell when the price is high, and buy when the price is low.

You also write about using separately managed accounts (SMAs) to invest in crypto. Please explain.

Many advisors recommend SMAs and TAMPs [turnkey asset management programs] to their clients, and there are now several of these available in the marketplace.

This is an opportunity for advisors to provide [crypto] exposure in a way that clients can’t [pursue] on their own.

Let’s talk crypto basics. You write that “digital assets” is the preferred term over “cryptocurrency.” Do you think people will change over and start saying “digital assets”?

It will evolve over time, and people will eventually begin to refer to it correctly.

It’s called cryptocurrency because that was the original phrase used by Satoshi Nakamoto — we don’t know if this was an individual or a group — when Bitcoin was invented. It was an unfortunate use of the term and has contributed to the confusion.

What’s the difference between digital currency and digital assets?

A digital asset is like other assets that have prices that rise and fall — stocks, bonds, real estate, gold, oil.

Digital currency has a stable value, like a bank account or money in money market funds; and it’s tied to the U.S. dollar.

It doesn’t fluctuate in price. It’s based on the value of a dollar; and the prices are stable, just like a currency.

Is there physical crypto that you can hold in your hand?

No. It’s all electronic. That’s the whole point. There’s no need for physical representation of the asset. Digital is safer, cheaper, more transparent and faster.

So, to what extent is the financial services industry embracing digital assets?

They’re behind. The industry now recognizes that this asset class has gone mainstream, that it’s here to stay, that clients are clamoring for advice in this area, that advisors are engaged.

Nearly half of all financial advisors personally own Bitcoin, but the firms themselves have not kept up.

Now many of them are racing to develop a crypto strategy to provide a way for their advisors to serve clients with this new asset class.

But why were advisors so skeptical about crypto?

Because it’s so new and different. Without proper levels of education, it’s easy to reach incorrect conclusions or make wrong assumptions.

It was easy to be dismissive of this for the first five years of its life; but now Bitcoin is 12 years old and can no longer be ignored.

Advisors are therefore recognizing that they need to become knowledgeable about this subject because they can no longer ignore it.

FAs must show the SEC why they aren’t investing in digital assets, if that’s the case, you write. Please explain.

The SEC is predominantly concerned with whether you’re serving [the client’s] best interest. You therefore have to [provide] a detailed explanation of why you do what you do, as well as why you don’t.

Dismissing a well-established asset class out of bias or ignorance does not rise to the fiduciary standard.

Advisors routinely explain in detail why they don’t recommend annuities or leverage or why they don’t short the market.

They need to be able to offer similar [explanations] regarding crypto.

Comments made about crypto by Warren Buffett and Jamie Dimon are “ridiculous,” you write. Please explain. 

Both those gentlemen have stated that they believe Bitcoin is worthless. That’s because they’re using a set of assumptions applicable to stocks but not to digital assets.

They don’t appear to realize this fundamental flaw in their thinking.

It’s as though somebody is complaining about an automobile because it’s not wet. You shouldn’t expect a car to be liquid. Using the absence of moisture to refuse to buy an automobile is absurd.

Yet, that’s what they’re doing when they [analogically] describe Bitcoin.

Just how do they characterize it?

They say that Bitcoin isn’t a product, isn’t a company, has no employees, no revenues, no profits; and therefore, it’s worthless.

But [all that[ is irrelevant in the examination of Bitcoin because Bitcoin is a computing network using blockchain technology.

You don’t value it based on the metrics that they’re using.

Their failure to consider that has caused them to make embarrassingly foolish statements about Bitcoin.

Do they persist in doing that?

I predicted earlier this year that Jamie Dimon would stop saying that Bitcoin was worthless. So far, I’ve been proven correct. Neither he nor Warren Buffett has said anything about it this year.

Can investors get bitcoin through JPMorgan’s advisors?

Jamie Dimon’s traders are engaged in digital assets, and JPMorgan has developed blockchain technology and are continuing to build out their crypto strategy, which demonstrates that Jamie Dimon is out of step with his own company.

How exciting is it for you to be in this new phase of your career?

I’m having a lot of fun. It’s very exciting and wonderful to be able to reach people about something brand new that can really help them achieve financial security.

But the question arises: How many long-time investors are motivated enough to learn about this new asset class? Thoughts?

If you care about your money and your financial future, then you’ll want to learn about the most significant new investment opportunity of a lifetime.