Liam Gibson
Wealth of Geeks
Scenes of disgraced FTX founder Sam Bankman-Fried in the courtroom this month have brought the dangers of investing in cryptocurrencies back into the public consciousness.
Not all digital assets are alike, however, nor are they equal in value, and for some, greater institutional adoption confers legitimacy.
Fidelity, one of America’s largest asset management companies, finds the investment thesis for Bitcoin compelling. The company recently issued a new report reassessing Bitcoin’s value, and found the coin superior to other digital assets.
“Bitcoin is fundamentally different from any other digital asset,” the report states. “No other digital asset is likely to improve upon Bitcoin as a monetary good because Bitcoin is the most (relative to other digital assets) secure, decentralized, sound digital money, and any ‘improvement’ will potentially face trade-offs.”
Fidelity highlighted BTC’s top features, including its durability, divisibility, fungibility, portability, verifiability, scarcity, decentralization, and run on open-source code. Fidelity concluded that Bitcoin may become a primary monetary good in the future, hinting that the asset is more than just a payment technology.
This report is proof of deepening institutional interest in the asset. Yet how does Bitcoin exposure sound to financial planners responsible for determining the allocations of everyday retail investors? There is nuance in how to position it best in a balanced portfolio.
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Bit or bust?
Historically, cryptocurrencies had no place in traditional retirement portfolios. However, since the pandemic, more financial advisors are introducing cryptocurrencies into clients’ portfolios.
One survey by Bitwise Asset Management and ETF Trend showed the percentage of financial professionals allocating client funds into digital assets increased from 9% to 15% through 2021 (although the overwhelming majority limited exposure to 5% of a portfolio). Nonetheless, interest in the asset was high, with 94% of advisors saying they fielded questions about crypto from clients in 2021.
In 2023, with crypto’s last bull run long past and popular currencies humbled by major price corrections, the buzz may have fizzled somewhat, but there’s still cautious optimism among some advisors about Bitcoin’s lasting value.
“I view Bitcoin as a unique asset that has the potential to provide both long-term growth and short-term volatility,” says Jorey Bernstein of Bernstein Investment Consultants. “It is a scarce asset not subject to inflation or government control. However, it is also a relatively new asset with high volatility. Investors should be aware of the risks therein.”
If anything adds to price volatility, it is regulatory rumors. With so much at stake, the government’s next move could make or break the coin.
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Regulatory rumble
Bitcoin bulls are pounding their hooves, ready to charge out of the gate with news of further institutional adoption of the asset. Yet regulators still have them boxed in — the SEC’s delayed decisions on numerous ETF applications has doubts lingering over the herd.
Recently, Bitcoin surged 10% on bogus reports that BlackRock’s application for a spot price ETF had been approved.
“Crypto markets have just shown how sensitive they are to any potential good news, with their premature rally today on rumors of the approval of a spot bitcoin ETF,” Ben Laidler, global markets strategist at eToro, told Reuters.
The fake news-fuelled rally could be a sign of things to come. If the SEC finally gives the green light to the world’s largest asset manager, there could be a stampede and an ensuing price breakout.
“I think the SEC may approve a BTC spot price ETF,” says Bernstein. “However, there are several factors that the SEC will need to consider before making a decision. These factors include the potential for market manipulation, the level of investor protection, and the impact of an ETF on the price of Bitcoin.”
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2024 breakthrough?
Other factors internal to the ecosystem can move the price needle, too. One is Bitcoin halving, which occurs roughly every four years. Each halving lowers the rate at which new Bitcoin is created through mining, making the asset scarcer.
Recently, Binance CEO Changpeng Zhao commented that next year’s scheduled Bitcoin halving may make way for “all-time highs.”
Zhao sees a responding bull rally playing out in three distinct phases. First, the “Pre-Halving Excitement,” which sees a surge in speculation, online discussions, and media coverage in the lead-up to the event. This is followed by a “Post-Halving Reality,” which sees a prolonged period of consolidation and adjustments to the new supply. Finally, a “Subsequent Price Surge,” where Bitcoin’s price surges to new highs, usually a year or more afterward, after a combination of factors all coalesce to drive the price higher.
The current price of Bitcoin is about $28,000, while its historical all-time high is about $68,000.
If Zhao is correct, significant gains could be in store for Bitcoin soon, but that’s no safe bet—historical trends are no guarantee of future results.
Investors and advisors alike must tread carefully as they approach Bitcoin. Last year, the CFP Board, the professional organization for Certified Financial Planners, issued an official notice to the community, stating advisors are not barred from providing advice to clients on crypto but, “should do so with caution.” Certified Financial Planners have a fiduciary duty and a duty of competence. Essentially, a CFP must know their stuff to advise their clients.
Before hiring a financial advisor, consumers interested in cryptocurrencies should consider online resources like Wealthtender to research advisors and read reviews or ask their accountant for recommendations of advisors they trust.
Whether consumers seek help from financial advisors or prefer a do-it-yourself approach, Bitcoin is best kept at the riskier end of one’s allocation spectrum and not as a mainstay investment. No one should stake their retirement on such a volatile asset.
