2022 US Wealth Management Outlook: All Aboard the Crypto Train?

Are you a wealth manager who thinks bitcoin and other cryptocurrencies are a fad or worse? You are not alone. But you might also want to reconsider. Wealthier customers certainly disagree and vote with their wallets.

In fact, 72% of high net worth individuals (HNWIs) have invested in crypto, according to the Capgemini World Wealth Report 2021. This is a staggering statistic. After all, despite the buzz of the last decade, cryptocurrencies have only become mainstream in the last few years, and during a pandemic no less.

That nearly three-quarters of HNWIs worldwide have expressed confidence in crypto is a positive indicator of things to come. Regulation, and a volatile market, may still dampen crypto fervor, but wealth managers would do well to learn the language and familiarize themselves with the various digital currencies and their potential benefits. To best serve our clients, we need to know how to invest in the space and what roles crypto can play in a diversified portfolio.

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Learn the Crypto Lingo

What are the key cryptocurrency terms that customers ask about? Here are some of the basics:

  • cryptocurrency is a digital and decentralized currency that can be used as a medium of exchange. Bitcoin, Ethereum, and Dogecoin are among the most well-known, but there are many, many others. Each comes with its own issues related to security, regulation, etc.
  • Fiat coins they are government-issued currencies that are not backed by any physical asset. They have no intrinsic value or use value per se, but their value is established by their government backing and common acceptance as legal tender.
  • Blockchain is a method of recording information in a cryptographically secure ledger on a decentralized network so that the data cannot be hacked. Each block in the chain contains several transactions, and each time a new transaction occurs, a record is added to each participant’s ledger.
  • Block chain miners they are people who approve crypto transactions by confirming that the user has not spent the same coin twice.
  • Non-Fungible Token (NFT) is a digital asset stored on a blockchain and can represent a physical item such as a work of art.
  • Turnkey Digital Asset Management Platform (TDAMP) is a technology platform where investors can create their own accounts and invest in digital assets.
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Crypto Varieties

There are many different cryptocurrencies available to investors. As a best practice, advisors may wish to limit crypto investments to only those approved by the SEC.

Bitcoin is the most popular cryptocurrency and has paved the way for many others to be minted and distributed on decentralized peer-to-peer networks.

Among the cryptocurrency issuing platforms that have gained the most traction (read: market cap) are:

  • Ethereum it has the second largest market capitalization among cryptocurrencies. It is a decentralized software platform that enables the creation of smart contracts and decentralized applications without disruptions or threats of fraud. Ethereum’s value proposition lies in its ability to create a globally accessible set of financial products.
  • Litecoin is the “silver to bitcoin’s gold” and is based on an open source decentralized global payment network. Although similar to bitcoin, it has a faster block generation rate, thus a faster transaction confirmation time.
  • Cardano it has been called “Ethereum’s killer” because it can have a more robust blockchain. It is considered to consume less energy than other cryptocurrencies.
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Benefits and risks of cryptography

So what role can a crypto allocation play in a client’s wallet? It could serve as a hedge against rising inflation or, given its lack of correlation with the stock market, offer some diversification benefits. When it comes to returns, crypto hasn’t always disappointed either. However, skeptics abound and many see bitcoin and company as a modern version of Tulip Mania.

Of course, for wealth managers, increasing our crypto knowledge can have another benefit. Crypto suffers from a generational divide. Early crypto adopters tend to be younger digital natives. But as crypto has gained more acceptance, new adopters may be older and less tech-savvy. By becoming crypto experts, we can help close the gap between the older and younger generations of the families we advise.

Crypto Investing: Operational and Legal Requirements

Like any security, cryptography has its own set of risk and regulatory considerations. As asset managers, we must be careful to follow all mandates.

  1. Check your company’s insurance policies, especially their Errors and Omissions (E&O) policy to make sure cryptocurrency investments are covered.
  2. Consider recommending only SEC-approved cryptocurrency investments, such as exchange-traded funds (ETFs) based on bitcoin futures.
  3. Remind clients to properly report their investments on their taxes and consult a tax advisor if they need help.
  4. Disclose crypto investments on SEC Form ADV.
  5. Rebalance crypto investments as you would other investments in a client’s portfolio.
  6. Know how to run cryptocurrency investments in your client’s wallet. While there are a handful of methods, the TDAMP, which your compliance team must sign, may be the most common.
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For HNWIs, Crypto may be here to stay

Now is the time for wealth managers to get crypto-savvy. We owe it to our customers. After all, it’s been over 13 years since Satoshi Nakamoto published the bitcoin white paper. And now the market capitalization of crypto assets is in the trillions.

Most of our wealthiest customers have already stamped their tickets. At what point can we safely say that bitcoin and the like are here to stay?

We better get on board before the crypto train leaves the station.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images / RichLegg

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April J. Rudin

Founder and Chairman of The Rudin Group, April J. Rudin is widely recognized as one of the leading marketing strategists in the financial services and wealth management industries. She is recognized by Onalytica as the #1 “influencer” in wealth management and is a regular source of expert commentary to international news and business media, trade publications and media outlets. Rudin contributes annually to the Capgemini World Wealth Report, produces the Annual Outlook for US Wealth Management for a Entrepreneurial investor, and speaks about wealth, the next generation and fintech at conferences around the world. His thought leadership has been featured in Huffington Post, American banker, entrepreneurial investor, Report on family wealth, Fundfire, and Wealthmanagement.com. She’s a mother of two who is quick to point out that she was considered an “influencer” long before Onalytica did.

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