CEO of Flipside Crypto
Many financial advisors understand cryptocurrencies but are afraid to broach the subject with clients for fear of being laughed out of the room. There are, however, practical ways to ignite real conversations about this emerging asset class.
In times of great technological change, there is never a shortage of naysayers.
We’re all familiar with these folks, quick to dismiss new technologies as “passing fads,” ill-conceived creations that have “no practical applications” or are “fatally flawed” in some way.
Our past is littered with quotes from naysayers. In 1964, Darryl Zanuck, the head of Fox Studios famously made a bold prediction about television:
Sorry Darryl, but my entire childhood would have to disagree.
No group is more familiar with naysaying than tech investors. Think back to Google being derided for not having a sustainable model because of its lack of cash flow. Amazon, Netflix and Facebook all faced this same sort of short-sightedness, and it continues today, just as it will tomorrow and the day after.
For all the doubters, however, there are plenty of folks on the other side, those that see great opportunity in new technology. Nowhere is this truer than in the cryptocurrency and blockchain space, which is presenting real opportunities long-term investors can no longer ignore.
But how can investment advisors and wealth managers — as stewards for individual investors — have serious conversations about this new technology? The terminology alone–hash functions, cold storage, proof of work–is in itself a challenge. And what about all the price volatility, the hacks, the nefarious underworld activity? How should advisors approach these difficult conversations with clients?
We’ve been thinking a lot about this, and just recently put together a detailed guide that addresses many of the questions we continue to get from financial advisors.
In the guide, we recommend three simple ways advisors can approach these conversations:
First, ask your clients to flash back to what they thought of Google et al. ten years ago. Then ask them what they think of these tech giants now.
A much different story I’m sure.
It’s important to encourage your clients to think about where these companies once were, and how today they have become mainstream components of any investment portfolio.
The biggest winners were the investors with the foresight and the appropriate risk tolerance to invest in these companies early. Asking your clients to think about cryptocurrencies and blockchain in the context of past innovations will help put them in the driver’s seat with a comprehensible framework for how this new industry will evolve.
It’s also important to focus on real cryptocurrency and blockchain use cases, which will help your clients recognize the potential endgame.
In other words, there’s an endgame that goes way beyond virtual gold for this new asset class. Being specific about uses of the technology will help support its attractiveness as an investment.
Finally, talk to clients about a systematic way to evaluate new blockchain and cryptocurrency projects without the hype of short-term price fluctuations.
A framework for evaluating projects might include the following:
That said — even with the above roadmap — there’s more noise than you can shake a stick at in the crypto space. Telling the chaff from the wheat is no easy task. If you’re overwhelmed by the noise, start focusing on 3 core fundamentals:
It might go without saying that investing in cryptocurrencies at this point isn’t for everyone. If you’re an advisor, you should make sure you understand your client’s overall risk tolerance, comprehension of the utility of the technology, and comfort level with volatility.
And there are certainly a lot of other factors–the regulatory environment being a big one–that shouldn’t be ignored.
There is no escaping the fact that the blockchain and cryptocurrency sector still has a lot of risks. However, there is a way to paint a picture of the upside while reasonably managing expectations on the downside (e.g., focusing on projects that are going to create long-term value and avoid those with scanty thinking about their business model).
Fear shouldn’t be driving client conversations about investing in the crypto space and the voices of naysayers should only be part of the discussion. As more investors become educated about cryptocurrencies and blockchain technologies, conversations should be focused on separating the good from the bad, not about avoiding the space all together.