cryptocurrency financial advisors

Money Re-Imagined: Cryptocurrency & the Disruption of Investing

As part of this year’s Riskalyze Fearless Week Client Conference, CEO Aaron Klein asked if I had a topic that I’d like to be interviewed about. I suggested cryptocurrency, since I’d been interested in it for a number of years and believe it has the potential to transform financial services and wealth management.

I was interviewed by Riskalyze Product Manager Dane Kurtz, and we broke the conversation into three parts: My History with Crypto, A Quick Overview of Crypto and My Thoughts on Recent Crypto News.

My Crypto Backstory

My interest in cryptocurrency surfaced three years ago when a few friends and I were talking about starting a company around the digitization of securities, and managing them on a distributed blockchain. At the time, Bitcoin prices were skyrocketing. We started researching how cryptocurrency tools raise money and, also, help firms raise money. The company never came to fruition, but it launched my curiosity about crypto’s potential.cryptocurrency financial advisor

Today, my knowledge of cryptocurrencies comes in handy is helpful for wealth management firms that have questions about how they can incorporate crypto holdings into client statements, or advisors wondering how to respond to client questions about it. However, what investors may not know is that cryptography, the core feature of cryptocurrency, has a long history preceding Bitcoin or The Imitation Game. As I explained in the interview, the history of crypto has roots in the open source movement. 

Open source software used to be something that only hackers and geeks like me would work on. Linux, for example, was an early open source software and nobody thought of it as more than a toy or hobby. Now the majority of computers and smartphones run on some form of open source software. Without it, you’d have no crypto because crypto in itself is open source software.

While the Bitcoin white paper was released in 2009, cryptocurrency actually dates back 20 years before, when people began to conceptualize how to create digital gold and digital cash. These ideas paved the way for cryptocurrency, which is basically an immutable asset that only exists in your computer. 

I like to compare a blockchain to a big spreadsheet, a ledger shared by thousands of computers throughout the world. Each row of the spreadsheet is linked to the last, meaning that once a row is posted in the ledger, it can’t be changed. This is why, when spending cryptocurrency, you can’t go back and edit previous transactions.

I broke it down like this: If I paid you a thousand dollars in Bitcoin, and then wanted to go back and undo it, I couldn’t. You can’t double spend because every transaction is unique and encoded with a timestamp. 

Why is Crypto Important?

Today, there are plenty of reasons for financial advisors to pay attention to cryptocurrencies. The first and simplest? They’re a store of wealth that is protected against inflation. It’s “digital gold,” uncorrelated with any existing currency. While some people spend Bitcoin, the vast majority of people are holding onto it as a commodity, similar to what you might do with gold. According to Ric Edelman,  72 percent of advisors say their clients own some Bitcoin, but only 6% are recommending it in their portfolio. Another 79 percent say clients ask about cryptocurrency. As cryptocurrencies gain traction, wealth managers need to pay attention.

There are more than  6,000 cryptocurrencies that came to life after Bitcoin made it big, and while most are garbage, a few have advantages to consider. Bitcoin might be the  most resilient, as it’s de-centralized and there is no single authority controlling it.

You can’t send me any Bitcoin by looking up my name. You have to know my digital wallet’s address which is a long string of numbers and letters. This makes it a lot more difficult for the average person to use it for payments, which is one of the strongest use cases for decentralized digital assets. 

Take the example of my daughter who is living in London after graduating from university there. When I need to send her money, I have to go to a cross-border payment service such as TransferWise or OFX (don’t ever use a bank for this unless you want to pay 10X the fee). They take dollars out of my bank account, put it into their account and execute an FX trade, and send Pounds to my daughter’s account in the UK. However, this usually takes 3-4 days for the money to hit my daughter’s UK account due to the sluggishness of the banking system in both countries.

If instead I transferred some Bitcoin (or another crypto), I would just need her wallet ID to execute the transfer myself from directly to her and it would be there almost instantaneously.

While Bitcoin may be the best known form of cryptocurrency, that doesn’t mean it’s the only one financial advisors should watch. Ethereum is another form of crypto that can be advantageous because it uses Smart Contracts, which can be built inside of Ethereum and permit secure transactions that don’t require a middleman, such as a bank.

What Else Can Be Digitized? 

When asked my opinion about how wealth management firms view cryptocurrency, I answered, long story short: they don’t. They don’t relate to it yet. However, I pointed out that cryptocurrencies offer opportunities for firms or investors to digitize physical assets, such as real estate. 

I wouldn’t invest or purchase real estate in Manhattan, as the initial buy-in would be in the millions. But if I could put it on the blockchain and create my own cryptocurrency around it, I decentralize it, and can then sell it in thousand-dollar increments. When this property is sold, I take the proceeds and distribute it to the owners. This type of trade, without a broker or middleman, is impossible by other means. Especially considering secure cryptocurrency shares cannot be falsified or duplicated. 

For the most part, traditional institutions are sticking to their roots. While a fistful of startups are narrowly focused on digitizing assets, almost no advisory firms offer support for crypto. Since the average age of advisors hovers around 51, new assets like cryptocurrency can feel like a scam.

Even among advisors who include alternative assets in their recommendations, you’ll be hard-pressed to find one willing to suggest putting a chunk of a client’s portfolio into any cryptocurrency. Most advisors are steering clear because they mostly see digital assets as another fad that has to play itself out before there can be any real guidance.  

On the other hand, major cryptocurrencies are worth trusting because of the security they offer users based on their security, privacy (mostly) and immutability. Bitcoin  

When cryptography first became available to the public in the ‘70s, the U.S. government feared the amount of privacy that average citizens could create for themselves through encryption. It isn’t perfect privacy, but it can be good enough that the government would need a significant resource to crack it. 

My Take on Crypto News

Recent media attention should turn the heads of financial advisors still wondering why they should care about crypto.

Grayscale Investments record inflow of $900M last quarter as the firm gobbled up more Bitcoin than was mined in the same period. Business software firm Micro Strategy has transferred huge amounts of their cash on hand into Bitcoin, believing it is more stable and unaffected by future dollar-based inflation.

Even CNBC’s Jim Cramer has come over to the crypto side and announced he’s buying some Bitcoin. He joins Paul Tudor Jones, Bill Miller, and other prominent Wall Street leaders that have turned bullish.

Fintech apps have led the way with innovation and they are jumping into crypto with both feet while legacy wealth management stand around and watch.  PayPal’s announcement that it plans to join Robinhood, Square Cash and Coinbase by allowing customer to buy and sell crypto on their Venmo peer-to-peer payments app is huge indicator of crypto infiltrating mainstream finance.

Paypal has over 325 million users worldwide that will be able to exchange their local currency for crypto as easily as splitting the dinner bill.  Crypto trading is tremendously lucrative with Cash App reporting $306 million in bitcoin revenue in its most recent earnings report.

Over the summer, Twitter was compromised by a 17-year old hacker who managed to access its “god mode” admin panel. The hacker accessed more than 25 influential accounts, such as former president Barak Obama, Tesla CEO Elon Musk and social media influencer Kim Kardashian, and posted fraudulent tweets promising to double any Bitcoin payments made to their wallet address.

The tweets were sent out from accounts that had a combined 346 million followers and the scam delivered over $120,000 worth of Bitcoin from unsuspecting users. Even after the hack was publicized and most major crypto wallets and exchanges blocked transfers to the hacker’s wallet, people were still trying to send Bitcoin to them.

Last week, Twitter notified all “high-profile” and election-related accounts that they were required to carry out additional security measures to protect their login credentials.

This event doesn’t say anything about whether crypto is good or bad, but it’s human nature to trust people, right? Everyone has fallen for some sort of scam, even if it didn’t cost them money – whether it’s forwarding chain mail, or clicking on a link. This has been going ever since the internet was invented.

Investing in Crypto

How can advisors invest in cryptocurrency for their clients, or recommend their clients to invest on their own? 

I’m not a financial advisor, so do not take anything here as investment advice. For those advisors looking to offer their clients exposure to Bitcoin, one option is Grayscale Capital’s Bitcoin Investment Trust (trading on pink sheets). Full Disclosure: I own some of this in my IRA.cryptocurrency financial advisors

Another option is Kingdom Trust, a provider of self-directed IRAs, through their Choice platform, which allows investors to buy cryptocurrencies as well as stocks, bonds, and ETFs. 

It’s only a matter of time before the SEC approves the first crypto ETFs. In the meantime, individual investors can also buy crypto through mobile apps including Robinhood, Cash App, Square, Coinbase, or eToroNote: Trading is not free in any of these apps, even when they say it is. There are hidden markups everywhere, selling of order flow (which means someone is front-running your orders) and other fees.

We’re reaching a point where the number of people who hold crypto is going to become so great that advisors are going to say, “we need to track this.” At that point, the portfolio management vendors will add support for crypto so advisors don’t have to add it manually.

For advisors who want to talk about crypto with clients but feel unprepared, the best way to get started is to do a web search (via DuckDuckGo or Bing): “what is crypto?” or “What is bitcoin?” There are a million resources out there for beginners, YouTube videos, Investopedia, CoinDesk, or Blockgeeks. If you like podcasts, I recommend The Pomp Podcast, Crypto 101, or Bad Crypto, a personal favorite because of its fun, lighthearted perspective. 

While advisors are slow to trust cryptocurrency, it’s time they start caring about it. With its growing popularity, potential for growth, and inherent protection against inflation, you can expect to see more investments in Bitcoin, Ethereum, and the like. Cryptocurrency will one day be a key line in everyone’s portfolio, and without getting too deep into the weeds, there are plenty of resources available for those who want to learn more about investing in crypto.

Follow me on Twitter @CraigIskowitz 

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