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:
1. Focus on the Past
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.
2. Specificity is King
It’s also important to focus on real cryptocurrency and blockchain use cases, which will help your clients recognize the potential endgame.
- A lot of advisors understand the basics of cryptocurrencies and blockchain, but they don’t know enough specific examples to understand the sector’s end game. For example, value investors might have a hard time thinking of bitcoin and other cryptocurrencies as anything more than a non-cash flow generating inflation hedge.
- Using real life case studies can help demonstrate that blockchain technologies offer distinct advantages for businesses and governments. These include tracking supply chains and collectibles, vote auditing, land registries, creating local or product-specific currencies and much more. Cryptocurrencies are the way forward to capture value from these new blockchains.
- Another way to drive this point home is to compare crypto assets to more liquid versions of the shares that are held privately for early-stage startups. Cryptocurrencies allow access to an asset class that previously was almost entirely network-based and insider-based. Imagine investing in Facebook early on as opposed to during the IPO–which would have been the difference between making a billion-dollar return (as in Peter Thiel’s case) and merely making a few thousand.
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.
3. Identify a Framework
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:
- Consider the team: Are there strong business, design, and technology players in the space? Do they have proven track records for building impactful companies?
- Consider the funding: Have they raised a traditional round of venture capital or are they associated with a high-prestige accelerator in the crypto realm (e.g., Consensys)? These are both strong positive signals.
- Consider the business model: Does the landing page and whitepaper describing the project simply explain a viable business model and a realistic paying customer?
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:
- Is the asset mature enough to respond to effective trading strategies.
- Are developers building on the blockchain itself (follow the developers, right?)
- Is the token actually being utilized. This can’t be overstated enough — there isn’t a business that can succeed without actual customers1
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.