Cryptocurrencies like Bitcoin and Ethereum are growing in popularity and are capturing the imagination of investors across the country. Some customers may be afraid of leaks – after hearing about big gains and steep jumps in the value of some cryptocurrencies. Given all the publicity, there is a good chance that some of your clients have asked you about these new digital devices. How should you respond when clients ask you about investing in cryptocurrencies?
Don’t just dismiss cryptocurrency issues
Your first reaction might be to reject investing in cryptocurrencies as a passing fad and discourage clients from getting involved in it as too risky and inappropriate for their portfolio. But unintentional rejection may not be enough – it will not make their interest disappear. Some clients will still want to invest in cryptocurrencies or are afraid to miss out and should invest in it.
In fact, up to 43% of investors already own at least some cryptocurrency and there are currently nearly 100 million Coinbase accounts. It is prudent to know how to ask clients questions about investing in cryptocurrencies and offer a thoughtful answer. If nothing else, you don’t want to be left out of the conversation.
The first step is to educate yourself to understand the basics of what investing in cryptocurrencies is, how it works, and how to invest. Second, when clients inquire about cryptocurrencies, ask them open-ended questions about it. You want to know what is behind their interest; for example, are they simply curious or have a serious interest in investing? What is their knowledge of crypto investment and do they understand the risks?
Here are some suggestions on how you can talk to your customers when they ask you to invest in cryptocurrencies:
1. Explain the risks of investing in cryptocurrencies.
Cryptocurrency presents many unique risks that are not present in traditional types of investments. One of the biggest facts is that cryptocurrencies are not traditional companies that produce tangible products or provide the services that people are looking for. So you can’t research and analyze them as a listed public company.
The value of cryptocurrency is driven by supply and demand among market participants. In other words, their value grows only when new investors pay more than previous ones, not when sales and profits increase. This is a good opportunity to discuss overall risk tolerance with your clients and make sure they understand their true risk tolerance. If the client is not at risk, you may need to advise him to stay away from investing in cryptocurrencies.
As always, you should emphasize to your clients that past performance is not a guarantee of future results.
2. Emphasize how variable cryptocurrencies can be.
Recent news headlines praise the extreme volatility of cryptocurrencies. Between November 2020 and 2021, the total crypto market jumped from $ 500 billion to $ 2.9 trillion.Then, during the six months between November 2021 and May 2022, the crypto losses exceeded $ 1 trillion.
The history of Bitcoin illustrates this instability. The value of one Bitcoin jumped from about $ 2,000 in July 2017 to nearly $ 20,000 by the end of the year, to fall below $ 10,000 in early 2018. Starting in September 2020, it jumped to more than $ 61,000 in just six months, only to lose half of its value over the next four months before returning to a $ 64,000 peak by the end of 2021. Bitcoin then fell in the first half of 2022 as financial markets battled inflation, falling below $ 30,000 in mid-May.
Not every client is equipped to deal with this type of extreme volatility. For some, this can lead to great anxiety and sleepless nights, so make sure clients know what they are getting into before investing in cryptocurrency.
3. Explain the lack of current regulation on cryptocurrencies and the potential risks of future government regulation.
The U.S. government has so far been slow to regulate cryptocurrency, at least compared to fiat currency. The events of May 2022 revealed what this lack of cryptoregulation could lead to. TerraUSD, the so-called stablecoin that was supposed to maintain a value of $ 1 per coin, fell on May 12 to 36 cents. This resulted in a loss of $ 200 billion for cryptocurrency investors virtually overnight.
Fiat currencies like the U.S. dollar are backed by full faith and credit by the U.S. government, but cryptocurrencies are backed only by faith in their developers. The collapse of TerraUSD poses a risk that investors will lose faith in other virtual currencies, creating what some analysts have called a “market contagion”.
One of the positive developments is the issuance of an executive order on cryptocurrencies by President Biden in March 2022. The intention is to begin the process of regulating cryptocurrencies and bringing them closer to the mainstream. There is considerable uncertainty about the future and how potential future regulation could affect the value of cryptocurrencies.
4. Suggest to clients to limit their exposure to cryptocurrencies.
Position Bitcoin and other cryptocurrencies for your clients as speculative investments so they must be prepared for a loss. Help clients understand that it would not be prudent to rely on them for their core retirement assets or their overall financial strategy. Another way to express this is to tell clients that they should not invest in cryptocurrencies more than they are willing to lose.
Like any particular asset class, there should be a limit to how many cryptocurrencies are kept in each client’s portfolio. This constraint will vary from client to client depending on factors such as their goals, risk tolerance, and investment time horizon.
As for the use of cryptocurrency as stock protection, this has not been an effective strategy so far. You may need to educate clients about this fact. For example, there was a jump in the correlation between Bitcoin and the S&P 500 index during the bear market from February to March 2020 when prices both fell and then recovered before a big rise. It is still unclear whether cryptocurrencies can serve as a hedge to protect investors from steep stock market declines.
5. Take a balanced approach in your conversations.
Discuss with your clients the advantages and disadvantages of investing in cryptocurrencies. One way to do this is to refer to esteemed opinions from both sides of the conversation. For example, you can tell clients, “Don’t just take my word for it … here’s what (fill in the blanks) has to say about investing in cryptocurrencies.” In this way, you can offer clients a perspective on both sides of the aisle – the cryptocurrencies of bulls and bears.
Consider the perspective and context of the expert opinions you share with clients. For example, are they discussing crypto investment in the context of investing for themselves, their fund, their clients, or some other entity? What can I gain or lose with my advice? Institutions will have a different view of crypto investment than fund managers and individual investors.
Finally, warn customers to beware of cryptocurrency fraud. Investors lost $ 14 billion in 2021 due to cryptocurrency fraud, according to Blockchain analytics firm ChainAnalysis. If they look at investing in cryptocurrencies, they may want to stick to established players like Bitcoin and Ethereum.
High risk, great potential reward
We are still in the early stages of cryptocurrency so there are a lot of unknowns. This makes investing in cryptocurrencies very risky, but also potentially beneficial for clients who have the correct risk profile.
Talk openly and honestly with your clients who are interested in crypto investment, sharing both advantages and disadvantages. Clients can then decide on their best approach based on their risk appetite, investment time frame, and general goals and objectives.