Are you a wealth manager who believes bitcoin and other cryptocurrencies are a passing fad or worse? You’re not alone. But you also may want to reconsider. The wealthiest clients certainly don’t agree and they are voting with their wallets.

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

That almost three quarters of HNWIs worldwide have expressed confidence in crypto is a positive marker of things to come. Regulation — and a volatile market — may yet dampen the crypto fervor, but wealth managers would do well to learn the lingo 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 clients 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 currencies are government-issued currencies that are not backed by any physical assets. They do not have intrinsic value or use value per se, rather their value is established by their government backing and their common acceptance as legal tender.
  • Blockchain is a method of recording information on a cryptographically secured ledger on a decentralized network so that data cannot be hacked. Each block in the chain contains several transactions, and every time a new transaction occurs, a record of it is added to every participant’s ledger.
  • Blockchain miners 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 may represent a physical item like a piece of art.
  • Turnkey digital asset management platform (TDAMP) is a technology platform on which investors can create their own accounts and invest in digital assets.
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Crypto Varieties

Many different cryptocurrencies are available to investors. As a best practice, advisers may want to limit crypto investments only to those approved by the SEC.

Bitcoin is the most popular cryptocurrency and has paved the way for the minting of many others and their distribution on decentralized peer-to-peer networks.

Among the crypto-issuing platforms that have gained the most steam (read: market capitalization), there are:

  • Ethereum has the second largest market capitalization among cryptocurrencies. It is a decentralized software platform that enables smart contracts and decentralized applications to be built without interruption or threats of fraud. Ethereum’s value proposition lies in its ability to create a globally accessible suite of financial products.
  • Litecoin is the “silver to bitcoin’s gold” and is based on a decentralized open-source global payment network. While similar to bitcoin, it has a faster block generation rate, hence a quicker transaction confirmation time.
  • Cardano has been called the “Ethereum killer” because it may have a more robust blockchain. It is considered less energy intensive than other cryptocurrencies.
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Crypto Benefits and Risks

So, what role might a crypto allocation play in a client’s portfolio? 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. Nevertheless skeptics abound many see bitcoin and company as a modern version of Tulip Mania.

Of course, for wealth managers, increasing our crypto knowledge might have another benefit. Crypto suffers from a generational divide. Early crypto adopters tend to be younger digital natives. But as crypto has gained greater acceptance, newer 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, crypto has its own set of risk and regulatory considerations. As wealth managers, we must be careful to follow all mandates.

  1. Check your firm’s insurance policies, particularly its errors and omissions (E&O) policy to make sure cryptocurrency investments are covered.
  2. Consider only recommending SEC-approved cryptocurrency investments, such as exchange-traded funds (ETFs) based on bitcoin futures.
  3. Remind clients to correctly report their investments on their taxes and consult with a tax advisor if they need assistance.
  4. Disclose crypto investments on the SEC’s Form ADV.
  5. Rebalance crypto investments as you would other investments in a client’s portfolio.
  6. Know how to execute the cryptocurrency investments in your client’s portfolio. While there are a handful of methods, the TDAMP, which must be signed off on by your compliance team, may be the most common.
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For HNWIs, Crypto May Be Here to Stay

The time is now for wealth managers to get up to speed on crypto. We owe it to our clients. After all, it’s been more than 13 years since Satoshi Nakamoto published the bitcoin whitepaper. And now the market capitalization of crypto assets is well into the trillions.

Most of our wealthiest clients 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. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / RichLegg


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April J. Rudin

Founder and president of The Rudin Group, April J. Rudin is widely acknowledged as a top marketing strategist for the financial services and wealth management sectors. She is recognized by Onalytica as the #1 “Influencer” in wealth management, and is a regularly featured source of expert commentary to international news and business outlets, trade publications, and broadcast media. Rudin is an annual contributor to the Capgemini World Wealth Report, produces the Annual Outlook for US Wealth Management for Enterprising Investor, and speaks about wealth, next-gen, and fintech at conferences throughout world. Her thought leadership has appeared in Huffington Post, American Banker, Enterprising Investor, Family Wealth Report, Fundfire, and Wealthmanagement.com. She is the mother of two sons who are quick to point out that they considered her an “influencer” well before Onalytica did.




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