It's been a terrible year for cryptocurrencies as the November 2021 crash took nearly $2 trillion off its all-time high market cap of $3 trillion. The leading Bitcoin token, which traded at $64,400 a year ago, is now worth around $20,000. It hit a two-week low on Tuesday after a dispute between the two major cryptocurrency exchanges, but recovered after they agreed to a fusion.
No one claims that cryptocurrencies are a hedge against inflation anymore; indeed, the classic inflation hedge, gold, has been hit by digital currencies this year. On the other hand, potential investors today view cryptocurrencies as cheap. And the owner who held it as it fell must be wondering what to do with it. For this week's big question, we asked advisors what they tell clients about cryptocurrencies.
Andy Wang, consultant at Runnymede Capital Management: There is less client demand this year than 12 months ago. Last year there was a level of fear of missing out on something that wasn't there this year.
What do financial advisors tell clients about cryptocurrencies? It's a bit difficult because of its volatility and concerns about how cryptocurrencies are valued and regulated. Cryptocurrencies do not act as insurance against inflation and do not behave like digital gold. They are speculative and tend to move in the same direction as other risky assets: when stocks are in a bear market, cryptocurrencies also tend to be in a bear market. So cycles are important, and for that reason, now may not be the best time to add risk to a portfolio. When the time comes and suits the client, a small cryptocurrency allocation can make sense. If a client has a large percentage of their portfolio in cryptocurrencies, they may want to opt out.
Do cryptocurrencies have intrinsic value? I think there is potential for something real. Until recently, I did not advocate clients holding cryptocurrencies, but I followed this area very closely. Even if another hypothetical crypto bubble is not expected in 2023, it is possible that cryptocurrencies will be integrated into mainstream platforms and blockchain could find its way into social media applications, banking, logistics, and other areas. But in my opinion, it is still too early to consider cryptocurrencies as an asset class.
Chris McMahon, CEO of Aquinas Wealth Advisors: The cryptocurrency has a market cap of $1 trillion, even if its price is cut in half. I don't think there's any chance it will go away. I think with a 60/40 split, investors should have 6% of an aggressively growing portfolio and half be able to go into crypto because the opportunity exists. Blockchain-related technologies may be even more important than the cryptocurrency game.
You know, after the dot-com bubble burst, a lot of companies went bankrupt. But it turns out there is a hidden value in it. For most people, ETFs are a way to gain exposure to crypto; The coin itself is very expensive. Personally, I have an account with (crypto broker) Voyager. And Voyager exploded, which was really annoying. I'm still receiving documents from the class action lawsuit. But when you buy an ETF, you don't have to worry about that.
Mark Mattson, CEO of Mattson Money: We believe that cryptocurrencies are very dangerous for humans. They call it currency, but that's a misnomer. You can't think of an asset that can lose 50% as currency. It's not a very good hedge against inflation, and that's one reason some people buy it. If I buy stocks or bonds, at least I have a company with real assets.
And it's not just cryptocurrencies; They have NFT which is just internet art. You have a metaverse where someone pays $450,000 to buy a virtual lot next to Snoop Dogg. I mean, it's all crazy. This is another way for people to guess and bet with their own money and get hurt in the process.
When you buy a cryptocurrency at a high price, the psychological tendency is to wait to sell it until you return it. But as a Las Vegas player, there is no guarantee that you will win. So the best approach for an investor is to ask: when is the right time to be cautious? The purchase was essentially a reckless speculative move. And the best job is selling. You have to ask yourself: "How can I allocate my money in the future, take my share and not be emotionally attached to the loss?"
George Schultze, Managing Member of Schultze Asset Management: We are telling people who are interested in buying crypto that now that it is down sharply, it might look good. But at times like these, it's best to be patient and then reconsider. While we've seen a lot of decline in value over the past year, cryptocurrencies are sure to fall before becoming an attractive asset class. I don't think we're there yet; I don't think there is enough devotion.
And if you're looking for inflation protection, it's probably a lot safer to look for a precious metal that has stood the test of time. On the other hand, cryptocurrency is a new market that is currently facing all kinds of risks. There is a risk of fraud. We have seen crypto rigs blown up and coins stolen. There are regulatory risks: The IRS now requires taxpayers to include cryptocurrency income on their tax returns, and the SEC is beginning to require some forex offerings to be securities offerings, and therefore all securities offerings are subject to the appropriate rules. This is a big change. And some countries just ban cryptocurrencies.
John Thiel, Advisor, Wealthspire Advisor: Cryptocurrencies and tokens are highly speculative assets where you should expect large price fluctuations. For example, Bitcoin is down more than 50% since the start of the year. But crypto assets and blockchain are truly innovative technologies that will change the financial landscape over time. I believe that Bitcoin and Ethereum have the strongest track records in terms of security and stability and are the best in terms of long-term use. I also believe in buying and holding for the long term and I don't try to trade on volatility.
Most of my conversations with clients about cryptocurrencies are educational, but monitoring is important, especially considering how much prices have dropped this year. Although tax losses on cryptocurrencies can be recovered in the same way as stocks, crypto assets are not currently subject to money laundering regulations. This allows holders to collect tax losses more aggressively if they wish. Most of the clients I work with who own crypto assets are relatively small compared to their total asset base, so they usually don't have much room for tax savings.
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