You know how people always say history repeats itself? Lately, I’ve been looking back on my years as an advisor in the 1990s and realizing just how true that statement is.
This rush of interest in blockchain and cryptocurrency investing feels a lot like the early demand for technology stocks. Remember when the Internet was still new, during the time of the Dot Com Bubble and the advent of companies like Amazon? Investors saw the developing value of tech, and, as the pattern goes, stock prices soared based on the promise of vast wealth creation and disruption.
However, as we learned in the subsequent “tech wreck” of the early 2000s, sometimes expectations have nothing to do with reality. Many investors lost everything and far more than they made in the previous bull market. This is typical of a bubble. Most investors enter at or near the high only to watch their wealth disappear in the ensuing correction.
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When we invest, we need to separate the hype of revolutionary technology from the actual prospects for commercialization. This is really hard to do, especially for the average investor, as well as incredibly difficult for the financial advisor who is trained to counsel prudence and caution while insanity rages on everywhere around them.
In the ’90s, many advisors’ clients wanted all-in on tech stocks. Clients were losing faith in their advisors because diversification flat-out did not work. During the bubble period, the NASDAQ Composite index, which is heavily weighted towards technology stocks, rose from around 1,000 in 1995 to a peak of 5,048.62 on March 10, 2000. This represented an increase of more than 400% in just five years. During that same time, the S&P 500 also performed very well, rising over 200%, but that wasn’t good enough when the Nasdaq was up almost double.
Imagine telling your client for five straight years that the tech stock bubble was just a “fad” that would soon pass. Even the best, most trusted advisors had difficulty convincing clients to avoid the “shiny object” and stay the course with a diversified portfolio of stocks and bonds. Unfortunately, many clients lost faith entirely and took matters into their own hands, becoming either day traders or investing all of their money in the famous Janus Twenty fund, which at its peak grew to a whopping 88 billion dollars. Notably, this fund invested in just twenty stocks, with their top holdings in companies like AOL, Cisco, and Qualcomm. By the end of 2002, this fund’s assets under management had fallen to around $12 billion.
Give them what they want…but not so much of it
As an advisor, I chose a different approach. Rather than alienating the client by telling them what not to do, I was far more interested in building a collaborative process. If they wanted to sell everything and put it all in Qualcomm, my response was, “Yes, Qualcomm has really performed lately; perhaps we should create a small allocation to Qualcomm and some other telecom stocks. What other stocks are you considering for this more aggressive part of your portfolio?” The clients felt heard, and I was able to protect them from their own worst enemy, which was greed.
Some of you may be feeling the same burn with digital assets. Like tech, blockchain has real, tangible, long-term use cases. Unfortunately, the pattern for consumer adoption of new innovation is to take it to extremes, and this was very apparent with crypto. Terra Luna, Three Arrows Capital, Blockfi, Celsius, FTX, and many others are all good examples of this. Not only were clients investing in crypto, but they were also playing around with leverage!!! It only makes sense that you’re factoring this into your investment strategy by generally telling clients to stay away from or avoid this speculative asset class.
However, telling the client to “go it alone” is not the answer—and if they’re interested, they will go it alone. As we saw after the inevitable industry shake-up, a number of investors were heavily invested in specific exchanges or tokens, often without guidance from financial professionals or diversification. With all of their eggs in one basket, they took massive losses. I would argue that many of these clients would have worked with their financial advisor if their advisor had simply offered a more open and welcoming approach toward digital assets.
The thing that I learned through tech stocks and that I can now impart to you is that taking a conservative stance toward investing in a new asset class makes sense, but it doesn’t have to be binary. There is a way to exercise caution while still giving your clients exposure. Just like the tech bubble and the subsequent crash in the early 2000s, small doses of the speculative asset class help satisfy the client’s urge to go “all in” while protecting them from the inevitable upheaval that comes with major innovation. This gives you the future chance to look back and say that you gave your investors a chance to embrace opportunity and the excitement of change while still maintaining a balanced, rational investment strategy.
The fact that blockchain technology is stirring up the market is a sign that it’s working. Like the Internet, it’s disruptive by nature, making the highs and lows we’ve weathered over the last year symptoms of positive change. We’re in the early phases of blockchain tech today, but we’re rapidly approaching broader innovation, with cryptocurrencies making way for the tokenization of real-world assets that are spurring revolutionary changes in the distribution of investment opportunities. Before you know it, there will be innumerable ways to invest in digital assets on behalf of your clients because blockchain will be a part of everything. Just as various businesses now leverage tech, blockchain has the potential to permeate across and benefit a wide swath of industries.
All of that is to say: it makes sense that investors want in on digital assets, and with your guidance, you can enable them to engage the market behind tomorrow’s exciting possibilities thoughtfully and, more importantly, securely.