It’s fair to say sentiment toward crypto among the general public has plummeted in the past year. This may have a secondary effect of pushing financial advisors to shy away from the category, and digital assets in general, at least until there is more certainty in the markets and the forces driving them.
Looking at the long term — as advisors are supposed to do — lends itself to a different perspective. Crypto is still a relatively new technology, and with all new technologies, there is an adoption curve, and a good way to evaluate this is Metcalfe’s Law. Metcalfe's Law states that a network's impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 x 10).
If you believe crypto is still early in its evolution (and it almost certainly is), it has unmatched potential to grow in an exponential manner. The analogy isn’t perfect, but one of the toughest times to buy Amazon stock was in the 2000s, when it was virtually stagnant; of course, that also turned out to be a great time to buy.
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In addition to its untapped potential, crypto and blockchain have come to be defined by such features as decentralization, security, transparency, efficiency, innovation and financial inclusion. Many of these facets are attractive to financial advisors as they scan the macroeconomic landscape for investment opportunities for their clients. With a difficult 2022 behind us – during which almost every asset class went down – and the traditional 60/40 portfolio had its worst year in over a century, it is important for advisors to be open to possibilities in the future landscape to rebuild, protect and grow their client portfolios.
Emotion can be a difficult thing to manage, and in one sense, that is part of an advisor’s job description. The situation in the U.S. has big challenges: The country has one of the highest debt-to-GDP ratios we have encountered, a devaluation of fiat currencies is ongoing, and demographics are aging with no end insight. A natural question arises: How can we find opportunities to outpace these challenges? It is important to realize that the economy is often slow to reflect economic conditions. We should expect to see challenged earnings, a credit crunch and uncertainty around the Fed. One answer is blockchain and crypto.
There are several reasons why investing in crypto makes sense: diversification, high growth potential, being on the bleeding edge of new technologies, a hedge against inflation and self-custody, to name a few. The question is, how should advisors allocate a portion of client portfolios to digital assets?
Without taking a single token or third-party risk, the SEC’s intransigence in disallowing a spot BTC ETF, and trying to keep up in this 24/7 cycle market, what is a regulated option? As famed value investor Warren Buffet once said, “Be fearful when others are greedy, and greedy when others are fearful.”
Now it is one of those periods. In preparing for the long term, we need to get out of the day-to-day noise. Will this asset class be higher in five, 10, 15 years and beyond? I believe so and believe it is responsible to research this asset class and have a portion of client portfolios allocated to it, just as it was for Amazon in the early 2000s. Crypto and blockchain are important because they offer a new way to manage and secure financial transactions, increase transparency and accountability, and enable innovation in a variety of industries.
A hedge against uncertainty
Debt has been the backbone of the global economy. As debt grows and credit tightens, it challenges all facets of the markets. This ultimately devalues fiat currencies. While the U.S. dollar remains the world reserve currency (for now), there is no guarantee of that in the future. The ultimate story is that all fiat currencies depreciate because of our system.
As advisors, our job is to maintain purchasing power for our clients. Moving forward, 60/40 portfolios and traditional wealth management strategies may not be enough to do this. This is why we see an allocation to crypto as a responsible decision moving forward so as to not miss an exponential opportunity. Crypto as an asset class is directly tied to global liquidity; this faucet cannot be shut off. As money supply rises over time, we need to be prepared to capitalize on that environment.
In the new world of “work from home,” where does commercial real estate fall in? We just hit a first-quarter record in office vacancies approaching 13%, which is larger than after the financial crisis of 2008. Commercial real estate loans account for nearly 40% of what’s on bank lending books. This issue, along with the now very apparent potential for a bank run via a cellphone, adds pressure on the system, compounding the challenges to advisors. Crypto and digital assets expand the set of tools to help deal with them.
With a system built on debt and big challenges ahead for Fed Chairman Jerome Powell, now is the time to look at additional alternatives. Advisors owe it to their clients to put in the work to navigate the digital asset space so they’re better positioned to endure the looming headwinds. No single solution is a perfect fit, but a combination of these strategies puts the people we work for in a better position to be successful for themselves and their families.