Winter in New York’s North Country is cold. So cold that the dim January sun and howling winds along the St. Lawrence River can leave wind chills well below freezing for an entire month or more, even in an era of warming global climates.
In such conditions, winter weather gear wasn’t optional like it is now in many parts of the U.S. – children don’t forget their hats and gloves, and waterproof boots and wool socks are necessities to avoid potential loss of limbs due to frostbite.
Those lessons should serve me well as “crypto winter” descends upon us. Not only are asset prices well down from their highs across almost all of the crypto ecosystem, but we’re starting to see dominos fall in projects and companies failing.
Singapore-based Three Arrows Capital, a crypto-focused hedge fund, was ordered to liquidate after several weeks of difficulties. Ahead of the liquidation, crypto exchanges BlockFi and Voyager Digital took on huge lines of credit to help survive the crunch, as both had participated in financing Three Arrows. Their creditor, FTX founder Sam Bankman-Fried, went on to say that he believes many crypto exchanges and firms are already “secretly insolvent.”
As it turns out, Voyager recently joined a series of crypto firms that have frozen activity, including withdrawals, amid the chilling of the digital asset space, and subsequently filed for bankruptcy protection.
These difficulties themselves followed an announcement by Coinbase (COIN) that investors at crypto brokerages don’t necessarily have the same liability protections and insurance they would at traditional brokerages or banks.
The advisor question
What’s an advisor to do? We’ve already written that clients want access to crypto and that advisors are gradually adopting digital asset investing and management into their practices. These trends are not easily reversed, no matter how much asset prices decline.
Ric Edelman, founder of the Digital Assets Council of Financial Professionals, told an audience at Financial Advisor magazine’s recent Invest in Women conference in Atlanta to keep the faith.
“As an advisor, you don’t have to like crypto, but you want to help your clients manage it,” he said. In recent weeks, Edelman has noted that growing institutional involvement in crypto has it trading like a technology stock as they buy and sell in response to daily volatility.
Investors who want to benefit from crypto’s growth have to be able to hold on through the swings, said Edelman. If they wait until crypto is a “safe” investment, they end up missing the growth.
I think advisors have a responsibility to help their clients who are already invested in crypto and those who are crypto-curious avoid losing their toes to frostbite in the crypto winter. Here are some ways they can help:
1. Stop the panic.
Digital assets are, for the time being, risk assets with greater volatility than other financial assets. A “crypto winter” was to be expected as the economy rarely goes for more than a decade without experiencing a recession.
As long as investors are well-diversified and prudently invested, they should be able to weather a downturn in crypto asset prices. Those with cash to spare and healthy risk appetites might even consider buying more while prices are low.
2. Know the risks and communicate them clearly.
Advisors are already comfortable discussing risk in equities, real estate and other assets – cryptocurrencies and digital assets should be treated no differently. A common practice is to prime clients for market volatility – and extra care should be taken to prime them for volatility in their crypto holdings.
Also, communicate to them some of the issues currently being worked out in crypto custody.
3. Lean on your knowledge of a client’s risk capacity and risk tolerance.
Some clients will require more hand-holding than others. Some clients may even be eager to invest more in crypto, while others might actually be better off lowering their allocations or divesting from the asset class due to their response to the current volatility. Don’t let these lessons go unlearned.
4. Wait for the dust to clear – or don’t.
Those more risk-tolerant clients may want to follow Warren Buffett’s advice to “buy when there’s blood in the streets.” They will need help allocating their assets appropriately. This is an opportunity to show value as an advisor, so do not shy away from helping them.
Will there be a spring?
I’m a writer, not a prognosticator. I don’t know how long this winter will last, or whether we’ll ever emerge. What I can say is that capital continues to be invested in crypto technology and infrastructure, and innovative new projects continue to be launched. The metaverse is under construction. Not only that, but the rails for institutional involvement in crypto and digital assets are still being built despite the downturn.
It seems to me that the smart money anticipates a “crypto spring” to come. Clients who are able to be patient and keep a level head will be the ones to reap the rewards of any rebound in the digital assets space.
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