Bitcoin (BTC) is hitting new highs, with other cryptocurrencies like Ether (ETH) and XRP joining the rally. These upticks signal a renewed surge of interest in digital assets after Donald Trump’s presidential election win in November.
Trump has made pro-crypto appointments to his incoming administration, including naming Paul Atkins as his pick for chair of the Securities and Exchange Commission, and creating a new White House role for venture capitalist and podcast host David Sacks as the artificial intelligence and cryptocurrency czar.
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These moves mark a sharp pivot from the more cautious approach of current SEC Chair Gary Gensler, suggesting the potential for regulatory changes that could pave the way for broader acceptance of cryptocurrencies.
While this is encouraging news for crypto enthusiasts, financial advisors continue to see challenges when it comes to allocating digital assets in client portfolios. Here are some issues that are holding advisors back from being crypto advocates:
— Difficulty in valuing crypto.
— The bubble factor.
— Lure of crypto exchange-traded funds.
— Do advisors personally own crypto?
Difficulty in Valuing Crypto
There are plenty of ways to determine the intrinsic value of stocks and bonds, as well as the future potential of stocks. However, it’s not so easy to properly value cryptocurrencies.
Traditional financial metrics, such as return on invested capital or price-to-earnings ratios, don’t pertain to digital assets.
“Advisors looking to apply some kind of fundamental analysis need to learn entirely new metrics, such as market value to realized value,” says James Lee, founder of StratFI in Wilmington, Delaware.
“Meanwhile, advisors who are familiar with technical and chart analysis have much less difficulty trading crypto,” he adds. “The principles are the same.”
Crypto relies heavily on factors including network adoption, utility and macroeconomic sentiment, says Jason Gilbert, managing partner and president at RGA Investment Advisors in Great Neck, New York.
“As fiduciary advisors, we prioritize investment opportunities that offer a clear risk-reward framework,” Gilbert says.
This doesn’t mean crypto lacks potential, he adds, but its nascent nature and unique valuation challenges require additional scrutiny.
“Our role is to educate clients on these nuances, ensuring they understand crypto’s speculative aspects and its divergence from traditional investment criteria,” Gilbert says.
The Bubble Factor
Stuart Schiffman, founder of Compound Wealth Advisors in San Diego, likens crypto’s rapid rise to the 17th-century Dutch speculative bubble over tulip bulb prices.
“Crypto is not readily exchangeable, and its value rests on sentiment,” Schiffman says. “In addition, some countries are outright hostile to crypto. Witness the expulsion of cryptocurrency miners in China.”
The potential for a bubble is among the reasons why many investors approach crypto cautiously, says Brent Matthew, founder and president at Scottsdale Wealth Advisory in Paradise Valley, Arizona.
“Since 2011, we’ve seen different cryptocurrencies spike and then crash in a repeated bubble pattern,” Matthew says. “While it dropped from a little over a dollar to 60 cents in 2011, now we are seeing values in the tens of thousands and losses framed in the trillions of dollars,” Matthew says, referring to Bitcoin.
This pattern illuminates both the risks of crypto and the potential gains for those with some luck and well-timed decisions, he adds.
Lure of Crypto Exchange-Traded Funds
In January 2024, the SEC approved the launch of ETFs that track the price of Bitcoin. The financial services industry sought regulatory approval for a decade.
Investors were clearly interested, too: The iShares Bitcoin Trust ETF (ticker: IBIT) set a new record for growth, reaching $30 billion in assets under management in less than 10 months after its Jan. 11 debut. As of December 2024, it has more than $53 billion in assets.
Lee says almost all his clients have a small allocation to crypto, usually in the form of ETFs.
According to data from Morningstar, a small allocation in crypto doesn’t have a significant impact on an investor’s return and results in minimal change to volatility.
Morningstar found that the Ether cryptocurrency (the native token of the blockchain network Ethereum) contributes more to portfolio risk than Bitcoin. The SEC approved spot Ether ETFs in July 2024, with funds launching almost immediately.
The right percentage allocation for crypto in a client portfolio is typically in the range of 3% to 5% with regular rebalancing, Lee says.
“An allocation of less than 3% won’t make enough of a difference,” he says. “An allocation of over 5% percent usually results in clients not getting enough sleep.”
Crypto ETFs provide a regulated and relatively accessible way for clients to gain exposure without navigating the complexities of digital wallets or exchanges, Gilbert says.
“While I generally avoid direct recommendations, if a client is determined to explore crypto, ETFs can be a reasonable entry point for self-managed accounts, as we don’t allocate to these funds,” he says.
He also recommends that clients limit crypto allocations to about 1% to 2% of a portfolio, ensuring they don’t overshadow traditional, diversified investments.
“The goal is to integrate such exposure thoughtfully without jeopardizing the client’s long-term objectives,” Gilbert says.
Do Advisors Personally Own Crypto?
Some advisors hold digital assets in their own accounts, with different reasons for doing so.
For example, Matthew says he’s not concerned about missing out on gains; rather, he’s curious about crypto’s behavior and performance.
“I love what I do, and crypto is the newest kid on the block,” he says. “There’s no doubt that crypto, in some form, is here to stay, and I want to keep my finger on the pulse of this innovative investing so that when it does become a more sustainable and less risky investment option, I’m ready to help my clients take advantage.”
Gilbert has similar reasons for personally owning digital assets.
“I do hold crypto personally, though as a deliberate effort to better understand the ecosystem, not out of fear of missing out,” Gilbert says.
This hands-on experience, he says, helps him educate clients more effectively about the opportunities and risks.
“However, I still emphasize caution when discussing crypto with clients,” Gilbert says. “It’s a rapidly evolving space with significant uncertainty, and our role as fiduciary advisors is to guide clients toward sound financial decisions based on their unique needs, rather than speculative trends.”
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Is Bitcoin a Good Investment, With Trump Favoring Cryptocurrency? originally appeared on usnews.com
