Investment advisers still warn their clients about the dangers of bitcoin – but they are getting more inquiries about the cryptocurrency.
Bitcoin began the year at $899.65, according to WorldCoinIndex.com, and was trading Wednesday at $7,229.39 – a 704% increase. Shares of Bitcoin Investment Trust (GBTC) have soared 659.09%, according to Morningstar.
Returns like that tend to turn investors' heads. "I have clients who invest in bitcoin, and just last week had two clients call me to find out how," said Erika Safran of Safran Wealth Advisors. "I don't use cyrptocurrency as part of client portfolio allocation but will explain the difference between buying bitcoin direct versus the bitcoin ETF and am happy to guide them through the process."
Investing directly in bitcoin means having to create a digital wallet, which clients can do via several websites, such as coinbase.com. The wallet links to your bank account and allows you to buy or sell bitcoins. The other alternative, Bitcoin Investment Trust, is easily traded through a brokerage account. The drawback: "GBTC has its own price volatility based on its own trading volume liquidity," Ms. Safran said. "It can trade at a huge premium or discount to the market value of bitcoin. It's been up when bitcoin was down and vice versa."
Planners stress that any bitcoin gains can vaporize quickly. "I am hearing from clients about investing in bitcoin," said Ashley Foster, partner at Gross & Foster Financial Services. "But I warn them that this is a purely speculative play," he said. "The amount of volatility in this asset class is more than most can stomach with hundreds of dollars' worth of swings on a daily basis."
Nevertheless, inquiries seem to be increasing. "Just last week I had two clients call me to find out how to invest in bitcoin," Mr. Foster said.
Most advisers, along with many economists, remain skeptical about bitcoin's worth as an investment. "With cryptocurrencies, there is nothing behind the curtain. The only thing propping up the prices and driving them higher is that people see the prices increasing astronomically, and think that they want to get in on this "gold rush,' " said George Gagliardi, founder of Coromandel Wealth Management.
VALUE OF BELIEF
The "value" of the various cryptocurrencies is dependent upon the belief that someone will purchase it at a higher price than was paid for it, meaning "guaranteed" profits, according to Gagliardi. "That was the case with dot-com IPOs and speculation, and we all know how that ended. I see a similar end for the current cryptocurrencies."
As it was during the dot-com boom, it's hard to talk down an investment that has made so much money so rapidly. "I remain baffled at the upward trajectory of the bitcoin and anticipate a major correction at some point in the near future," said Austin Frye, president of Frye Financial Center. "Trees don't grow to the sky."
Mr. Frye's own son is one of the recipients of that advice. "A couple of years ago, when my son was working and interning in my office, I bought eight coins, and he invested a couple of his paychecks in purchasing three coins," he said. "We paid $400 per bitcoin. His $1200 investment is worth over $21,000 now, and I have been explaining to him that he needs some kind of sell strategy. He, who is now a medical school student, hasn't listened to his dad."