Cryptocurrency frenzy poses a challenge to advisers

Be sure to have a solid, informed case for your viewpoint on bitcoin

Dec 16, 2017 @ 6:00 am

Nothing like roaring into the holidays with a mania on our heels.There has been enough news swirling the last few weeks on bitcoin, other cryptocurrencies, their futures, the underlying blockchain technology and, yes, even CryptoKitties — it's a thing — to make one's head spin.

We certainly will not "go gentle into that good night" of the year's end. Though Dylan Thomas wrote that about human life, it's utterly fitting for 2017, which will "rage, rage against the dying of the light."

But be not weary, advisers. We're just getting started, and 2018 is sure to be a doozy.

Last week, we saw the price of bitcoin jump almost 35% before dropping back again. It has doubled since late November. We dare not print a price here because it will be ludicrously out of date by the time you read this.

Similar swings occurred during the debut of bitcoin futures Dec. 10 on the Cboe Options Exchange. The enthusiasm spurred two trading halts in order to calm the market. And get ready: CME Group Inc., the world's largest exchange owner, will begin trading bitcoin futures contracts Monday.

We know what follows: other derivatives, and even inclusion indirectly in mutual funds and ETFs. We've already seen that with two money managers our senior columnist John Waggoner wrote about last week. Their funds get in on the phantom currency through the Bitcoin Investment Trust, which owns a set number of bitcoins and typically sells for a large premium to the value of its holdings. Yikes.

Things are moving fast for advisers, and even faster for news outlets such as InvestmentNews trying to keep you ahead of the curve.

We were all set to deploy our Market Intelligence e-newsletter last Tuesday with a lead story titled "Bitcoin futures debut with 26% rally." But that morning's news had eclipsed the previous day's sunshine with headlines about such trades tumbling 93%. (It appears we're going to need an even faster piece of news-writing equipment and delivery system than the human brain and internet.)

But during such chaos, as during tranquility, it is the job of advisers to stay ahead of the client on financial matters lest the client lose all confidence in them. A response of "I don't know" will not suffice for the many questions clients will throw at you. Especially the crazed ones.

Manias need maniacs

Though some of your clients are undoubtedly remaining sane amid the fervor, we know that to feed a mania we need maniacs. Be honest, you know a few. According to Joseph Borg, Alabama securities director and president of the North American Securities Administrators Association, there are plenty out there hounding their advisers about the cryptocurrency. As he told CNBC last week, people are going into debt, opening home equity lines of credit and taking cash advances on credit cards to buy bitcoin. As he warned, "Innovation always outruns regulation."

Which makes this a particularly crucial moment for advisers to earn their keep, and help put reason between hungry investors and their eagerness to risk too many of their hard-earned dollars.

Securities and Exchange Commission Chairman Jay Clayton released a statement last week on cryptocurrencies and initial coin offerings. Half of the notice was directed at market professionals such as broker-dealers and investment advisers.

Mr. Clayton said that although cryptocurrencies are purported not to be securities, his agency is keeping a close eye on them.

(More: Jay Clayton issues cryptocurrency warning)

"When advising clients … advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years," he said. "I also encourage market participants and their advisers to engage with the SEC staff to aid in their analysis under the securities laws."

So whether you are intrigued by bitcoin and the technology that underlies it, or mortified by the mania, be sure to have a solid, informed case for that viewpoint — and share it freely with those coming to you for guidance. They'll definitely need it.


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