Bitcoin sell-off shakes adviser confidence in crypto

The Bitcoin sell-off last week, which sent the cryptocurrency slipping below $40,000 for the first time since September, marked one of the worst starts of the year for the digital asset and tested investor confidence in the larger crypto universe.

The oldest cryptocurrency fell as much as 6% in New York trading Monday morning, before paring some of those losses to top $41,000 by midday. The decline so far this year is the largest for the beginning of a year since at least 2012, according to Bloomberg News.

For many financial advisers, the slide has reinforced the notion that Bitcoin is just too volatile for client portfolios. Many still believe cryptocurrencies are speculative and not true investments that provide real rates of return over time. 

Anthony Watson, a consultant with Thrive Retirement Specialists in Dearborn, Michigan, called digital assets “speculation vehicles” and said he is currently not recommending them in client portfolios. “The value of a cryptocurrency is determined by supply-and-demand factors of an unstable and unpredictable group of market participants,” he said.

Technically cryptocurrencies are an alternative form of currency, Watson said, but they don’t have the necessary qualities to be considered an acceptable or strong currency, and are not a suitable alternative to holdings in cash. 

While cryptocurrency is notorious — and in many cases sought after — for its extreme volatility, the current sell-off may be a response to recent interest-rate announcements from the Federal Reserve. Analysts from Goldman Sachs Group Inc. expect the central bank to raise rates four times this year and begin the process of reducing its balance sheet size as soon as July. 

A more hawkish Fed means investors are likely bracing for lesser returns and decreasing their exposure to risky investments.

“Crypto is a speculation at this point, not an investment,” said Matt Chancey, an adviser in Tampa, Florida. “It's going to be a bumpy ride that not everyone can stomach.” 

The Covid-19 pandemic catapulted Bitcoin further into the mainstream as institutions and retail investors jumped on board with the crypto market and other digital-enabled investments, like non-fungible tokens. 

Still, adviser adoption has been limited. While more than 80% of financial advisers are being asked about cryptocurrencies, just 14% of advisers use them or recommend them as of now, according to research by the Financial Planning Association released last year.

For Charles Sachs of Kaufman Rossin Wealth in Miami, Florida, it might just be a case of a normal market response to an overinflated asset class. “It could be that crypto is a bag of hot air, and some of that air is escaping,” he said.

But increased crypto adoption might be on the way. According to the latest U.S. Future Flows report by InvestmentNews Research, about a third of all advisers surveyed expect to increase their clients' exposure to digital assets in the coming years. A similar report from IN early in 2021 found that while only 10% of advisers were currently using crypto, 44% believed they would be using it within five years.

“If you believe in the ‘to-the-moon’ hype, remember that when we actually went to the moon as a species, that time was also filled with peril,” Chancey said.

There are products that help leverage the volatility. A partnership between Thor Financial Technologies and Eaglebrook Advisors created a risk-managed Bitcoin strategy. The model portfolios offer 70% of crypto’s upside performance and 40% of the downside risk.

What most advisers will admit is that the underlying technologies, like blockchain, have the potential to fundamentally change the way financial transactions are done worldwide. With such sweeping implications, some believers are calling digital assets the most important invention since the dawn of the internet. 

“There are many people that believe crypto and Bitcoin might change global financial markets and the way the financial services system functions,”  Chancey said, “but no one should believe — even if that happens — it will be a smooth ride.”