Like it or not, wealth managers are being forced to weigh in on Bitcoin in the wake of its recent swoon.
The price of Bitcoin has collapsed over 27% in the past six weeks, dropping from over $126,000 to under $92,000. As a result, there has been an uptick in calls to financial advisors from clients concerned that the quintessential “risk-on” asset has been turned off.
James Vermillion, founder of Vermillion Private Wealth, is undaunted by the recent pullback, calling Bitcoin “notoriously volatile.” In the context of its short but eventful history, he believes this pullback “barely moves the needle,” having weathered through far deeper and more dramatic corrections.
“Whether this episode proves to be a brief correction or develops into something larger is impossible to know in real time. What I emphasize to clients is that every investment, especially one as volatile as Bitcoin, should be sized and evaluated with risk in mind. The key is understanding why you own it, what role it plays in the broader portfolio, and being prepared, emotionally and financially, for these kinds of swings,” Vermillion said.
Vermillion adds that communication is part of the “job description,” and the potential for volatility, whether it's Bitcoin or bonds, should never come as a surprise to clients.
“When questions do come in, I anchor the conversation in long-term perspective, revisit the original investment thesis, and remind clients why we own what we own. I also make space for them to process the emotional side of volatility,” Vermillion said.
Randol Curtis, chief investment officer at Thryve Wealth Management, views the recent selloff as a “temporary correction.” This correction was driven by diversification into other asset classes by long-term Bitcoin holders who have significant unrealized capital gains, liquidation by short-term speculators who have sold in sympathy with the recent pullback in equity markets, and softening inflows from ETFs and other institutional investors after a period of exceptionally strong demand.
“Our investment thesis on Bitcoin centers around rising US national debt-to-GDP, persistently high inflation and gradual erosion of purchasing power of the US Dollar. These long-term trends are clearly present and likely to persist for years to come,” Curtis said.
Kevin Thompson, founder and CEO of 9i Capital Group, believes Bitcoin's drop may be a precursor to more of a risk-off environment and further declines due to Federal Reserve rate cut concerns and the overall weakening economy.
“Bitcoin has no real intrinsic value because it does not pay a traditional dividend, nor does it produce cash flows. The crypto market has gone through one reset already a few years back and is likely to experience many more to come. This may be temporary, but it is truly hard to say with an asset that produces no real economic value,” Thompson said.
As to whether the recent volatility has changed his crypto positioning in client portfolios, Vermillion says it has not changed much. In his view, the forces that drew his attention to Bitcoin in the first place - runaway government debt, persistent inflation, and the expansion of fiat money – have not gone away. If anything, he sees them accelerating.
“As long as those structural pressures remain and Bitcoin continues to exhibit the attributes that make it a potential hedge against them, I still see it as a viable allocation for certain clients,” Vermillion said.
Thryve’s Curtis, meanwhile, rebalances client portfolio weights quarterly, so he will not be rushing to scoop up Bitcoin simply due to this latest selloff.
“Our investment process is based on proven principles that are disciplined and systematic. For each client, our asset allocation decision is customized based on each client’s unique goals and objectives. For growth-oriented portfolios we target a 3% to 5% weight to bitcoin,” Curtis said.
Finally, Thompson views crypto as a "gambler's bet" so he won’t be using the selloff to adjust his position.
“It is true that a small percentage of your portfolio into crypto could vastly outperform any other asset class while also having very little impact to the portfolio if it crashes to zero. It is the ultimate risk versus reward conundrum that we face as portfolio managers,” Thompson said.
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