The crypto world has had wild over the past two weeks. False tweets stirred up excitement about a Bitcoin ETF’s approval by the SEC, causing Bitcoin to shoot up from $25,000 to $30,000 in mere minutes. There was a further catalyst to the price action as BlackRock’s IBTC was listed then removed from the Depository Trust and Clearing Corporation website. This episode offered us a sneak peek into the potential chaos when a real Bitcoin ETF gets the green light, which might happen sooner than we think.

Closing the Knowledge Gap

Between 2020 and late 2022, the crypto market witnessed a 10x bull run. Stories of overnight millionaires triggered a wave of FOMO among investors, and that left many financial advisors swamped with questions from clients wondering why they weren’t part of the crypto boom. Despite the current “crypto winter” and some regulatory twists and turns, one thing is crystal clear: cryptocurrencies are here to stay, and this time, institutions are diving in.

Advisors have been on a mission to bridge the knowledge gap. Fortunately, a multitude of educational resources have emerged, catering specifically to advisors’ needs. Staying well-informed is more critical than ever. Advisors who can’t address client queries on digital assets risk undermining their professional credibility.

In the investment world, we find ourselves at a crossroads, where three major cryptocurrencies are capturing the spotlight. Bitcoin, often hailed as a modern store of value, stands tall and might even surpass traditional assets like gold. Ethereum, the pioneer of smart contracts, opens up an exciting world of decentralized applications, revolutionizing the way we interact with technology. And then there’s Solana, a rising star known for its high-performance blockchain, sustainability, and scalability, showing promise for long-term adoption. It’s important to note that we are still in the early stages of this crypto journey, and the potential for digital assets is vast. The unique opportunities presented by these – and the other thousand tokens – adds to the complexity of this evolving landscape.

The key takeaway here is that because it’s early, picking a winner is challenging. We recommend advisors explore diversified approaches to crypto investment. Much like investing in the S&P 500, there are index funds that offer broad exposure to digital assets, so you don’t need to pick individual winners and losers; you can ride the overall growth of the asset class.

Asset Allocation Dilemma:

While advisors continue to upskill, one central question looms large: How much should you allocate to crypto for your clients? For advisors well-versed in crypto, a balanced approach suggests an allocation of 3-5% for clients with higher risk tolerance. Dial it down to 1% for clients who are curious but cautious, in the distribution phase, or simply looking to dip their toes into the crypto waters through your guidance.

Reconnect with clients who’ve already ventured into crypto on their own. Some might have made risky decisions without fiduciary guidance, potentially putting their overall financial plans at risk, plans you’ve carefully nurtured for years.

Balancing Short-Term Revenue and Long-Term Relationships:

It’s essential to understand that investments in crypto may not immediately translate into a substantial increase in Assets Under Management (AUM). The initial revenue might appear modest, which could make some advisors hesitant to dive into crypto-centric strategies. But taking a short-term view would be a mistake.

By managing your clients’ crypto allocation, you’re not only providing essential oversight of their overall investment portfolio but also ensuring that the revenue from these assets remains within your purview. This leads to a more substantial and lasting client relationship.

Time to Get Ready:

If a Bitcoin ETF gets the green light in the U.S., advisors need to gear up for a crypto surge in 2024. Expect more regulatory clarity, traditional finance merging with blockchain technology, and more accessible crypto options.

If you’re not fully prepared, handling client questions and the risk appetites of those who venture out on their own could be challenging. It’s not too late to get ready, but time is ticking.

About the Author

Kenny Estes, Founder/CEO of Diffuse Funds and host of the DiffuseTap Podcast, is a former high-frequency trader and venture capitalist. He launched Diffuse Digital 30 (DD30), a publicly-available index fund that invests in the top 30 digital assets by market capitalization.