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Crypto for Advisors: To Crypto or Not to Crypto?

The financial advisory industry is at a crossroads. Cryptocurrency is no longer a speculative fringe asset; it’s becoming a part of the modern economy. Advisors who dismiss or ignore it risk alienating clients looking for forward-thinking guidance.

By DJ Windle, Sarah Morton|Edited by Marc Hochstein

Updated Nov 28, 2024, 7:58 p.m. Published Nov 28, 2024, 7:57 p.m.

As a seasoned professional with years of experience navigating the complex world of finance, I find myself increasingly captivated by the burgeoning field of digital assets. The transformative potential of blockchain technology and cryptocurrencies is undeniable, and as someone who has seen the evolution of traditional finance firsthand, I can’t help but be intrigued by this new frontier.

Today’s article features insights from DJ Windle of Windle Wealth, discussing the potential dangers that financial advisors encounter when they either lack the ability or choose not to assist clients seeking investment opportunities in digital assets.

Then, Hong Sun from Core DAO talks about custody and DeFi in Ask an Expert.

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– Sarah Morton

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Houston, Advisors Have a Problem

For a while now, financial advisors have tended to overlook cryptocurrencies, viewing them either as risky speculative investments or fraudulent schemes. However, the financial sector has undergone significant transformation in this timeframe. Heavyweights such as BlackRock, Visa, Mastercard, Venmo, and numerous others are now embracing blockchain technology and cryptocurrency within their business operations. This once marginalized crypto environment is increasingly being recognized as a vital component of the mainstream economy.

In simpler terms, if advisors don’t adjust quickly enough to meet their clients’ evolving needs, they may find themselves being left behind by competitors who are ready and willing to offer more modern solutions. This is a significant issue, especially when it comes to high-value clients.

The Two Crypto Scenarios

When customers discuss cryptocurrencies with their financial consultants, they often find themselves in one of two common situations.

1. Dismissal and Dismissiveness

Instead of dismissing client inquiries about cryptocurrency with the same overused phrases like “Crypto is a scam,” “It’s just like tulip bulbs,” or “It’s too risky and lacks inherent value,” financial advisors might consider their words more carefully to avoid coming off as out-of-touch or condescending. Clients may perceive such comments as dismissive of the potential benefits that crypto could offer, which can harm trust in the relationship between advisor and client.

2. Inexperience and Inaction

At times, some advisors may be open to providing advice but lack the necessary understanding or resources to execute it effectively. They haven’t invested time into learning about cryptocurrency, and their regulatory departments prohibit them from giving recommendations. Consequently, these advisors find themselves unable to assist their clients in buying or managing crypto assets, which creates voids in their service offerings and their clients’ investment portfolios.

In both cases, the outcome is dissatisfied clients who perceive their counselors as lacking foresight regarding the future.

Clients Notice

In my professional role as an analyst, I’d like to shed light on a situation that highlights a disconnect I’ve encountered. Recently, a client with substantial assets sought guidance from their advisor regarding a $50,000 investment in cryptocurrency. The advisor labeled it as a scam and advised against it. However, the client, who had conducted extensive research, remained unconvinced and sought alternative advice from their estate planning attorney. Recognizing their lack of knowledge on the matter, the attorney reached out to me for assistance.

We established an account for our client, guided them through essentials about this novel investment category, and offered the necessary knowledge to help them make wise decisions. In a short while, they moved all their assets under our management, expressing dissatisfaction with their former advisor due to perceived lack of foresight. Their final remark? “Why should I entrust my funds with an advisor who seems oblivious to the future?

In my experience, I’ve found myself inundated with requests for advice from various quarters – individuals seeking help because their advisors are hesitant, advisors asking me to oversee their clients’ crypto investments, and even seasoned advisors reaching out for assistance with their own portfolios. It’s quite ironic, isn’t it? These very professionals who once dismissed cryptocurrency as inconsequential are now struggling to keep up and, in many instances, losing clients because they underestimated its potential.

The Perfect Storm for Crypto Adoption

As a researcher immersed in the world of digital currencies, I find myself standing on the precipice of an exciting era. A confluence of elements has arisen, fostering conditions ripe for widespread acceptance of cryptocurrency.

1. Institutional Legitimacy

Major financial institutions such as BlackRock, Fidelity, and others are starting cryptocurrency-focused investment funds and converting traditional assets like property, artwork, and more into digital form. This move indicates that cryptocurrencies are no longer considered niche investments but have become a recognized part of the broader investment market.

2. Regulatory Shifts

Replacing Gary Gensler as SEC Chair may lead to a change towards a more welcoming regulatory environment, potentially reducing obstacles for both financial advisors and investors.

3. Increased Integration

Businesses such as Visa, Mastercard, and Venmo are adopting the innovative use of blockchain technology in their day-to-day activities, thereby making it simpler and more feasible for regular transactions using cryptocurrencies.

4. Client Demand

It seems that the main force behind this transformation is the clients themselves. A growing mistrust towards the government, coupled with an influx of favorable cryptocurrency news, has catapulted crypto into prominence. As a result, these clients are becoming increasingly curious and questioning why they haven’t had access to this investment class yet.

At this very instant, this situation offers an unparalleled chance for financial advisors to step up and be pioneers in a swiftly changing monetary environment. They can seize this opportunity to demonstrate to the general public that they are not merely following in the footsteps of their predecessors but are actively innovating and adapting.

The Bottom Line

As a researcher, I find myself standing at a critical juncture in the financial advisory landscape. Cryptocurrency is evolving beyond a speculative niche asset; it’s increasingly serving as a foundation stone in our contemporary economic structure. Ignoring or dismissing its significance could potentially lead to a disconnect with clients who seek innovative, forward-thinking advice.

Instead of wondering if cryptocurrency will have a part in finance’s future, it’s clear that it already does. The actual query is whether financial advisors can adapt swiftly enough to cater to their clients’ evolving requirements. Advisors who seize this opportunity and adapt will become reliable allies in an ever-changing world. Those who don’t might find themselves falling behind.

– DJ Windle, founder and portfolio manager, WIndle Wealth

Ask an Expert

Q. How do you see the evolution of custody models for institutional players?

Although self-possession is in line with the fundamental values of cryptocurrency, it isn’t always feasible for institutions. With multiple parties involved, these entities frequently need custodial services because of the intricacies related to regulations, compliance, and day-to-day operations.

Institutional actors place great importance on adhering to regulations, managing technological hazards, ensuring security, improving operational performance, building a good reputation, fostering trust, and maintaining market fluidity. They strive for a balanced strategy that allows them to take advantage of the benefits offered by digital assets while minimizing any associated risks. The fact that this model mirrors traditional finance practices involving custodianship adds to its attractiveness among institutions.

Embracing both personal control (self-custody) and professional management (third-party custodial models), the cryptocurrency sector can draw a more diverse group of users. This versatility allows institutions to interact with digital assets according to their operational and security preferences, thereby promoting widespread acceptance and staying true to the essence of cryptocurrencies.

Q. How will custody models enable a shift toward decentralized products?

The concept of custody, whether it’s handed over or self-managed, revolves around ensuring safety of ownership. Blockchain technology presents a flexible solution for asset management, which benefits both individuals and organizations. Digital assets such as bitcoin foster trust through unalterable programming, allowing users the freedom to choose who they want to entrust with storage.

In the world of Decentralized Finance (DeFi), it’s not mandatory for institutions to hold their own assets (self-custody). Instead, they can interact with decentralized applications, while outsourcing asset protection to custodians. This flexibility enables institutions to experiment with DeFi offerings without having to completely revamp their existing custody structures. As a result, this fosters wider participation and encourages innovation within the decentralized environment.

What changes might be necessary for large institutions to start adopting Bitcoin, DeFi, and staking platforms?

For institutions, crucial factors that motivate adoption are security, environmental responsibility, and the ability to expand operations. Institutions need guarantees to retain total control over their assets while minimizing risks such as hacking or threats from third-party smart contracts. They also prioritize transparency in income generation sources, favoring eco-friendly activities within a Bitcoin Decentralized Finance (DeFi) environment.

Scalability is critical as institutions must efficiently deploy substantial capital and ensure the system can handle it. Models that offer flexible options tailored to diverse user needs are best positioned to support institutional involvement at scale.

In much the same vein as traditional DeFi (Decentralized Finance), Bitcoin DeFi (BTCfi) thrives on the same fundamental principles. A compelling value proposition, robust and secure smart contracts, and substantial liquidity pools are key to its widespread acceptance. As these aspects evolve and strengthen, it’s anticipated that institutions will discover BTCfi not only for access to bitcoin ETFs but also for a variety of advanced derivative products that cater to intricate financial strategies.

– Hong Sun, institutional contributor, Core DAO

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

DJ Windle

DJ Windle is the Founder and portfolio manager at Windle Wealth, where he manages the Income Growth and Crypto portfolios. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.

Sarah Morton

As a visionary researcher at the helm of MeetAmi Innovations Inc., I, Sarah Morton, strive to equip future generations with the knowledge and tools necessary for successful investment in Digital Assets. To achieve this goal, I oversee both our marketing and product development teams, guiding them in creating intuitive software that simplifies complex transactions, adheres to regulatory standards, and educates users about the intricacies of this technology. My track record of launching tech companies before they became mainstream trends underscores my forward-thinking approach.

2024-11-28 23:08