By Cale Moodie
Cryptocurrency is one of those revolutionary tech trends — like artificial intelligence and virtual reality — that we’ve had our eyes on for the better part of the last decade. Investors know it’s a big deal; they know it’s going to change how we communicate and do business, and they know they need to keep paying attention. But for all the hype and excitement around cryptocurrencies, many retail investors still don’t know where to start when it comes to making smart investments.
Part of the reason for this is cryptocurrencies’ rapid growth. A decade ago, these coins were nothing more than a pipe dream known only by tech geeks and anarchists. No one paid them much attention until prices of Bitcoin started to rise around 2012. Today, we’re inundated with sensationalist headlines documenting both the highs and lows of Bitcoin’s accession to the mainstream.
However, these stories tell us little about the underlying blockchain technology and offer investors minimal direction on where to get started. As a result, the long-term potential of investing in cryptocurrency gets lost in the buzzwords and hyperbole.
This media aggrandizement has naturally drawn the attention of investors and governments alike. Increasingly, governments are putting infrastructure in place to better regulate the trading of coins; both China and South Korea are starting to regulate cryptocurrencies. The U.S. Securities and Exchange Commission and other regulatory agencies are also keeping a close eye on the market.
This has created a better environment for retail investors to enter the space, but before that can happen, it’s critical they truly understand the investment options available to them. Investment advisors must encourage better crypto literacy so they can break down digital currency to the average client. Otherwise, clients risk making poor investments that can compromise their portfolios.
For advisors whose clients are thirsty to enter this new crypto market, there are a few important things to stress.
Demystifying Digital Currency
First off, it’s important to differentiate between blockchain technology companies and digital currency exposure. You must determine which of these components clients truly want to add to their portfolios — because investing in each is very different. Then, it’s necessary to identify companies a client can access in the public market to provide that exposure allocation.
Finally, you must be able to debunk popular cryptocurrency myths, such as:
- Cryptocurrencies have no value: Just because a cryptocurrency isn’t backed by a traditional commodity doesn’t mean it has no value — after all, value is nothing more than what someone is willing to pay for something. Since 1971, the U.S. dollar has not been backed by gold. Gold has had value for more than 5,000 years and is easier to understand because it’s tangible, but cryptocurrencies have this same premise written into their code. If anything, their decentralized nature makes them more stable than the dollar.
- The government will shut down cryptocurrency: Opponents have been waiting for years for a government crackdown on cryptocurrencies, but I hope they’re not holding their breath. Cryptocurrencies are decentralized, so it would take a massive collusion between governments around the world to ban digital assets and shut down everything that makes them work. Instead of a futile all-out ban, governments are regulating and taxing these currencies.
- Cryptocurrencies are used by criminals: Initial headlines around Bitcoin focused on its usage on darknet marketplaces like the Silk Road. Though its origins on underground channels may have been shady, associating cryptocurrency with criminal behavior is a fallacy. The traceability alone of transactions completed on the blockchain makes it far less appealing for criminals, who perform most illegal transactions in cash.
Investing in Cryptocurrency
While firms have typically shied away from recommending cryptocurrencies as part of balanced portfolios, this likely won’t be the case for long. After all, new cryptocurrencies have unprecedented levels of governance and more stable business models than their predecessors.
Furthermore, there are companies powering the underlying infrastructure that make crypto transactions possible and are accessible by retail investors on the public markets. These companies allow average investors to diversify their portfolios by using a proxy to purchase crypto — think of buying shares in a gold company, rather than buying physical gold.
Investors dedicated to helping their clients make smart choices should take the time to explain the details of digital currency, blockchain technology, and the risks involved in holding these assets. As an advisor, you should be aware of the following:
- Know your client’s risk profile.
The crypto space is still in its infancy, and many of the products are speculative, volatile and risky. The security risks of being hacked or locking yourself out of your own account are high, not to mention the risk of buying at the wrong time. A client’s risk profile is key to understanding whether crypto is the right investment.
- Know your client’s exposure preference.
As mentioned before, cryptocurrency has different exposure vehicles. First, there are 1,384 currencies themselves, and new ones pop up every day. Then there are businesses developing blockchain technology, which is starting to be implemented in regular business outside of cryptocurrency. There are also crypto mining companies, which focus specialized hardware into generating currency. Each of these is a completely different investment with unique benefits and risks.
- Know your client’s savviness.
Cryptocurrency is a hot subject these days, and as it continues gaining mainstream attention, more people are considering it a viable investment. However, it’s a complicated market that’s still in the early stages and poised for a lot of volatile activity. Cryptocurrency can be a smart investment, but like any other investment, it requires a knowledge of the market.
Outlining the key aspects of the industry and the underlying technology and guiding clients toward the investment opportunities that fit their portfolio and goals will help them make smarter decisions. There’s money to be made in crypto — you just have to know where to find it.
Cale Moodie is CEO and director of Neptune Dash, a cryptocurrency company that constructs and operates masternodes of Dash, a digital currency built on the blockchain that’s designed to enable instant, private payments online or in-store. He’s been a follower and investor in the digital currency and blockchain space since 2013.