Like them or hate them, cryptocurrencies are here to stay. So, it makes sense to educate your clients about Bitcoin and other CryptoCurrencies. The reason is CryptoCurrencies are much more than simply their underlying price movement. More importantly, it is the underlying technology called blockchain, that will provide the foundation for digital assets to be part of the future.
A blockchain is a digital ledger. Simply put, blockchain allows for a number of different possibilities including tokenization of assets, immutable audit trails and more.In addition, to potentially providing investment diversification, discussing the underlying technology is vital to providing a holistic approach when introducing your clients to Bitcoin and the CryptoCurrency universe.
This is probably the most common question clients ask when their investment advisor starts the conversation about Bitcoin and Cryptocurrencies. As the world moves to more online transactions, Cryptocurrencies can be considered the “Currency of the Internet” using peer-to-peer transactions. This means, just like real money, individuals can exchange Bitcoin to buy stuff. They can send Bitcoins and other Cryptocurrencies to family and friends without going through a bank as the intermediary. They are a decentralized currency. It’s as simple as sending an email. To send a Bitcoin to another person all you would is need is their digital wallet address.
Digital transactions using Cryptocurrencies are relatively fast. You’ll receive initial confirmation of the transaction within seconds and final settlement will occur soon after.The transaction is immutable. This means once the transaction is confirmed it can’t be taken back. Unlike using a credit card to make a purchase. If you don’t like the product and would like a refund, you can dispute the transaction with the credit card company.
A Cryptocurrency transaction doesn’t have an intermediary, such as a credit card company, so all transactions are immutable.Also, with Cryptocurrencies, there is no worry about changing exchange rate or potentially large wire fees as with traditional transactions. Usually it is only a few pennies in fees when you use a Cryptocurrency for a transaction.
Bitcoin and cryptocurrencies are a volatile asset class. They aren’t right for every client, however, for those looking for potentially uncorrelated alpha and diversification into alternative investments, this may be the solution. As with other suitable alternative asset classes, consider adding a small portion of your clients assets into this improved technology.
Like all investment classes, Cryptocurrencies offer inherent risk. Here is a brief overview of risks associated with this alternative investment class:
Business Risk: Just like investing into an individual company, individual Cryptocurrencies offer business risk. Loss of confidence in the development team of the underlying currency may bring a decline in the underlying price.
Cyber/Theft Risk: Cryptocurrencies are a digital asset that carries the risk of cyber threat and loss. Online criminals can hack digital exchanges and steal currencies or malware on an individual’s computer and can drain a digital wallet. Or, if an individual holds their Cryptocurrencies in a digital wallet and does not have a backup of the wallet, they can lose all of their digital currencies if their computer or phone crashes.
Market Risk: Markets are volatile. As with other liquid investment assets, (stocks, bonds, physical currencies, etc.), cryptocurrencies experience volatility. Extreme price movement can be a daily occurrence based upon liquidity and other factors of an underlying digital currency.
Regulatory/Compliance Risk: Some countries may prevent investment into and the trading of Cryptocurrencies within their borders. Or, may have laws on the books stating Cryptocurrency transactions violate anti-money laundering regulations. Contact your compliance department if you have any questions regarding AML and know your client requirements.
Unlike a few years ago, owning Bitcoin and other Cryptocurrencies is much simpler today. Here is a brief walk-through for taking the first steps to owning a digital currency. There are two ways your clients can get started with Bitcoin. The first is to open the account with your firm. The second is to have your clients get a Bitcoin wallet.
Open an Account with Your Firm:
- Open an account that can hold your Bitcoin
- Deposit the funds in the account
- Make the purchase of the Bitcoin
- Use AmiPRO’s platform to obtain complete one-stop reporting for all of your clients’ digital asset holdings
Have Your Clients Get a Bitcoin or Digital Wallet:
- Have your clients download a Bitcoin wallet
- Open an account on a Bitcoin exchange
- Deposit money into the exchange account and make the purchase
- Once purchased from the exchange, transfer the bitcoin into your clients account at your firm
- AmiPRO will provide complete one-stop reporting for all of your client digital asset holdings.
While the concept of Bitcoin may be new to many clients, many may already be using the underlying blockchain technology in their everyday lives without even knowing it.Industries including financial services, healthcare, media, logistics, manufacturing and many others are using blockchain to power their companies.
Did you know?
- The financial services industry is adopting blockchain to speed transaction time, reduce costs and combat money laundering.
- The media industry is using the immutability of blockchain technology to protect copyrights and track intellectual property rights.
- The manufacturing industry is using blockchain to combat counterfeit products, while the logistics industry is using this technology to increase transparency in the supply chain.
- Since blockchain technology is already in everyday use, it makes sense to help clients understand the benefits of adding Cryptocurrencies to their portfolio.
At the time of this writing, most developed countries including Canada, U. S., Japan, and others have stated Bitcoin and other Cryptocurrencies are legal. Other countries including China and India offer more strict regulations.
Here is the wrong way to sell this emerging asset class:
- The market is going higher!
- Bitcoin was $.50 CAD several years ago and it’s over $10,000 CAD today. The track record is terrific!
- Bitcoin is new way to make money!
Here is the right way to present this emerging asset class:
- Share real world usage of blockchain with your clients. Bitcoin and other Cryptocurrencies may be an ideal way to take advantage of this emerging technology. While no investment is perfect, the imperfections of Bitcoin may be something your clients may be comfortable with.
- Share the experience of the development team behind the cryptocurrency your client is considering investing into. Share the speed of the blockchain. Tell them about how the daily transactions of the blockchain are increasing or decreasing.
At the time of this writing there are over 5,000 different cryptocurrencies to research. With so many choices, here is a brief overview to consider when starting your research.
Experience of the Management Team
- The experience and expertise of the management is vital to success in a company or cryptocurrency. One of the best ways to learn about the experience of the development team is to visit their website and read the white paper. This will provide a comprehensive overview of the development, technology of the underlying cryptocurrency project.
Consider the Number of Transactions on the Underlying Blockchain
Are the number of daily transactions increasing or decreasing? What is the transaction time? Examining the blockchain will provide insight if the project is gain traction and acceptance in the marketing and achieving purpose of the cryptocurrency
Total and Circulating Supply
Total supply is the maximum number of coins or tokens for a project. Circulating is the current number on the market. In the crypto world most of the coins initially held by the founding members. That is why there is a difference between the two numbers.
High involvement by the development team is a sign of a strong project. Continual updates on social media, Ask Me Anything sessions. all point to a strong product. To learn more, visit the project on GitHub.
Strong projects usually also have a very active community on Reddit, Twitter, etc. Spend some time on the community pages of the projects you are researching.
Strong projects are usually listed across a number of different crypto exchanges. This provides liquidity to the project. Check with the most popular crypto exchanges to see if the project you are interested in is available on the exchange.
Since the outbreak of Covid-19, many brick-and-mortar stores have been closed or experienced limited hours, online transactions have increased dramatically. While Covid-19 has adversely impacted countless individuals and businesses, it may have also inadvertently increased interest in the use of “touch-less” money. Many more individuals and businesses. have turned to making more and more purchases online. This may be the perfect time to start a conversation with your clients about Bitcoin and other Cryptocurrencies.
AmiPRO “de-risks” the process of investing with Digital Assets. AmiPRO provides end-to-end reporting for you and your clients’ use. These customized reports help to track your clients Cryptocurrency positions seamlessly and provide in-depth and easy to understand reports for you and your client.
Clients want to know their wealth manager fully understands their individual investment needs and strategies. They want to know their wealth manager is moving them toward a comprehensive and healthy financial lifestyle. In other words, taking a holistic approach to your clients overall financial needs and requirements keeps you one step ahead of the curve.
It also helps you to build long-lasting trust and deep multi-generational relationships with your clients and their heirs. Starting the conversation about digital assets provides an opportunity for you to choose how, when and which digital assets to discuss. Following this bottom-up approach enables you to build your practice on a holistic-approach and not simply assets under management.
Diversification is one reason to consider when adding digital assets to your client’s portfolio. However, it is not the sole reason. Here are three additional reasons why investors should consider allocating a portion of their portfolio into digital assets:
Adding asset classes that are decoupled from other classes may reduce the overall risk of the underlying portfolio, while potentially adding to overall return. To date, it appears Bitcoin is an uncorrelated asset that is similar to gold.
Bitcoin is a Deflationary Asset
Unlike a government, that can print a seamlessly endless supply of money, Bitcoin only has 21 million coins when fully mined. This provides the potential for increasing demand on fewer supplies.
Bitcoin is a Systematic Hedge
Think Greece. Lack of liquidity has wrecked countless economies over the centuries. Greece, the 2008 banking crisis, the Great Depression, etc. individuals and entire economies experienced lack of liquidity. Bitcoin, being decentralized, may be appropriate for those looking for a systematic hedge.
Similar to the valuation of a company and other currencies, there are several underlying factors that determine its value. Here is a general overview of how a digital currency has value.
Useful Function (Utility)
How does the digital asset allow the public to utilize the unique features of the project? This simply means the underlying blockchain should be working and its features be able to perform the stated purpose of the project. In other words, what is the utility of the digital asset. You can learn about the utility of specific digital assets by read the project’s white-paper. This is usually available on the project’s website.
While the future of individual Cryptocurrencies are uncertain, one area that is immutable is the adoption of the underlying blockchain technology across numerous industries. When researching specific digital assets, market adoption and usage are important factors to consider.