Crypto Client Conversations: A Guide

Cryptocurrency has transitioned from a fringe topic to a significant asset class, highlighted by the rapid approval of crypto futures exchange-traded funds (ETFs) followed by spot bitcoin and ether ETFs in the early part of this decade. As a financial advisor, you’re now likely facing client inquiries about these and other digital assets. Remaining a trusted resource means addressing this major financial development. Ignoring it is becoming increasingly difficult.

Christina Lynn, a behavioral finance expert and certified financial planner at Mariner Wealth Advisors, told Investopedia that “The SEC’s (Securities and Exchange Commission) green light on bitcoin and ether ETFs is a game-changer in the regulatory sphere.” Lynn’s 2024 article in the Journal of Financial Planning (JFP) gained attention for underscoring the necessity for advisors to engage with clients on the topic of crypto.

Her article focused on financial advisors who remain hesitant to discuss cryptocurrencies. A Cerulli Associates study from July 2024 showed that only 13.7% of financial advisors actively engage in crypto discussions or advice with their clients, and only 2.6% provide specific recommendations. While over a quarter anticipate offering guidance on cryptocurrency investments in the future, more than half have no plans to do so.

Due to this lack of advisor engagement, many investors are navigating the crypto landscape independently. BlackRock reports that roughly 80% of inflows into crypto ETFs have come from individual investors using online brokerage platforms.

To help shift these trends, we’ve gathered key insights from experts to present ten essential tips for financial advisors and planners regarding crypto investments. By embracing this topic, you showcase your adaptability and ensure clients receive reliable advice from you – their trusted advisor – rather than potentially unreliable information found elsewhere.

1. Start With a Behavioral Finance Assessment

Lynn’s JFP article is notable for suggesting that advisors and planners should conduct a behavior-finance-type self-assessment to identify personal biases against crypto, similar to how they assess client biases. She wrote that self-assessment tools could help financial professionals recognize their preconceptions by answering a series of questions or considering scenarios that reveal common financial biases like loss aversion, overconfidence, or status quo bias.

Working With Crypto Clients

“I emphasized a behavioral approach because financial advisors, like their clients, are prone to biases and flawed reasoning,” Lynn explained to Investopedia. “Advisors are typically trained to dismiss potentially risky investments that promise significant returns, as they often prove unrealistic and dangerous for client funds.”

When considering providing advice regarding cryptocurrency investments, Lynn’s research demonstrates that applying behavioral finance principles can be very helpful for both clients and advisors navigating the crypto space. For example, many investors overestimate their ability to predict market fluctuations, particularly in crypto. She suggests considering the four most relevant cognitive biases for clients considering crypto:

• Anchoring: Clients may fixate on past price points or performance metrics. Encourage them to focus on current market dynamics and future possibilities rather than past highs or lows.
• Herd mentality: The fear of missing out (FOMO) can lead crypto investors to make rash decisions.
• Loss aversion: Clients may experience the pain of losses more intensely than the satisfaction of equivalent gains, possibly leading to panic selling during market dips.
• Mental accounting: Clients might compartmentalize their crypto holdings irrationally, overlooking their overall risk tolerance and financial goals. Advisors should encourage a complete view of the entire investment portfolio.

Lynn notes that the “overly risky portfolios” frequently seen among crypto enthusiasts “are willingly accepted by investors because they don’t seem to apply conventional investment principles to crypto assets.”

Potential Advisor Biases

Lynn’s application of these concepts to advisors themselves has garnered attention, especially given the recent arrival of spot crypto ETFs. Acknowledging that all decision-makers, including financial professionals, are subject to biases that can affect their judgment is important.

For instance, Lynn suggests a status quo bias may be at play, with some advisors resisting crypto because they are comfortable with established habits and traditional assets. While advisors generally perceive a bias toward new financial products – thinking what’s new is inherently better – resisting crypto altogether may not be beneficial.

Lynn also argues that many advisors and planners don’t believe the time investment is worthwhile, given the relatively small portion of a client’s portfolio crypto would represent – a case of “the juice not being worth the squeeze.” She paraphrases the mindset in the JFP, writing that “Such a small portfolio allocation (e.g., 1% to 3%) may not seem to justify the 12 or more hours of study required to gain a baseline understanding.”

The SEC’s approvals of crypto ETFs from 2021 through 2024 “lends legitimacy to the asset class and provides clients with a more straightforward, regulated investment vehicle,” Lynn notes. However, “advisor adoption remains relatively slow.” Nevertheless, she anticipates change. “While these obstacles persist… more advisors are exploring and incorporating cryptocurrencies into portfolios,” she stated.

2. Acknowledge Your Concerns

There are valid reasons to be cautious about crypto investments. The large sums involved and increased media attention have attracted unscrupulous individuals looking for quick profits. In 2022, the SEC increased the size of its crypto-enforcement unit, and starting in 2023, it increased its charges against crypto operators by over a third.

From 2021 to 2023, crypto criminals defrauded or outright stole more than $20 billion from investors. A Chainanalysis study found that crypto scams and thefts decreased by about 30% in 2023 compared to 2022, but this occurred after massive sell-offs. Chainanalysis’s 2024 report explains that this decrease “aligns with the long-standing trend that scamming is most successful when markets are up, exuberance is high, and people feel like they are missing out on an opportunity to get rich quickly.”

Therefore, there are reasons to be concerned about a potential surge in scams as crypto prices have significantly increased since the end of 2023. SEC Chair Gary Gensler stated in 2024 that “the whole field is rife with abuses and fraud.”

Despite these concerns, Lynn argues that there is genuine value within these spaces. “Crypto is different,” she said. “It represents the most significant technological and economic shift since the internet.”

Tyrone Ross, a startup advisor, cofounder of Turnqey Labs, and Principal of 401 Financial, told Investopedia that warnings from the SEC and other regulators are likely to make financial advisors even more cautious about getting involved in this up-and-coming asset class.” But Ross believes ignoring the potential of crypto assets would be a mistake. “Overall, the infrastructure now is a lot better than it was in 2017 [when he formed his own practice]—the derivatives market has been built out, and there’s a lot more liquidity in the system.” The returns are starting to speak for themselves. “It’s hard to ignore the characteristics of Bitcoin and what it may mean for a portfolio,” he said.

Advisors don’t need to agree with Lynn or Ross about crypto’s potential, but they should acknowledge that clients are increasingly interested in crypto-related investments. Recent bitcoin and ether ETF approvals mean it’s essential for advisors to become knowledgeable in this area to guide their clients. As Lynn stated in her article, advisors need to be “our clients go-to person for crypto, just as we are for the other areas of personal finance,” otherwise clients will look for advice elsewhere.

3. Educate Your Clients

Next, ensure that you help educate clients who are asking about crypto. To ensure you’re fully knowledgeable, you can pursue relevant certifications or take courses specifically designed for financial advisors, such as the certified digital asset advisor designation or certificates from the Digital Assets Council of Financial Professionals. Once you’re ready, you can begin by explaining the risks and prospects of crypto assets.

Crypto Assets

Many financial advisory firms, like Strategic Financial Planning in Plano, Texas, have a cautious approach towards direct cryptocurrency holdings. David Tenerelli, a certified financial planner at the firm, explains his firm’s position: “While we aren’t dismissive of bitcoin and other cryptocurrencies, we’ve decided…that we won’t facilitate any direct digital asset holdings in client portfolios (either in crypto wallets or via bitcoin ETFs).” This is a common stance among many financial planners and advisors we’ve spoken with.

A cautious approach doesn’t mean neglecting to educate clients on crypto, particularly regarding the risks and volatility involved. When discussing crypto investing with clients, it can be useful to divide it into two broad categories. The first category includes assets on unregulated exchanges—the cryptocurrencies and other digital investments clients own directly. Clients can buy and hold digital assets like bitcoin and ether, which gives them full control over their crypto but requires understanding digital wallets and security measures. The table below shows various blockchain-based assets, each with a specific purpose.

Bitcoin, the first and best-known cryptocurrency, was introduced in 2009. Since then, the market has expanded with thousands of alternative coins, each offering new features and potential applications. There are several main types of crypto holdings:

• Payment cryptocurrencies are primarily designed to serve as a medium of exchange, offering a decentralized alternative to traditional fiat currencies.
• Platform crypto can be used for payments, but their creators say they are built to support decentralized applications and smart contracts. These digital assets allow developers to create and deploy applications on their blockchain networks.
• Stablecoins are designed to maintain a stable value, usually pegged to the U.S. dollar. They serve as a relatively secure place to store crypto funds during high market volatility and facilitate transactions between crypto exchanges and regular currencies.
• Utility tokens are units of value functioning only within a specific network, like tokens earned and used within a video game.
• NFTs are unique digital assets representing ownership of items or content, such as digital art, music, videos, or virtual real estate.

Distinguish for your client, as we do here, between the “exchanges” or crypto platforms where the currencies are traded and the regulated exchanges overseen by the SEC, Financial Industry Regulatory Authority (FINRA), Commodities Futures Trading Commission, and stock market authorities.

Below are the top 10 cryptocurrencies in mid-2024, measured by market share:

Exchange-Traded and Other Crypto-Related Assets in Regulated Spaces

For investors who want exposure to the cryptocurrency market through regulated exchanges—those overseen by the CFTC for crypto-related futures and the SEC for options and exchange-traded funds holding crypto products—these options exist:

Crypto ETFs have become a popular choice for many seeking crypto exposure, providing simplicity and integration with traditional brokerage accounts. They come in two primary forms: spot ETFs, which directly hold cryptocurrencies, and futures ETFs, which use futures contracts to track crypto prices. Spot bitcoin and ether ETFs, approved in 2024, provide direct exposure, while futures ETFs offer an alternative approach to exposure through standardized agreements.

“The ETF structure increases ease of access to Bitcoin and helps investors or speculators avoid some of the risks of direct, self-custodied, wallet-based crypto holdings,” Tenerelli explained.

Crypto-related stocks provide another option for investing in crypto through shares traded on regulated exchanges. Choices include cryptocurrency mining and mining hardware makers, companies like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL) that support cryptocurrency, and companies like MicroStrategy Inc. (MSTR) that hold a substantial amount of cryptocurrency on their balance sheets.

4. Find Your Own Balanced Approach

Financial advisors face the challenge of reconciling client interest in cryptocurrencies with their responsibility to offer responsible investment guidance. Tenerelli stated that his firm is working to be a responsible steward of client assets while still addressing interest in crypto.

“While we don’t support direct crypto holdings, if a client insists on some degree of crypto exposure in their managed portfolio, we’re prepared to facilitate this by allocating a small portion to publicly traded companies with notable exposure to the cryptocurrency and blockchain industry,” he said.

This enables advisors to provide clients with crypto market exposure through regulated, more recognizable investments, avoiding the murkier territory of advising on direct cryptocurrency purchases. By concentrating on publicly traded companies in the crypto and blockchain industry, advisors can reach a compromise that aligns with client interest and fits with the approach of institutional funds and others investing in the crypto space.

5. Emphasize Risk Management

Tenerelli said he’s “open to influence as cryptocurrencies and blockchain continue to evolve and mature,” however, his firm’s fiduciary and compliance-related duties make it difficult to justify direct crypto holdings. He noted that traditional financial risk and returns metrics don’t produce positive results for crypto holdings, considering their history of extreme volatility and fraud. Other financial advisors have compared crypto investing to the worst forms of gambling.

Tenerelli