Does Your Financial Advisor Speak Crypto?

It’s almost impossible to avoid frequent headlines declaring that Bitcoin or some other new cryptocurrency is the gold standard of the new world of digital assets. Nobody wants to miss out on a gold rush, but Bitcoin isn’t gold, and neither are its rivals. However, just as with gold mining, crypto mining involves expending energy to acquire something that, depending on the coin’s inflation schedule, may have finite availability.

In early 2024, there were more than 9,000 active cryptocurrencies. What may be surprising is that in a 2022 study by Investopedia regarding financial literacy, 49% of adults, when asked how well they understood crypto, said they were “beginners.”

Where does this leave the individual who believes in the future of these crypto assets but can’t figure out how to invest in them? A modern financial advisor who is well-versed in crypto can help you make sense of this relatively new landscape.

Is Crypto Investing or Gambling?

There is no consensus (pun intended) on whether crypto is gambling or investing. It seems it can fill both roles, depending on who is buying it, how informed they are, and their strategy behind the purchase. Financial advisors are more likely to tell you it resembles gambling, but investors who have experienced growth using crypto might claim differently.

However, even among investment advisors who like alternative assets that tend to move independently of the S&P 500 Index, you’ll be hard-pressed to find many willing to suggest putting a chunk of your portfolio into any of the cryptocurrencies. Most wealth managers are steering clients clear of crypto for two reasons, listed below.

Your Advisor Is Skeptical

Some advisors might not view cryptocurrency as an asset, something most of their clients should stay away from unless they have money that they can afford to lose—and don't mind losing.

Cryptocurrencies may be thrilling to watch, but an advisor could put their client in a bad position by recommending placing money in a new financial product without any real understanding of how it works—this really is gambling.

Your Advisor Is Trying to Protect You

Although an advisor may be deeply knowledgeable about crypto, the advisor may not provide any recommendations on whether to buy or sell any digital currency. The advisor is not alone in this way of thinking. The reason is that an advisor’s job is not to sell transactions but rather to manage their clients’ money and expectations.

Wanting to protect advisory clients, sometimes from themselves, the advisor screens out the noise in the market and steers them away from the many cryptocurrency scams that have cropped up. To put that in perspective, crypto scammers stole some $10 billion in 2021 and $5.9 billion in 2022. Crypto scams and crime are dropping, but millions of dollars in cryptocurrency are still being stolen.

Advisors Are Hesitant to Recommend Crypto

Many clients ask how they can invest in crypto because they’ve heard how much money they could make. The problem with this thinking is that cryptocurrencies are so volatile that investing in them while the volatility continues is essentially gambling. 

A better way to think about cryptocurrencies is to focus on the technology behind them: the blockchain. The blockchain is more or less a distributed ledger. Bitcoin is the most well-known cryptocurrency because it was the first viable one and has the highest market cap.

Blockchain technology was originally developed with payment processing in mind, but in reality, there are a lot of truly solid potential uses for it. Some possibilities include digital identity, data tokenization, data management, and secure audit trails.

CFP Board Cautious About Crypto Assets

As of December 2022, advisors are free to talk to their clients about cryptocurrencies. However, the influential Certified Financial Planner (CFP) Board of Standards urged any CFPs considering offering advice on cryptocurrency-related assets to do so cautiously.

In a Nov. 30, 2022 notice, which will have been closely read by CFPs and the wider financial advisor community, the entity responsible for overseeing professional standards stated that cryptocurrencies should be treated with greater scrutiny than more conventional financial assets as they “have particular attributes and present significant risks and uncertainties that warrant careful analysis.”

Among other things, the CFP Board noted that cryptocurrency-related assets are generally:

• Difficult to analyze
• Hard to value
• At risk of getting stolen and more susceptible to heavy losses
• Speculative and volatile

The CFP Board mentioned that this update had been planned for a while, and interestingly, alongside laying out the risks, it chose to remind CFP professionals that they are not required or obligated in any way to provide financial advice about cryptocurrency-related assets. It’s likely that the CFP Board is aware that an increasing number of CFPs are asked by their clients about these types of investments and wanted to remind them to be extra careful before giving in to these requests.

In the end, this notice didn’t result in any rule changes for CFPs. However, it clarified the risks of crypto assets and possibly made financial advisors even more cautious about advising clients on these types of investments.

What Your Financial Advisor Can Do

In an ideal world, you would turn to your financial advisor, ask about adding some cryptocurrencies to your portfolio, and discuss which ones and how much. In the real world, most advisors don't even recognize them as an investable asset class and don't bother researching or analyzing them. Therefore, many are not able to talk about them.

So, where can you go for real advice about investing in Bitcoin, Ethereum, or any other cryptocurrency you're considering? You can always fall back on the less-than-5% rule, a simple guideline that dictates not putting more than 5% of your portfolio into any high-risk category. Even then, at this point, you'll have to get a little creative in your quest for crypto investments if you're working with most financial advisors.

Different Ways to Get in This Market

However, there is more than one way to participate in cryptocurrencies, and not all of them involve buying the digital assets directly. Some knowledgeable advisors would rather take one of these indirect approaches instead of actually helping you own cryptocurrency.

Your financial advisor might go for one or more of the following alternatives:

• Bitcoin-related stocks and companies with exposure to blockchain
• Bitcoin futures ETFs
• Bitcoin Spot ETFs
• Cryptocurrency-focused hedge funds
• Crypto mining exchange-traded funds (ETFs)

Remember, like betting on a horse race, the amount of money you’re willing to risk on cryptocurrencies should be limited to the amount you can afford to lose. Of course, the high level of risk associated with crypto assets doesn’t automatically mean that they’re gambling and not an investment. There are plenty of so-called “real” assets that come with loads of risk as well.

Still, if cryptocurrencies do take their place among conventional investments, then advisors will have to catch up with those who waded into the fray long before them.

How to Buy Crypto

If you’ve spent time studying blockchain technology and want to invest in it for what it is—instead of speculating and hoping for the best—you may have to do the heavy lifting and buy the cryptocurrency yourself. To do so, you need a digital wallet to store your cryptocurrency keys securely.

To convert any cryptocurrency into cash, look for an exchange that supports trading the currency you want to purchase, such as San Francisco-based Coinbase, one of the more well-known exchanges. This digital currency exchange lets you buy and sell Bitcoin, Ethereum, and other crypto products in your local currency.

Does Your Advisor Understand Crypto Exchanges? 

Not all digital exchanges support all cryptocurrencies and/or all fiat currencies (the technical term for dollars, euros, yen, and other government-issued currencies). Start with well-known names such as Coinbase, Kraken, or Gemini, and do your homework before investing any cash. However, even the best crypto exchanges are not entirely without a blemish. Examine each exchange’s history of freezing and closing accounts, outages, and close ties with some traditional banking establishments. Most importantly, look for an exchange that offers insurance coverage for any losses that are its fault.

To buy or sell cryptocurrencies, you only need to log into your account on the selected exchange, either in its mobile app or on its website. For maximum security, you may want to set up your own cryptocurrency wallet to hold the currency rather than use one provided through the site. Before starting, you’ll want to learn the safest ways to store your bitcoin and other cryptocurrencies.

The Bottom Line

The rhetoric in this article will likely be adjusted continuously as the crypto landscape is still unfolding. New coins are added daily, and the once-niche concept of blockchain is gaining real-world traction and government attention.

It is becoming ever more important for financial advisors to understand the asset class, yet many are hesitant to do so, and even more will not recommend it. This makes finding an advisor well-versed in crypto difficult, but not impossible.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.