Investing in crypto-platforms is like ‘selling blue jeans’ in the Gold Rush, Digital Assets Council founder explains

Ric Edelman, The Digital Assets Council of Financial Professionals Founder, sits down with Yahoo Finance Live to talk about adding cryptocurrencies in moderation to investment portfolios, crypto regulations, ETFs, and advisors becoming crypto literate.

Video Transcript

Well, roughly 20% of Americans say they have invested in, traded, or used cryptocurrency, at least that’s according to Pew Research. But our next guest says 1/3 of all adults in the US will own crypto by the end of the year. And it’s time for financial advisors to catch up. Let’s bring in Ric Edelman, The Digital Assets Council Financial Professionals founder. We’ve also got Yahoo Finance’s David Hollerith joining in on the conversation. Ric, I feel like the last time we talked, you were talking about the fact that financial advisors, whether it was a 1% exposure or 2% exposure, needed to start including crypto in some form in the broader portfolio. How do you view that mix right now?

RIC EDELMAN: Yeah. My attitude remains unchanged. There is no question that this is a new asset class, the first new asset class since the discovery of oil about 150 years ago. So we need to recognize that this new asset class is additive to a portfolio. It assists in diversification. It improves returns and lowers risk.

And so there’s no reason not to include this. But because it’s still so new and developing and emerging with a lot of uncertainty around the world, in terms of government reaction, et cetera, let’s not get carried away. So 1% allocation, 2% or so, that’s plenty. You don’t need to do 10%, 20%, 50% of your portfolio. Have some exposure. Get off zero. That’s the main message.

DAVID HOLLERITH: And Ric, David here. I’ve spoken to a number of financial advisors. And they’ve sort of expressed a desire to wait until the approval of a spot ETF-type product. But you’ve also pointed out that it’s a lot easier than it used to be for people who are financial advisors who are interested in allocating to cryptocurrency. Now, why is that? Why has that changed?

RIC EDELMAN: It’s really very foolish to wait for the Bitcoin ETF. Most advisors are in agreement that there will be a Bitcoin ETF and that the price will rise when that happens. But why wait? If you think there’s going to be an ETF and that the price will rise with it, that means you should be investing now before that happens. And the good news is, as you noted, today, there are so many different ways you can invest in crypto that didn’t exist even as recently as two or three years ago. You can invest, as you note here, the ProShares Bitcoin strategy ETF, which is a Bitcoin futures ETF.

There’s five of those products now available. You can invest in publicly traded stocks like Riot Blockchain and Marathon Digital, which is publicly traded Bitcoin miners. You can invest in Coinbase, which is a publicly traded Bitcoin and crypto exchange. There are proxy stocks like MicroStrategy, which owns $7 billion worth of Bitcoin. And its stock price tracks the price of Bitcoin.

There are OTC securities from Grayscale, OSPRay, and Bitwise that allow you to invest in funds that trade over the counter that invest directly in Bitcoin, Ethereum, or certain other securities. There are a wide variety of ETFs, dozens of them now, that invest in what we call the picks and shovels approach. In other words, not buying crypto, it’s investing in the companies that are supporting and developing the crypto technology.

Think back to the California Gold Rush and Levi Strauss. He didn’t try to mine gold. He just sold blue jeans to gold miners. So that’s what these picks and shovels ETFs do. There are so many different ways that you can invest today that there’s absolutely no reason for an advisor to say, sorry, I can’t help you or, gee, I need to wait for an ETF. That is simply outdated, incorrect thinking.

BRIAN CHEUNG: Ric, Brian Cheung here. How about the regulatory angle to all of this because, yes, even though there might not be a bad reason to invest off of that thissis. I mean, there is some uncertainty over how the SEC might approach cryptocurrency regulation down the line as they continue to work on that. And then there’s also just the rules that we have right now around registered investment advisors and the fiduciary rule regarding making sure that you’re perfectly aligned with the risk tolerance of your clients. How do you balance those things in an uncertain regulatory environment?

RIC EDELMAN: Yeah. I share that concern, Brian. And that’s why just 1% or 2%. The point is we don’t need to be pristine and saying, this is absolutely going to fail, therefore do zero. 1% allocation can give you the exposure needed. If this does well, you’ll participate. But if it does blow up for whatever reasons may yet occur, you’re not going to hurt yourself. You’re not going to prevent your financial security from happening because you had 1% of your portfolio in digital assets.

More importantly, we have to recognize what is going on in the regulatory landscape. The SEC, the IRS, FINRA, CFTC, FinCEN, Treasury, Congress, everybody everywhere in the regulatory and environmentals are all saying, we’re embracing this. It’s not a question of will we allow it or will we ban it. It’s now a question of how. It’s kind of like cigarettes, and alcohol, and airplanes. We’re going to allow them. We’re just going to make sure that it’s operating safely so that we’re not putting consumers in a position of being hurt through scams and all the other kind of problems that we’ve seen in any emerging environment in its early days.

So those who are saying it’s too early, they’re thinking is frozen in 2013. That is not the case today. When you’ve got members of Congress who are buying crypto, when you’ve got hearings on Capitol Hill which is trying to figure out how to move forward, when you have mayors at major cities in the country taking their paycheck in Bitcoin, this isn’t going to be regulated away. This is going to see setting up guardrails to protect us. That’s all.

BRIAN CHEUNG: As a follow, I guess there is kind of the question about who should be initiating that conversation, right, because, again, there are guardrails around when an investment advisor can recommend something versus a client saying, I would like to get involved into something that’s risky. So how much initiative does the financial planner actually have in a situation to say, you know, hey, I took a look at this asset. It’s crypto. But you might like it. Versus you can’t do that because of the fiduciary rule and maybe not being aligned with your client’s interests.

RIC EDELMAN: It’s actually being shifted now, Brian, which is fascinating. Five years ago, the question was, why are you recommending crypto? Now it’s the question is, why aren’t you recommending it? In fact, some compliance attorneys that I’ve been talking to have been acknowledging a very different change of attitude at the SEC and with other regulators saying, why are you not doing this for your client? You’ve got to give us a legitimate reason. Not just, oh, it’s a Beanie Baby or a tulip bulb or who’s some kind of scam or fraud.

That argument worked 5 years ago, 10 years ago. It’s not really legitimate today. If you’re going to serve your fiduciary obligations, serving your client’s best interest, you need to have a legitimate reason for not recommending this asset class. Merely because, oh, I don’t believe it. I don’t trust it. It’s premature. Or I don’t understand it. That isnt fulfillment of your fiduciary obligations. The challenge for advisors today is to get the knowledge they need so they can make an informed decision on benefiting their clients. That’s why we created our certificate in blockchain and digital assets here at DACFP to teach advisors what they need to know so that they can serve their clients best interests, whether that means buy or not buy.

One final thing to keep in mind, Brian. In a recent survey by Bitwise, 2/3 of financial advisors said my client is buying crypto. But they’re not doing it through the advisor. And what that means they are running into problems. They could be getting scammed because they don’t have the advice, the counsel, the hand-holding of their advisor. They could be buying too much or buying it from the wrong places too expensively. Getting engaged as an advisor with the client, that is how you fulfill your fiduciary obligations.

BRIAN CHEUNG: And Ric, in that same Bitwise survey, it looked like financial advisors were, maybe 15% of them, were actually allocating client portfolios to crypto now. What do you expect that number to be maybe, say, in a year from now?

RIC EDELMAN: It’ll double. According to that same survey, roughly as you said, about 14% are owning crypto, recommending it, but there are another 15%, 16% plan to do so this year. But there was a more troubling number in that data. About half of the financial advisors surveyed said they personally are investing in Bitcoin and other digital assets. Half of them. But only 14% are recommending it to clients. To me, that is a major fiduciary violation.

I think it’s a good enough investment for me to own it personally. But I’m not going to talk to you about it or recommend for you. How does an advisor justify that behavior? And how are they going to defend themselves to a client who asks them, do you own this? When did you buy it? And why didn’t you talk to me about it? Those are significant fiduciary questions that advisors are going to have to answer.

BRIAN CHEUNG: Yeah. Certainly, very important questions indeed. Ric Edelman for a fantastic conversation from The Digital Assets Council of Financial Professionals founder, and also Yahoo Finance’s David Hollerith. Thanks so much, guys.

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