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Published: May 18, 2021 9 min read

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A robot hand is presenting an investor with crypto coin.
Kiersten Essenpreis for Money

Robo-advisors have been suffering from Bitcoin FOMO. Now some of these automated financial and investing platforms are dipping their toes into volatile cryptocurrencies — and trying to square the speculative investments' notorious volatility with robos' stated goals of helping young people invest for the long term.

Robo-advisors came on the scene a decade ago as Wall Street recovered from the 2007-08 financial crisis. Driven by algorithms, they ask investors to share information about their financial situation, goals and risk tolerance and use it to recommend a diversified mix of stocks and bonds. Today, Robo-advisors manage hundreds of billions of dollars, and have transformed investing for a new generation, making them one of the hottest innovations in the investing world — until cryptocurrency came along.

Buzz around Bitcoin, Dogecoin and others has recently exploded, creating a dilemma for robo-advisors: Should they ignore the chorus of criticism and join the crypto party, or should they risk losing the relevance that attracted new investors?

It’s akin to the fear of sitting on the sidelines while friends win big with crypto that millions of everyday investors face too, but now taken on by Wall Street and Silicon Valley executives.

Robo-advisors consider taking the crypto plunge

San Francisco-based SoFi is a personal finance company that offers a robo-advisor service, in addition to products like loans and insurance. The company's website says its goal is to "help people get their money right." Its philosophy emphasizes goals like paying down debt and having a financial safety net.

Still when it comes to cryptocurrency, the company has a hands-off attitude: It has been allowing customers to trade Bitcoin, Ethereum and Litecoin since 2019. "Cryptocurrency is not for everyone but without the choice, investors would not be able to make that decision themselves," says Brian Walsh, a certified financial planner at SoFi.

SoFi also says that cryptocurrency is not included in its "automated investing" portfolios — its robo-advisor-like product — which are made up of stock and bond ETFs. Instead, the digital coins are offered through its "active" investing service, a Robinhood-like brokerage. Nonetheless, the services are marketed side-by-side and both accessed through the same mobile app. SoFi says its individual customers may have money in both automated and active accounts, allowing them to take a cautious, passive approach with part of their savings, and make more aggressive bets with money they may be willing to lose.

More established robo-advisors are also jumping on the bandwagon. Wealthfront, one of the largest robo-advisors, recently announced that it’s exploring options to allow its customers to add crypto to their portfolios. Cryptocurrency has been a consistent request from Wealthfront customers for a few years now, Kate Wauck, the company's vice president of communications tells Money.

“Rather than deterring people from trying their hand at these things, we felt it was a much better approach to embrace it,” Wauck says.

The company is currently in talks with potential partners, and exploring offering Bitcoin and Ethereum on its platform with some sort of cap to limit how much customers can invest. When added, crypto would be part of Wealthfront's new custom portfolio feature, meaning that customers will be able to add it to their classic portfolios that the robo builds for them — or build their own portfolio with crypto included — but it won't automatically be included in a classic portfolio when new users sign up with Wealthfront.

Betterment, another of the major players in the robo space, is also considering getting into the crypto game. The company is "researching options to potentially add cryptocurrency to Betterment's offerings," although it has no immediate plans, Betterment told Money in a written statement. If the company did offer crypto, it would be in a way where investors could opt in for it to be treated as a small part of the overall portfolio.

And while M1 Finance isn’t currently working on a cryptocurrency offering, its founder and CEO Brian Barnes says it’s probably a question of when — not if — the platform will add crypto.

Are robos making a mistake?

For an industry that has long pitched itself as a way for young people with little knowledge of the financial markets to get comfortable investing, allowing users to buy crypto carries risks.

“A lot of these robos advisors cater to investors who are just starting out,” says Amy Arnott, a portfolio strategist for Morningstar. “Cryptocurrency isn’t necessarily the first asset you should be adding to your portfolio.”

Whether or not robos can do this responsibly depends on how offerings are implemented, she adds. For example, having a cap on the amount of crypto included in a portfolio could help (for most investors, only 2% to 3% makes sense, Arnott says). Another way to ensure responsible investing could be to have users apply to trade crypto by answering questions about their risk tolerance and time horizon, as many brokerage accounts make options traders do, she adds.

Cryptocurrency still has an uncertain future. That’s not only because of the speculation and extreme volatility (Bitcoin’s price hit a record high in December of 2017 before plunging 50% the first month of 2018), but also because it’s not regulated. You can’t even invest in a cryptocurrency ETF in the U.S. yet. Recently, Gary Gensler, chairman of the Securities and Exchange Commission, said that the crypto market needs more investor protections. Treasury Secretary Janet Yellen has also raised concerns over cryptocurrency’s extreme volatility, saying that investors should beware.

Trading in an unregulated, decentralized market poses liquidity and pricing risks, Roger Aliaga-Díaz, Vanguard’s chief economist for the Americas, pointed out in a March post for the investing giant that has a robo-advisor platform. It could become hard or impossible to sell cryptocurrencies at a reasonable price, and there is no one pricing mechanism that reflects the coins’ values, he said. (Vanguard declined to say whether it would consider offering cryptocurrencies to customers and instead pointed Money to Aliaga-Díaz's blog post on the risks surrounding the new asset.)

The lines are being blurred

While robo-advisors are toeing the line between responsible investing advice and remaining relevant to users, cryptocurrency firms are moving in on their customers.

“We’re kind of seeing a blurring of the lines between robo-advisors, crypto platforms, exchanges and apps,” Arnott says. “I think we’ll see more robo-advisors offering cryptocurrencies but there are also crypto firms who are trying to move into robo-advising.”

A company called Makara, for example, opened up its pre-launch waitlist at the end of March and is calling itself a “crypto robo-advisor.” The service isn’t necessarily for investors who want to invest their entire life savings in crypto, but it aims to simplify cryptocurrency investing and give investors index-like exposure to baskets of cryptocurrencies, according to a company spokeswoman.

And all of these services are competing with no-fee trading apps like Robinhood, a favorite among young traders that allows users to trade cryptocurrencies like Dogecoin.

So while robo customers who are suffering from crypto FOMO may rejoice, remember that even if you're suddenly given the option to add bitcoin to your carefully diversified portfolio doesn't mean you should. If the critics are right and the crypto bubble bursts — or becomes highly regulated, or obsolete — your hard-earned savings are at risk.

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