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Published: Jun 23, 2021 10 min read

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Portrait of Ivory Johnson, Tiffany Welka and Douglas Boneparth with different cryptocurrencies in the background
Money; From Left Courtesy of: Ivory Johnson; Tiffany Welka; Douglas Boneparth

Financial advisor Douglas Boneparth considers himself to be fairly pro-crypto. But, despite the fact that he has clients who directly hold cryptocurrencies, he can't actually recommend that they buy or sell their digital coins.

That's because cryptocurrency isn't regulated by agencies like the Securities and Exchange Commission and Financial Industry Regulatory Authority, which Boneparth and other advisors take their guidance from before bringing recommendations to clients. The most he can do is educate them on where and how they can buy it if they choose to themselves, the risks associated with incorporating crypto assets into their portfolios and how it can impact their overall financial goals.

“There is a regulatory and compliance landscape that is handcuffing the vast majority of registered investment advisors from making recommendations about the purchase or sale of crypto assets,” says Boneparth, an advisor at Bone Fide Wealth based in New York City which specializes in millennials.

But interest in cryptocurrency has boomed in the last year, with Bitcoin’s price reaching an all-time high of more than $63,000 in April of 2021 after sitting around $8,000 just a year earlier. Apps like Robinhood and Webull allow users to trade cryptocurrency at lightning speeds with no fees, and even robo-advisors, which have long touted the goal of helping young people with long-term investing, are dipping their toes into crypto.

So it makes sense that financial advisors are getting inundated with questions from clients about whether or not cryptocurrency should be a part of their investment portfolio. And some advisors are warming up to the idea of digital currency. The Financial Planning Association’s (FPA) 2021 Trends in Investing Survey found that 14% of advisors surveyed say they are currently using or recommending cryptocurrencies, up from below one percent in 2019 and 2020. And 26% said that they plan to increase their use or recommendation of cryptocurrencies over the next year.

Why financial advisors aren't recommending Bitcoin

But even if financial advisors want to recommend that their clients include digital coins in their investment portfolio, their hands are tied.

While government agencies don't prohibit advisors from selling or recommending cryptocurrency, Bitcoin remains unregulated in the U.S. Since the digital currency doesn't adhere to the rules government agencies have for other assets traded on the public market, like how public companies need to release regular financial statements, many firms don't allow advisors to make crypto recommendations.

Still, that doesn’t mean investors aren’t asking: the FPA survey also found that nearly half of advisors said clients asked about the asset in the last six months, compared to 17% in 2020. Clients ask Tiffany Welka about cryptocurrency every day, the financial advisor and vice president at VFG Associates in Livonia, Michigan says.

“I have to keep saying the same thing because our compliance department actually has told us and coached us that we’re really not supposed to be advising our clients to be in cryptocurrency,” Welka says.

It’s tough because, while such a speculative investment might not be in the best interest of her clients right now, it could also represent the future of investing, spending and saving, she adds. For now, Welka lets her clients know that she isn’t able to recommend cryptocurrency — and if they decide to buy crypto on their own, she can’t manage it for them.

But advisors are warming up to cryptocurrency

Before 2020, financial planner Ivory Johnson in Washington D.C was skeptical about Bitcoin.

“I was like, ‘I’m not buying a magical currency,” he says.

Fast forward just over a year and the founder of Delancey Wealth Management recommends that many of his clients have a small amount of Bitcoin exposure in the form of the Grayscale Bitcoin Trust, the closest thing you’ll see to a strictly Bitcoin exchange-traded fund (ETF) on the U.S. stock exchanges.

What changed?

Johnson, who has been certified in blockchain and digital assets by the RIA Digital Assets Council, says his views on Bitcoin changed as he became more knowledgable. The cryptocurrency is a non-correlated asset that can help diversify a portfolio, he now believes, as well as being a hedge against inflation since it has a limited supply. (This argument has caused a stir in the financial world).

That interest from clients and financial advisors has spurred investment firm Baird to re-evaluate the investing case for cryptocurrencies, says Ross Mayfield, an investment strategy analyst at Baird. When it comes to client interest and institutional adoption, it certainly seems like the crypto space is here to stay, he adds — and that might not have been something he would have been as confident saying just two years ago.

“It’s a whole new world today,” Mayfield adds.

Advisors have to thread the needle. While Johnson points clients towards the Grayscale Bitcoin Trust, Welka lets her clients know there are ways to invest in the sector without being invested in cryptocurrency itself, like buying Coinbase stock.

Investors are increasingly interested in cryptocurrency

Even advisors who aren't on the crypto train are feeling a push to keep an eye on the space.

“Regulation needs to come before it’s really an investable asset class for us,” says Timothy Chubb, chief investment officer at Girard in King of Prussia, Pennsylvania. “But it’s something that we’re watching very closely, and I would anticipate will remain an area of research for us for the foreseeable future.”

That makes sense, since the digital asset seems to continue to gain legitimacy.

In June, El Salvador became the first country to make Bitcoin legal tender, meaning it must be accepted as a form of payment for goods and services. While it still isn’t too easy to spend Bitcoin in the U.S., the currency has gotten some buy-in from Wall Street’s major players, like Goldman Sachs, which recently declared crypto an official asset class. And earlier this year, Coinbase — the largest cryptocurrency exchange in the U.S. — made its debut on the public market, which many saw as a vote of confidence in the currency. Venmo also began allowing users to buy some cryptos.

Because that space continues to grow, financial advisors’ roles now include being able to educate clients about crypto assets, Boneparth says.

“The very last thing any financial advisor wants to be is unknowledgeable about something that their client is asking to be educated on,” he adds.

How the regulatory landscape could change for Bitcoin

The Securities and Exchange Commission (SEC) has repeatedly blocked efforts to bring a Bitcoin ETF to the U.S. market, and has said investors should be cautious of the volatility and potential for fraud when investing in Bitcoin. Most recently, the SEC delayed the decision for a second time on whether to approve a Bitcoin ETF via asset manager VanEck Associates, saying the agency needed more time to gather input on the potential of market manipulation of Bitcoin and — by extension — the fund. But experts don’t think a Bitcoin ETF is out of the realm of possibility, though likely not for at least a year or two. Analysts have been encouraged by the appointment of Gary Gensler, who previously taught blockchain and digital currency classes at the Massachusetts Institute of Technology, to the SEC. ETFs track the prices of underlying assets of indexes, so the price of one share of a Bitcoin ETF would move with the price of Bitcoin, according to the Canada's Corporate Finance Institute. In other words, investors could invest in Bitcoin without having to deal with a crypto exchange. (Canada has approved Bitcoin ETFs.)

An approved Bitcoin ETF in the U.S. would change the game for advisors who want to recommend adding Bitcoin to a portfolio but can’t, as well as their clients who might not feel comfortable buying it on their own via one of the crypto exchanges or trading apps.

So for now, financial advisors are keeping their eye on the potential of changing rules. And if the last few years are any example, the foreseeable future could change quickly when it comes to Bitcoin.

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