Should Advisors Bite on Bitcoin?

With Bitcoin cresting just short of the $5,000 price level recently, the digital currency is starting to get mainstream attention.

Bitcoin has since slumped a bit – with the price hovering between $3,500 and $3,700 in mid-September. But the questions are likely to be asked of investment advisors at some point.

Will money managers start getting calls getting calls and questions about Bitcoin? And if so, how should they respond?

Steering clients into Bitcoin seems to be a path few advisors want to take – but they do understand the rising client interest in the booming digital currency. Founded in 2009, Bitcoin is a digital payment system that exists solely on the Internet.

“With all of the hype surrounding cryptocurrencies at the moment, it's certainly a hot topic in the investing world right now,” said Zachary Welborn, an investment advisor with Manske Wealth Management in Houston.

'We Don't Invest'

Over the last several weeks, Welborn said he’s had a “number of clients” reach out wanting to get in on the Bitcoin action. Bitcoin has roughly tripled in price from the spring 2017. Still, most advisors are unmoved.

“We don't invest in cryptocurrencies for a number of reasons,” he said. “The most obvious reason, though, would be the uncertainty and the extreme volatility associated with trading digital currencies, which may already be in a bubble.”

One problem with new or unfamiliar investment vehicles like Bitcoin is that the average retail investor “doesn't really understand how it works or how to correctly value it,” Welborn explained.

Another comes from the unknown risk involved.

“Another big issue for us is the fact that it isn’t regulated or even recognized by the federal government,” he added. “This is why we don't see any of the large institutions investing in cryptocurrency.”

Bitcoin is “very interesting,” Welborn said, adding that he will “keep a close eye on it.”

“I’ll keep track, but I certainly don't plan on investing any of my own dollars in it,” he said. “A great alternative for investors to still get a piece of the pie would be investing in Fortune 500 companies that already plan to use cryptocurrencies and the block chain technology behind it in order to make a profit.”

Most advisors agree that cryptocurrencies is an investment category they’re avoiding.

“My goal of an investment advisor is to protect my clients’ capital and be conservative in my investment approach,” said Daniel Wachtel, a financial planner with Harbour Capital Partners in New York City. “Putting that capital at risk by investing in the cryptocurrency fad seems to me as not adhering to the fiduciary duty that I have to my clients.

“The currency is not backed by anything at all, unlike the U.S. dollar, which since 1971 is backed by the full faith and credit of the United States.”

Top Heavy

As with any free market economy, the price of Bitcoin is established by supply and demand, such as a regular currency, stock, and bonds. But the investment seems top heavy right now, dominated by a few big investors.

“The problem with Bitcoin and my clients are many at this point,” Wachtel said. “For instance, the cryptocurrency, being the largest and most well-known investors, is taken only by a handful of companies right now (the largest being Microsoft.)”

Plus, the market for Bitcoin is extremely illiquid which also adds to its volatility, he added.

There are rumblings that big-name financial companies like Fidelity might be ready to get into the cryptocurrency game. Fidelity rolled out a service that enables clients to track Bitcoin alongside their stock and fund portfolios.

But not many advisors are biting on Bitcoin yet, even if it’s becoming somewhat “normalized.”

“Though Bitcoin has been getting a lot of attention recently, it still remains an unregulated and extremely volatile investment vehicle,” said Karl Kaufman, founder of American Dream Investing in Boca Raton, Fla. “Firms like Fidelity have joined in on the craze by providing blockchain counters (and other services) for their clients, which further legitimizes the currency.

“Regardless, it still remains a highly speculative investment option that is unsuitable for all but the most risk tolerant investors.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]

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