Investing

More financial advisors are recommending clients invest in cryptocurrency: Here's why

"Institutions feel there is money to be made. Fintech feels there are solutions to be built."

Share
Twenty/20

If you work with a financial advisor, you may be hearing more about cryptocurrency soon. More than a quarter of financial advisors, 26%, say they plan to increase their use or recommendation of cryptocurrencies over the next 12 months, according to a recent survey conducted by the Journal of Financial Planning and the Financial Planning Association.

It's part of a big ongoing shift: More than one-tenth, 14%, of advisors are currently recommending the likes of bitcoin and ethereum to their clients, up from less than 1% doing so in 2020.

Planners say huge price spikes in prominent digital currencies have ignited interest among their clients. Almost 5 in 10 advisors say clients have asked about investing in crypto in the last six months, up from 17% over the same period in 2020.

Here's why financial pros are starting to get on board with investing in cryptocurrency, and some of the advice you're likely to hear.

Why more financial pros are recommending crypto

Even after a marked uptick in cryptocurrency usage among financial advisors, the majority still steer clear of recommending it to clients. The biggest reason for the hesitancy: risk. Unlike stocks or bonds, crypto prices aren't supported by fundamentals such as earnings or cash flows and are instead dictated by investor speculation.

That can make these investments extremely volatile at best and downright dangerous at worst, says Tendayi Kapfidze, chief economist at LendingTree. "There is no good way to assess the riskiness of some of these investments. They can be like a Hail Mary," he says. "Thousands of crypto coins have disappeared. You shouldn't have any certainty that any particular coin will exist a year from now."

VIDEO1:4401:44
Why boring investments are actually better

Video by Courtney Stith

Nevertheless, amateur and professional investors alike have been taking increasing interest in digital currencies. On a very basic level, it's not hard to see why. With recent skyrocketing prices in everything from mainstream coins such as bitcoin to so-called "altcoins" such as dogecoin, investors are speculating that there is more money to be made.

But the interest goes beyond making a quick buck, says Doug Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York City. "The bigger point is that institutions feel there is money to be made. Fintech feels there are solutions to be built," he says. "It goes well beyond bitcoin. Ethereum is a platform that developers can build all this other amazing stuff on."

In other words: Many investors are seeing crypto's long-term potential.

How advisors say to invest in cryptocurrency

If your advisor is among the cohort planning to recommend cryptocurrency to their clients, you're likely to hear some version of the following: Don't invest more than you can afford to lose. "You have to understand the risk you're taking as an individual investor," says Kapfidze. "Some people will make money but many more will not. It's essential that you don't overexpose yourself."

For most investors, that means having no more than 5% to 10% of your portfolio in crypto.

VIDEO6:1706:17
6 lessons new retail investors say they learned the hard way

Video by Helen Zhao

It may also be wise to spread your risk across several different coins, says Kiana Danial, CEO of InvestDiva.com and author of "Cryptocurrency Investing for Dummies." "It's sort of like the dotcom bubble. A handful still exist and the rest crashed," she says. "If you have an eye for picking the next Amazon or Google, you're likely going to be set up for gains. It's not all that pricey to diversify. You can buy fractional shares of several different tokens."

Whether you go all in on one coin or diversify among many, any crypto investment you make should be very intentional and well researched, says Boneparth. "Maybe you assume bitcoin is going to be as good as gold, or half as good. Maybe you think it's going to be a global reserve currency. There is money to be made under these scenarios," says Boneparth.

"Any serious investor in this space has to have a thesis for why they're buying," he adds. "'To the moon' isn't a thesis."

More from Grow: