Are you a money manager who believes Bitcoin and other cryptocurrencies are a fad or worse? You’re not alone. But it is advisable to reconsider. The wealthiest customers definitely disagree and vote with their wallets.
In fact, based on Capgemini, 72% of high net value individuals (HNWIs) have invested in crypto in 2021 World Asset Report. This is an astonishing statistic. Because despite the joy of the last decade, cryptocurrencies have only turn into mainstream in the previous couple of years, and through a pandemic.
That nearly three-quarters of HNWIs worldwide have expressed confidence in crypto is a positive sign for the long run. Regulation – and a volatile market – could still dampen crypto enthusiasm, but asset managers can It’s good to learn the lingo and turn into conversant in the several digital currencies and their potential advantages. To best serve our clients, we want to know easy methods to put money into this space and what role cryptocurrencies can play in a diversified portfolio.
Learn the crypto jargon
What are the highest cryptocurrency terms customers are asking about? Here are a few of the basics:
- Cryptocurrency is a digital and decentralized currency that could be used as a medium of exchange. Bitcoin, Ethereum and Dogecoin are amongst essentially the most well-known, but there are lots of, many others. Each comes with its own issues by way of security, regulation, etc.
- Fiat currencies are government-issued currencies that should not backed by physical assets. They don’t have any intrinsic value or use value in themselves, reasonably their value is set by their government support and their general acceptance as legal tender.
- Blockchain is a technique of recording information on a cryptographically secured ledger on a decentralized network in order that data can’t be hacked. Each block within the chain accommodates multiple transactions, and every time a brand new transaction occurs, a record of it’s added to every participant’s ledger.
- Blockchain miners are individuals who approve crypto transactions by confirming that the user has not spent the identical coin twice.
- Non-fungible token (NFT) is a digital asset stored on a blockchain that may represent a physical item corresponding to a murals.
- Turnkey Digital Asset Management Platform (TDAMP) is a technology platform where investors can create their very own accounts and put money into digital assets.
Crypto varieties
There are many various cryptocurrencies available to investors. As a best practice, advisors will want to limit crypto investments to only those approved by the SEC.
Bitcoin is the most well-liked cryptocurrency and has paved the way in which for a lot of other cryptocurrencies to be minted and distributed on decentralized peer-to-peer networks.
The crypto issuance platforms which have gained essentially the most traction (read: market cap) include:
- ether has the second largest market capitalization amongst cryptocurrencies. It is a decentralized software platform that permits the creation of smart contracts and decentralized applications without disruption or threats of fraud. Ethereum’s value proposition lies in its ability to create a globally accessible suite of monetary products.
- Litecoin is the “silver to the gold of Bitcoin” and relies on a decentralized, open-source global payment network. Although it is analogous to Bitcoin, it has a faster block generation rate and subsequently a faster transaction confirmation time.
- Cardano was called “Ethereum killer” since it could have a more robust blockchain. It is taken into account to be less energy intensive than other cryptocurrencies.
Benefits and Risks of Crypto
So what role could a crypto allocation play in a client’s portfolio? It could act as a hedge against rising inflation or provide some diversification advantages as a consequence of its lack of correlation with the stock market. Crypto has not all the time disillusioned by way of returns either. Nevertheless, there are lots of skeptics and plenty of see Bitcoin and Co. as a contemporary version of Tulip Mania.
Of course, expanding our crypto knowledge could have one other profit for asset managers. Crypto suffers from a generation gap. Early crypto adopters are frequently younger digital natives. However, as crypto becomes more widely accepted, newer users could also be older and fewer tech-savvy. By becoming crypto experts, we will help bridge the gap between the older and younger generations of the families we advise.
Crypto Investments: Operational and Legal Requirements
Like any security, crypto has its own risks and regulatory considerations. As asset managers, we must be sure that we comply with all requirements.
- Review your organization’s insurance policies, particularly errors and omissions (E&O) policies, to make sure cryptocurrency investments are covered.
- Consider recommending only SEC-approved cryptocurrency investments, corresponding to exchange-traded funds (ETFs) based on Bitcoin futures.
- Remind clients to appropriately report their investments for tax purposes and to seek the advice of a tax advisor in the event that they need assistance.
- Disclose crypto investments on SEC Form ADV.
- Rebalance crypto investments like other investments in a client’s portfolio.
- Learn easy methods to implement cryptocurrency investments in your client’s portfolio. Although there are a handful of methods, essentially the most common is maybe the TDAMP, which have to be approved by your compliance team.
For HNWIs, crypto may very well be here to remain
Now is the time for asset managers to get conversant in crypto. We owe that to our customers. After all, it has been greater than 13 years since Satoshi Nakamoto published the Bitcoin whitepaper. And the market capitalization of crypto assets is now well into the trillions.
Most of our wealthiest customers have already stamped their tickets. At what point can we are saying with certainty that Bitcoin and Co. will last?
We higher get on before the crypto train leaves the station.
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Photo credit: ©Getty Images / RichLegg
