FAs Warn Bitcoin Isn’t Ready for ‘Prime Time’
Alternatives to hard currencies aren’t just a gleam in the eyes of dark pool conspiracy theorists. The price for a Bitcoin recently hit $4,000 – a jump of more than 400% on the year. Wall Street pundits are climbing into the fray, some predicting a leap past $5,000 as the digital currency’s popularity spreads.
But even Goldman Sachs is warning of a looming correction. Meanwhile, asset managers are pointing to the long-term potential of Bitcoins with at least three cryptocurrency-focused ETFs reportedly awaiting SEC approval.
“Anyone who thinks this is a fad is deluding themselves – clients really need to be educated on this topic,” says Neil Waxman, managing director of Capital Advisors.
Most of his clients at the suburban Cleveland-based indie RIA, which manages about $800 million, are entrepreneurs and business owners who “don’t want to take big risks in their personal portfolios,” Waxman says.
“These cryptocurrencies are being traded without government backing or support of any hard assets,” he adds. “And it’s important to realize that Bitcoin is almost seven times more volatile than gold – you can easily lose 50% of your money at any time.”
Still, he sees issuance picking up and major clearing houses advancing so-called blockchain technologies, which Waxman describes as a sort of “decentralized cloud-based network that eliminates the middlemen and cuts trading costs.”
The SEC put cryptocurrencies on its regulatory radar in July, he points out. Right now, however, he’s suggesting strategic-minded investors might be better off staying on the sidelines. “If you want to invest, only put as much into it as you’re willing to lose,” Waxman says.
While he won’t recommend Bitcoin and the like for now, the longtime advisor is preparing to answer more questions as such alternative markets evolve.
“None of our clients are seriously considering trading in Bitcoin right now,” he says. “But as blockchain technologies improve and more stakeholders validate these types of digital networks, cryptocurrencies may find a place in strategic investment portfolios over time.”
George Gagliardi, an advisor in Lexington, Mass., believes within five years virtual currencies will be considered mainstream investments. “Several big Wall Street firms are already working on products in this area,” he says. “I truly believe that someday virtual currencies like Bitcoin will become an important form of payment and a highly liquid currency.”
At the same time, the FA notes that just recently hackers broke into cell phones and stole several investors’ virtual wallets used to digitally store coins.
“I tell my clients that although the potential is great, Bitcoin is like trying to pick an Internet winner in 1996 – this market is purely speculative at this point,” says Gagliardi, who charges by the hour and works on retainer. He also manages about $20 million in client assets.
Gagliardi also likes to explain to clients that virtual currencies are essentially “early stage” tech developers and represent a “swelling marketplace” with more than 30 different competitors. “It’s important to put all of this investment hype into perspective – digital currencies are still in the Wild West days,” he says. “At this stage, it’s hard to tell if you’re investing in the next Microsoft or the next Napster.”
Few investors really understand how Bitcoin’s underlying creation mechanisms work, Gagliardi adds, let alone blockchain encryption methodologies. “Investing in anything you don’t fully understand is like day trading,” he says.
With headlines blaring about Bitcoin's price run, Gagliardi adds that he's fielding more questions these days about alternative currencies. In fact, a local entrepreneur he recently talked to – and isn’t a client – told him he’s considering investing in cryptocurrency ETFs as they come to market.
“For people with relatively high tolerances for speculative investments, this might be a fun way to watch to see how alternative currency markets grow,” Gagliardi says. “But I tell prospects who bring Bitcoins up with me now to go in with their eyes wide open. It’s still like gambling in Vegas.”