by David Zeiler, Associate Editor, Money Morning
Special Report from Money Morning
As more people ask the question, “Should I buy Bitcoin?” more financial advisors are trying to find ways to accommodate them.
This is a significant shift for those professionals who help folks invest their money for a living. Just a couple of years ago, financial advisors almost unanimously steered clients away from Bitcoin and other crypto investments. Brokerages often forbid their advisors to recommend Bitcoin or crypto to clients.
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But the climate has shifted. More Wall Street types have been singing the praises of Bitcoin this year.
And the price of Bitcoin is on another big bull run. BTC is up more than 100% year to date, far above the gains of gold (23.3%) and the S&P 500 (10%).
But this is a dynamic that will work in both directions. As higher Bitcoin prices draw client interest, the growing flow of capital will feed the demand needed to keep prices climbing.
Let’s take a closer look at what’s going on…
Reasons to Shun Bitcoin Falling Away
Financial advisors have come a long way. Until recently, they were downright hostile to Bitcoin. They had a lot of issues with it – some were real, some were myths, some were problems that lacked solutions.
- They saw it as a tool for criminals (some justification for this, but cash has the same problem).
- They saw it as too volatile (becoming less true over time).
- They were concerned that, as a decentralized digital currency on the internet, Bitcoin wasn’t backed by a government or precious metal like gold.
- They were concerned about the lack of regulation and whether recommending it would violate their fiduciary duty (regulators are slowly coming around).
- They were concerned about custody. Bitcoin stored without proper security can and has been stolen – and it usually can’t be recovered (a problem that is being solved).
In addition to those objections, most financial advisors didn’t understand the technology – and had little interest in putting in the time needed to learn about it.
But Bitcoin never went away. It rebounded from its 73% decline in 2018 by gaining 94.4% in 2019 and is up 115% year to date.
Gains like that – better by far than any other asset class over the past two years – tend to get the attention of wealth mangers.
Why Financial Advisors Are Warming Up to Bitcoin
No advisor wants to be the last to catch on to a hot investing trend. It’s a “fear of missing out” that is spreading through the wealth management industry.
They always remember the ones that got away.
In an article for CoinDesk earlier this month, financial advisor Andy Edstrom likened skepticism toward Bitcoin today to what “experts” were saying about Amazon.com Inc. (NASDAQ: AMZN) back in 2005.
Advisors scoffed at Amazon just as they scoffed at Bitcoin. They called it a bubble, said it didn’t (and couldn’t) generate cash flow, said it had too much competition, and said it had too few users.
AMZN in 2005 was trading at $35 a share. Now it trades at more than $3,100 a share. Wealth managers who misjudged Amazon lived to regret it. No one wants to do the same with crypto now. Edstrom said:
“Just like Amazon became the obvious winner of the e-commerce market years ago and yet still continues to gobble up share of this enormous potential market, Bitcoin still has very far to run.”
As if that weren’t incentive enough, advisors are getting pushed toward crypto by a growing number of their clients.
In a Bitwise/ETF Trends survey of advisors taken at the end of last year, 76% reported having fielded questions from clients about crypto. And 72% said they believed clients were already investing in crypto on their own.
According to a recent study by Grayscale, which runs several crypto-based funds, more than half of U.S. investors (55%) are interested in investing in Bitcoin, up from 36% in 2019.
And younger clients are much more interested in Bitcoin and crypto than their parents and grandparents.
About two-thirds of the 25-34 age group (67%) and the 35-44 age group (68%) said they were open to investing in Bitcoin. The percentage of those interested drops to 56% for the 45-54 age group and all the way down to 30% for those 55-64.
Finally, crypto is gradually becoming recognized as a new and separate asset class with its own distinct characteristics.
Bitcoin in particular is viewed as “digital gold,” a long-term store of wealth and a safe haven in the tradition of gold. Better still, Bitcoin has a weak correlation with other assets.
So crypto offers a fresh diversification option for those clients open to adding it to their portfolios.
Should I Invest in Bitcoin? You Bet
For those wondering if they should be asking their financial advisor about adding Bitcoin and crypto to their investments – I say you should strongly consider it.
No doubt some worry that it’s too late. With Bitcoin north of $16,000 as I write this, that’s understandable. But just as Amazon and Apple Inc. (NASDAQ: AAPL) have continued to surge to new highs for more than a decade, Bitcoin is likely to enjoy huge gains for years to come.
For instance, I have a longstanding prediction of Bitcoin reaching $100,000 by the end of 2021.
And lately my call has started to look conservative. Thomas Fitzpatrick, a managing director at Citibank and global head of its CitiFXTechnicals market commentary report, has set a Bitcoin price target of $318,000 by December 2021. That forecast appeared in a leaked report intended only for the eyes of Citi’s institutional investors.
That makes $16,000 sound downright cheap.
The key is supply/demand. The Bitcoin supply is fixed at 21 million. New bitcoins are created at a steady rate that gets cut in half about every four years.
As money continues to pour into Bitcoin – not just from rising interest from retail investors, but from deeper pockets like institutional investors and billionaires like Paul Tudor Jones and Stanley Druckenmiller – demand will keep pushing the price higher.
All that said, Bitcoin is still a risky investment. So it should only occupy a small portion of your portfolio – somewhere between 1% and 5% depending upon your risk tolerance.
The decision comes down to risk/reward.
Even $1,000 invested today – just 1% of a $100,000 portfolio – could be worth $10,000 in a year or so and $25,000 a few years down the road.
So yes, you could lose 1% of your money. But you have the potential for gains of 10x, 25x, 50x, or more. That’s exactly the sort of logic billionaires offer to explain why they’re investing in Bitcoin. Billionaire Paul Tudor Jones wrote in a market outlook note in May:
“The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.”
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