Investors are increasingly asking their financial advisers about cryptocurrencies, according to research by AJ Bell.
In a survey of 311 financial advisers, the investment platform found that three quarters of advisers say clients have asked them about investing in cryptocurrency. This is testament to the current buzz and attention crypto is getting at the moment, but many IFAs are still not advising that their clients make the leap.
And while one third of advisers said their clients held cryptoassets, only 4% of advisers said they would consider advising clients invest in cryptocurrency directly. Laith Khalaf, financial analyst at AJ Bell, believes advisers will continue receiving questions on the subject: “However, the asset class hasn’t really made it into mainstream investment solutions, with the notable exception of funds from Ruffer, which bought Bitcoin earlier this year, but realised profits pretty swiftly thereafter.”
A quarter of advisers, however, would recommend multi-asset vehicles with some crypto exposure, compared with 43% who hold gold as part of a balanced asset allocation.
Fad or Staple
Khalaf adds that a multi-asset strategy is likely to be the bst way forward if crypto becomes a staple, but investors will need to build their exposure – something we have yet to see because of scepticism. Plus, its volatility, lack of functionality in the real economy, a heavy carbon footprint, and regulatory risk means cryptocurrencies in its current state remains fairly uninvestable for advisers and money managers.”
Not everyone agrees with the findings of the survey. Jason Hollands, managing director of Bestinvest, think the figures look high, particularly as the typical profile of wealth management clients is those aged 50+ who are mindful of risk.
“Cryptocurrencies are a topic that comes up on occasion, but often in the context of ‘what is this stuff I keep reading about?’ rather than a desire to be ‘invested’ in it. A lot of people are just trying to get their heads arounds the mechanics. In some ways this is similar to a few years ago when P2P was often talked about in the media, but now comes up less frequently,” he says. (Morningstar's Amy Arnott has written a glossary of crypto terms for newbies)
In his experience, clients aremore familiar and comfortable with gold as a position in their portfolios, using it as an insurance policy for periods of shock or declining confidence in financial markets. Of course, some have argued that Bitcoin is the new gold.
Cryptos remain speculative
Darius McDermott, managing director of Chelsea Financial Services, says clients are not showing any interest, and are certainly not asking about crypto. “We have one client who is an exception, but he is more of a hobbyist/active investor. He put some money in Bitcoin in December and sold the following March making a nice profit. But for him it was a punt, not an investment.”
McDermott believes that if crypto is to really take off, more regulation will be required. But as it stands, Bitcoin and its cousins will have to be approached with caution – they remain speculative and volatile, and it is difficult to get safe and transparent access.
But, the number of advised clients already invested in cryptocurrencies, and the price fluctuations and associated media coverage, is a reminder of the lure of rapid wealth that tend to accompany market frenzies.
This expectation of rapid wealth typically stems from the perception of scarcity and the lack of a demonstrable "fair value" to anchor prices, Dan Kemp, global chief investment officer at Morningstar Investment Management explains: “These frenzied periods tend to end poorly for later investors who realise that supply is not as limited as previously believed and an asset with no cashflow lacks a price floor as well as a ceiling.” And while cryptocurrencies have no expectation of cashflow, they do represent a step forward in technology, and could be of benefit to investors looking for diversification – but even here, reliability for differentiated returns is unclear.
Kemp adds: “As ever in investment, if something looks too good to be true it probably is and you should never invest in something that you don’t understand or for which you can’t determine a fair value.”
