Cryptocurrency has matured from a niche interest to a mainstream financial asset, with approvals for crypto futures exchange-traded funds (ETFs) quickly followed by those for spot bitcoin and spot ether ETFs in the early 2020s. As a financial advisor, you can't avoid questions about these and other digital assets with your clients. As their trusted partner, ignoring this major shift is now a far less tenable option.

"The U.S. Securities and Exchange Commission's (SEC) approval of bitcoin and ether ETFs marks a monumental shift in the regulatory landscape," Christina Lynn, a behavioral finance researcher and certified financial planner at Mariner Wealth Advisors, told Investopedia. Lynn's 2024 Journal of Financial Planning (JFP) arti❀cle gained notic✃e for putting advisors on notice of the need to get on board with clients in the crypto space.

Her article addressed financial advisors who still won't discuss cryptocurrencies with their clients. A July 2024 study by Cerulli Associates found that 13.7% of financial advisors use or confer on cryptocurrency with their clients, including just 2.6% offering recommendations. Meanwhile, more than a quarter of advisors expect to guide clients on cryptocurrency investments in the future, with more than half never expecting to do so.

Because advisors aren't helping in many cases, clients and other investors have been doing it on their own. According to BlackRock, about four-fifths of inflows into crypto exchange-traded funds (ETFs) have come from self-directed investors using online brokerages.

If you wish to help change these numbers, we've culled insights from researchers and practitioners for 10 essential tips for financial advisors and planners on crypto investments. By embracing this conversation, you'll demonstrate your adaptability and ensure your clients receive sound guidance from a trusted source—you—rather than potentially unreliable information readily found elsewhere.

1. Start With a Behavioral Finance Checkup

Lynn's JFP piece gained attention for suggesting advisors and planners need to perform a behavior-finance-type inventory to identify any biases against crypto, just as they often do with clients. She wrote that self-assessments could help financia🤪l professionals recognize their preconceptions about crypto by reviewing a series of questions or scenarios designed to reveal common financial biases such as loss aversion, overconfidence, or status quo bias.

Working With Crypto Clients

"I emphasized a behavioral approach because financial advisors, like their clients, are susceptible to biases and fallacious reasoni🀅ng," Lynn told Investopedia. "Advisors are trained to dismiss shiny new alternative investments that boast spectacular returns, as such opportunities often prove too good to be true and unsafe for client funds."

When considering advising clients about cryptocurrency investments, Lynn's research findings suggest many gains from engaging with behavioral finance principles, including helping clients and advisors navigate crypto investing. For example, many investors overestimate their ability to predict market movements, particularly in the crypto space. She suggests looking at the four most relevant cognitive biases for clients thinking about crypto:

• Anchoring: Clients might fixate on past price points or performance. Help them focus on market conditions and future potential rather than historical highs or lows.
• Herd mentality: The fear of missing out (FOMO) can drive crypto investors to trade impulsively.
• Loss aversion: Clients may feel losses more acutely than equivalent gains. This can lead to panic selling during market downturns.
  
• Mental accounting: Clients may irrationally compartmentalize their crypto investments, disregarding their overall risk tolerance and financial goals. Advisors should encourage a holistic view of the entire investment portfolio.

"The overly risky portfolios" often found among crypto enthusiasts "are willingly accepted by investors because they do not seem to apply traditional investment principles to crypto assets," Lynn wrote.

Potential Advisor Biases

However, it was Lynn's turning these principals back on advisors that got notice, especially since it was published when many were coming to grips with the new spot crypto ETFs. While it's crucial to understand client biases, it's equally important to acknowledge that all decision-makers, including financial professionals, are subject to cognitive tendencies that can influence judgment, she argued.

For example, Lynn suggested there might often be a 澳洲幸运5官方开奖结果体彩网:status quo bias at work, with some advisors resisting crypto due to having established habits and practices with more traditional assets. While advisors usually think there's the opposite bias among those pushing new financial products—what's new is automatically better—that doesn't mean resisting crypto is a good id�෴�ea.

Lynn also argued that many advisors and planners don't think it's worth the time for what would in the end be a small part of a client portfolio—the "juice is not worth the squeeze," as Lynn puts it. Paraphrasing the mindset, she writes in the JFP, "Such a small portfolio allocation (e.g., 1% to 3%) may not seem to warrant the 12 hours or more of study that is needed to acquire even a baseline of foundational knowledge."

The SEC's 2021 through 2024 approvals of crypto ETFs "lend legitimacy to the asset class and provide clients with a more straightforward, regulated investment vehicle," Lynn said. Yet, "advisor adoption remains relatively slow." Nonetheless, she thinks there's change afoot. "While these hurdles persist ... more advisors are exploring and integrating cryptocurrencies into their portfolios," she said.

2. Acknowledge Your Concerns

None of this means there isn't good reason to worry about crypto investments; the major sums involved and media attention have attracted many shady operators looking for quick profits. This forced the SEC, in 2022, to double the size of its crypto-enforcement unit, and from 2023 forward, the regulator increased its charges against crypto operators by more than a third.

From 2021 to 2023, crypto criminals defrauded or outright stole more than $20 billion from investors. A Chainanalysis study reported that crypto frauds and thefts were down about 30% in 2023 over the 2022, but that's like saying shark attacks are down when fewer people are swimming. That was after the massive sell-offs of 2022 to 2023. As Chainanalysis's 2024 report puts it, the drop "aligns with the long-standing trend that scamming is most successful when markets are up, exuberance is high, and people feel like they are missing out on an opportunity to get rich quickly."

There are reasons, thus, to be concerned about another rise in scams as crypto prices have climbed significantly since the need of 2023. Gary Gensler, the SEC chair, hasn't minced words about the problem, saying in 2024 that "the whole field is rife with abuses and fraud."

Despite all this, there's reason to believe, Lynn argues, that there's genuine value to be found in these spaces. "Crypto is different," she said. "It represents the biggest technological and economic shift since the internet."

Tyrone Ross, a startup advisor and cofounder of Turnqey Labs and Principal of 401 Financial, told Investopedia that warnings from the SEC and other regulators are likely to make financial advisors even more cautious about getting involved in this up-and-coming asset class.” But Ross said ignoring the potential of crypto assets could be a mistake. “Overall, the infrastructure now is a lot better than it was in 2017 [when he formed his own practice]—the derivatives market has been built out, and there’s a lot more liquidity in the system.” The returns are starting to speak for themselves. "It’s hard to ignore the characteristics of Bitcoin and what it may mean for a portfolio,” he said.

Advisors don't need to agree with Lynn or Ross about the potential crypto offers to acknowledge that clients are increasingly asking about crypto-related investments. Recent bitcoin and ether ETF approvals mean it's past time advisors get up to speed in this area to guide their clients. As Lynn describes in her article, "We need to be our clients go-to person for crypto, just as we are for the other areas of personal finance," lest advisors lose clients to less reputable sources.

3. Educate Your Clients

The next tip is to ensure that you help educate clients asking about crypto. To ensure you're fully up to speed, you can pursue relevant certifications or take courses designed for financial advisors, such as the certified digital asset adviser designation or certificates from the Digital Assets Council of Financial Professionals. Once ready, you can start by reviewing crypto assets' risks and prospects.

Crypto Assets

Many financial advisory firms, including Strategic Financial Planning in Plano, Texas, have adopted a cautious stance toward direct cryptocurrency holdings. David Tenerelli, a certified financial planner at the firm, explains his firm's position: "While we aren't dismissive of bitcoin and other cryptocurrencies, we've decided ... that we won't facilitate any direct digital asset holdings in client portfolios (either in crypto wallets or via bitcoin ETFs)." This is common among financial planners and advisors we've spoken with.

A cautious approach doesn't mean neglecting to educate clients on crypto, especially the risks and volatility involved. When discussing crypto investing with clients, it's helpful to divide it into two broad categories. The first broad category is for the assets on unregulated exchanges—the cryptocurrencies and other digital investments you own directly. Clients can buy and hold digital assets like bitcoin and ether, which offer them full control over their crypto but require an understanding of digital wallets and security measures. The table below sets out different blockchain-bas🧜ed assets, each with its own purpose.

Bitcoin, the first and still best-known cryptocurrency, was introduced in 2009, and since then, the market has exploded with thousands of 澳洲幸运5官方开奖结果体彩网:alternative coins, each promising new features and potential use🦩s. There aཧre main types of crypto holdings:

• Payment cryptocurrencies are designed primarily to serve as a medium of exchange. These digital currencies aim to offer a decentralized alternative to traditional fiat currencies.
• Platform crypto can be used for payments, too, but their creators say they are built to support decentralized applications and smart contracts. These digital assets allow developers to create and deploy applications on their 澳洲幸运5官方开奖结果体彩网:blockchain networks.
• Stablecoins are cryptocurrencies designed to maintain a steady value, typically pegged to the U.S. dollar. They're generally used as a relatively safer place to store crypto funds when there is high volatility on the crypto exchanges. They are also helpful in trading into and from crypto exchanges to regular currencies.
• Utility tokens are units of value that only work within a particular network with no value outside a specific crypto exchange—like tokens you earn in a video game and can only use there.
• 澳洲幸运5官方开奖结果体彩网:NFTs are notorious digital assets representing ownership of a particular item or content, such as digital art, music, videos, or "real estate" in virtual worlds.
  

You'll also need to distinguish, for your client, as we do here, the "exchanges" or crypto platforms where you can trade the currencies and the regulated exchanges overseen by the SEC, Financial Industry Regulatory Authority (FINRA), Commodities Futures Trading Commission, and stock market authorities.

Below are the top 10 cryp🦩tocurrencies in mid-2024 measured by market share:🃏

Exchange-Traded and Other Crypto-Related Assets in ꦺRegulated Spaces

For investors seeking exposure to the cryptocurrency market through regulated exchang🍸es—those overseen by the CFTC for crypto-related futures and the SEC for options and exchange-traded funds holding crypto products—there are these options:

Crypto ETFs have emerged as ✨the most popular choice for many who want to get into crypto, offering simplicity and integration with traditional brokerage accounts. These come in two main forms: 澳洲幸运5官方开奖结果体彩网:spot ETFs, which directly hold cryptocurrencies, and futures 🌠ETFs, which use futures contracts to track crypto prices. Spot bitcoin and ether ETFs, approved in 2024, provide direct exposure to these digital assets, while futures ETFs offer an alternative way to gain crypto exposure through standardized ♉agreements.

"The ETF wrapper increases ease of access to Bitcoin and helps investors or speculators avoid some of the risks of direct, self-custodied, wallet-based crypto holdings," Tenerelli said.

Crypto-related stocks offer another way for clients to invest in crypto through shares traded on regulated exchanges. Choices include cryptocurrency mining and mining hardware makers, companies like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL) that support cryptocurrency, and companies like MicroStrategy Inc. (MSTR) that hold a substantial amount of cryptocurrency on their balance shee🉐ts.

4. Find Your Own Balanced Approach

Financial advisors face the challenge of balancing client interest in crypt🐎ocurrencies with their duty to provide responsible investmen🌃t advice. Tenerelli said his firm is working to be a responsible steward of client assets as it tries to accommodate interest in crypto.

"While we don't support direct crypto holdings, if a client does insist on some degree of crypto exposure in their managed portfolio, then we are prepared to facilitate by allocating a small portion of the portfolio to a thematic tilt toward publicly traded companies with significant exposure to the cryptocurrency and blockchain industry," he said.

This allows advisors to provide clients with exposure to the crypto market through regulated, more familiar investments rather than diving into the far murkier waters of recommending direct cryptocurrency purchases. By focusing on publicly traded companies in the crypto and blockchain space, advisors can offer a compromise that satisfies client interest while maintai🌊ning an approach to portfolio management that fits with institutional funds and others also making some investme෴nts in the crypto space this way.

5. Emphasize Risk Management

While he's "open to influence as cryptocurrencies and blockchain continue to evolve and mature," Tenerelli said he and his firm's fiduciary and compliance-related duties make it difficult to justify. He noted that traditional financial risk and returns metrics don't come back positive for crypto holdings, given their history of extreme volatility and fraud. Less diplomatically, other financial advisors have likened crypto investing to the worst forms of gambling.

However, Tenerelli said his firm offers some guidance for clients who speculate on digital assets outside their managed portfolios, particularly with tax planning. "If a client provides us with their crypto-related capital gains and losses, that information could inform our portfolio management decisions and other planning recommendations," he said.

When advising clients about cryptocurrency investments, it's thus crucial to highlight the risk management strategies needed and ensure you're managing their non-crypto portfolio in light of any of these holdings. The volatile nature of cryptocurrencies and the potential for fraud in the market require taking a cautious approach. Financial advisors should educate their clients about the specific risks related to crypto and how they can impact their overall portfolio—not just what they hold in crypto but also their retirement and other holdings.

Tenerelli said it's important, too, to discuss with clients how they might already be invested in the crypto space already—at least indirectly. Thus, any additional crypto they add to their holdings could augment their exposure.

He gave an example of a client interested in crypto-theme ETFs. "They make [crypto exposure] possible, but that approach has its own downsides as well," he said. "For example, a well-diversified, index-based portfolio likely already includes many of the same companies that are included in crypto-themed ETFs," especially in technology.

6. Emphasize Diversification

When discussing cryptocurrencies with clients, it's crucial to emphasize the importance of a diversified portfolio to mitigate the high volatility and risks associated with these assets.Diversification and systematic investment plans are some of the most basi💃c and essential strategies for limiting risk𓂃.

If a client’s crypto holds only a small percentage of their portfolio, then even a catastrophic fall in the value of crypto won’t entirely ruin their efforts to ♎boost their wealth. It’s also possible to diversify within the world of crypto, holding not only bitcoin but also multiple other coins.

In addition🌟, while many crypto investors adopt short-term, speculative approaches, a more prudent strategy involves a longer investment 💟horizon, Lynn said.

"From a financial planning perspective, clients should approach crypto investing with a long-term perspective. A buy-and-hold strategy is superior for the average investor compared to day trading," Lynn said. "Clients should abandon get-rich-quick schemes and aim for above-average return on investment."

7. Concentrate on Established Crypto Assets

Lynn also suggests that clients avoid new or unproven coins. "Focus instead on top coins with real use cases," she said. "Diversifying among the top coins might also make sense."

Her advice might be different from yours—for example, Tenerelli's firm won't yet advise clients directly on their crypto coin holdings, and he thinks crypto investing is still too often a "tool for speculation"—her advice to clients on the proportion of their portfolio to give over to these digital assets won't strike any as imprudent.

Lynn first reviews if clients satisfy specific criteria in terms of their holdings, their risk tolerance, and other signs they can handle the volatility and risk. "For clients meeting these parameters, allocating 2% to 5% of their portfolio to crypto may be advisable," she said. You can start lower, too. "If you look at a 1% to 2% portfolio allocation and what that means for returns, I definitely think it’s something that financial advisors should realize has an attractive return profile," Ross said.

The main point, as Lynn succinctly put it in her JFP article, is that you need to "coach them to invest a prudent amount."

By focusing on established cryptocurrencies with real-world applications, Lynn said, clients can reduce their exposure to highly speculative and risky assets. Nevertheless, your firm might wish to keep clients away from direct crypto holdings altogether. In either case, it's important to remind clients that even a small allocation to crypto can significantly impact portfolio volatility, and this allocation should be regularly reviewed and rebalanced as needed.

8. Avoid Crypto Jargon

Financial advisors often have to break down complex financial concepts into everyday terms and analogies. Similarly, explaining cryptocurrencies to clients doesn't have to mean speaking in code.

 "Just how clients get that deer-in-the-headlights look when you start using financial planning-specific terminology ... be careful to translate esoteric crypto terms into more general financial terms so as not to alienate others," Lynn wrote.

For example, you can talk about blockchain as a digital ledger, like records of bank's transactions record, but visible to all users. By demystifying the vocabulary, advisors can have more productive conversations about the risks and rewards of crypto investments. The goal is to inform, not intimidate.

9. Avoid Falling Down the "Crypto Rabbit Hole"

Few people in the mid-2020s have yet to experience the crypto aficionados in their family, friendship circle, or the next seat over while traveling who go on about fiat currencies and their doom, the "democratization" that crypto offers, and generally offer hot takes that are "contrarian or libertarian in tone and message," as Lynn puts it.

Ultimately, these conversations are less reminiscent of staid financial planning discussions than attempts at religious conversion. That "does not suit the professional image financial advisers wish to emulate," Lynn wrote. "Maintaining a respectful attitude toward traditional and decentralized finance is a strategy that can help bridge the two schools of thought."

While most advisors are cautious about crypto, among those who aren't, there are dangers of sales pitches crossing the line from enthusiasm to irresponsibility. A 2024 study by FINRA found that member firms were too often running afoul of FINRA Rule 2210 (Communications With the Public), which "prohibits claims that are false, exaggerated, promissory, unwarranted, or misleading." FINRA found that 70% of the crypto-related retail communications it reviewed could have substantive violations of FINRA rules. This compares with about 8% of client communications for other products.

"With the growth in this market and increased interest in crypto assets, the potential harm caused by problematic communications has also increased," said Ira Gluck, FINRA's senior director of advertising regulation, on a FINRA podcast related to the study. "We've been concerned about how communications discuss the protections offered through the federal securities laws or FINRA rules... However, there are no such protections for accounts held at crypto asset entities."

Too often, Gluck said, FINRA has seen communications ဣthat suggest FINRA or SEC endorse, not just approve for trading particular crypto assets. Here are some of the main issues FINRA found, which also provides a helpful list of what advisors and planners should avoid:

1. Blurring firm lines: Many firms failed to distinguish between crypto offerings from affiliates and their own products.
2. Cash confusion: Some falsely implied crypto assets work like cash or are equally liquid.
3. Misleading comparisons: Crypto was often inappropriately compared to stocks or cash without explaining key differences.
4. Oversimplification: Complex features and risks of crypto assets were often explained unclearly or incompletely.
5. Missing details: Many communications lacked clear explanations of how crypto is issued, held, transferred, or sold.
6. False security claims: Some misrepresented the level of regulatory protection for crypto investments.
7. SIPC misinformation: Statements were made that there was SIPC coverage for certain crypto assets.

The tak♔eaway is that advisors and planners must be extraordinarily careful when discussing crypto with clients. Clarity, accuracy, and full disclosure of risks are paramount. When in doubt, err on the side of caution and seek a compliance review of all crypto-related communications.

10. Stay Informed About Crypto-ဣRelated Regulatory and Tax Developments

As the cryptocurrency landscape evolves, so do the rules governing it. Financial advisors must stay ahead of the curve to p﷽rovide sound guidance.

Crypto and Taxes

The Internal Revenue Service (IRS) treats cryptocurrencies as property. Here's a list of what the IRS considers taxable events:

• Selling crypto for fiat currency (e.g., U.S. dollars) is a taxable event, and any gains or losses must be reported.
• Exchanging one cryptocurrency for another is a taxable event, requiring the calculation of gains or losses based on the fair market value at the time of the trade.
• Using cryptocurrency to buy goods or services is another taxable event. The value of the cryptocurrency at the time of the transaction must be reported, and any gains or losses from the original purchase price must be calculated.

In 2024, the IRS introduced new regulations requiring brokers to report gross proceeds and adjusted basis for digital asset transactions. This includes sales and exchanges of digital assets (from cryptocurrency to stablecoins to NFTs), which extends the reporting requirements to include a broader range of transactions and assets. These changes were part of the IRS's efforts, which include dedicating more personnel to crypto-related tax enforcement, to improve tax compliance and transparency in the digital asset market.

The reporting requirements include any digital assets received through airdrops (distributions of cryptocurrency tokens or coins, typically for free, to numerous wallet addresses.), forks (these occur when a blockchain splits into two separate chains due to differences in the protocol rules), mining, and staking. Receiving new tokens through these methods is taxable income, and the fair marketও value of the nꦯew coins must be reported.

The 2024 regulations also extend to real estate transactioꦬns when digita♚l assets are used to buy property, and these crypto transactions must be reported, too.

Keeping Up With Crypto

Here's how to keep your crypto knowledge current:

1. Monitor announcements from the IRS, SEC, and FINRA. Their websites and social media accounts provide timely updates.
2. Use Google Alerts or similar services for terms like "cryptocurrency regulations" or "crypto tax rules" to receive relevant news articles.
3. Participate in finance-focused online communities or local groups where peers share insights and discuss regulatory changes.
4. Many organizations offer events focused on crypto regulations and tax implications.
5. Consider publications that focus on the intersection of cryptocurrency and finance.
6. Develop relationships with tax professionals and legal experts specializing in digital assets.

By staying abreast of such changes, you can help clients navigate the complex and rapidly changing world of crypto taxation and regulation while ensuring compliance.

The Bottom Line

Cryptocurrency has evolved from a niche interest to a mainstream financial topic, with approvals for crypto futures exchange-traded funds (ETFs) quickly followed by funds for spot bitcoin and spot ether ETFs in the early 2020s. As a financial advisor, you can't avoid questions about these and other digital assets from your clients. As your clients' trusted partner, ignoring this major shift is no longer an option.

The SEC's approval of bitcoin and ether ETFs marks a major shift in the regulatory landscape. Yet, most financial advisors still won't discuss cryptocurrencies with their clients. A July 2024 study by Cerulli Associates found that only 13.7% of financial advisors use or discuss cryptocurrency with their clients. Despite early 2020s approvals of crypto ETFs, the SEC has expressed concerns about endemic fraud in the sector. Advisors must navigate these challenges by staying informed, educating clients, and maintaining a cautious but open approach to crypto investments.

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