It is a moment that every financial adviser dreads.
Having carefully laid the groundwork for a stable investment portfolio that will build a client’s wealth gradually towards achievable financial goals, they are met with the dreaded B word: bitcoin.
'My friend Trev has made a fortune on bitcoin and he says it can go up 1,000 per cent, why aren’t we doing that?'
The adviser then must tread a fine line between dismissing cryptocurrency and appearing as a luddite, and giving credence to an asset class so volatile that it could just as quickly wipe out a client’s wealth as grow it.
It is a major issue. The Financial Conduct Authority has found that around 3m consumers are now using bitcoin compared to the total 17.3m who are invested in some kind of investment product.
In the same survey it found that nearly 40 per cent of those who have owned cryptocurrency claim to have made a return of greater than 100 per cent. A great many more claim even further substantial returns.
This presents a clear challenge to advisers. It is, after all, rather hard to explain to somebody who has doubled their money through cryptocurrency investment that it was a bad decision.
Perhaps it is these impressive returns that have caused a shift in attitude over the issue. In the latest research some 68 per cent claim they own cryptocurrency for investment or savings purpose. Importantly, the percentage who believe that it is ‘gambling’ has fallen to just 38 per cent.
In this context, cryptocurrency is here to stay. Few asset classes that reach a valuation of $1tn (£843bn), as bitcoin briefly did, end up disappearing.
Currently it remains rightly outside of the regulated world and inaccessible as an asset class for financial advisers or discretionary investment managers to invest in.
Our first step in discussing it with clients must be making this point clear. The question then is how on earth do we talk sensibly about the topic, and will this asset class ever play a valid role in a diversified multi-asset portfolio?
Here is our five-step plan for better conversations about cryptocurrency.
1. Focus it on bitcoin
The real crypto-geeks will want to take the conversation towards the most unusual of cryptocurrencies. However, it is entirely legitimate to focus the conversation just on bitcoin. Having peaked at $1tn in February this year, the market capitalisation of all bitcoin is now $632bn.
The second most common coin, ethereum, is less than half the size at a $260bn market cap. After this we are into much smaller assets, with the next largest, tether, being just $62bn. Therefore, it is reasonable to say that bitcoin is the only coin with enough scale to consider and focus the conversation here.
2. Emphasise the volatility