With positive and negative headlines around asset class, what are advisors telling their clients?
Bitcoin has gained over $10,000 (CAD) in value over the past month. In an almost 30% growth spike, the core cryptocurrency has approached $50,000 (CAD) in value — with other cryptocurrencies such as Ether rising alongside it. While still well below its $80,000 (CAD) highs hit in 2021, Bitcoin appears now to have recovered significantly from the significant losses it took through 2022.
While Bitcoin went for its run over the past month, Sam Bankman-Fried was found guilty in a US court on seven counts of fraud and conspiracy for his role in stealing $10 billion (USD) from investors in his cryptocurrency exchange and hedge fund company FTX. While unlikely to materially impact the price of an asset one way or the other, the scandal and trial have been seen as a cautionary tale about the bad actors and risks present in an asset class as new as cryptocurrency.
With opportunities and risks so openly on display, two advisors weighed in on how they use cryptocurrency exposure in their clients’ portfolios. Both advisors explained why they believe in the value and growth potential in cryptocurrency, as well as how that can fit in a well managed portfolio. They highlighted how they can present these opportunities and risks directly to clients in a clear, responsible way.
“As with any investment decision, you need to have an investment framework, you need to be able to assess risk associated with each situation very carefully,” says Michael Zagari, Associate Portfolio Manager with Mandeville Private Client Inc. “You have to go through a filter process the way you would evaluate companies…The way we incorporate crypto or any asset class into a client’s portfolio is by understanding their risk tolerance, their time horizon, and their ultimate objective.”
Zagari notes that there is no separate framework in his office for Bitcoin or other cryptocurrencies. He uses the same checks and assessment tools as he would any other investable asset. That doesn’t mean, however, that he only recommends crypto to his clients with the highest risk tolerances. He focuses on educating clients about the underlying technology behind cryptocurrencies — blockchain — and its range of uses in different technology applications. He notes that there is an inherent scarcity to digital assets and outlines some of the opportunities missed in past runs up in value. He lays out the risks and explains the volatility, but highlights potential for returns in the right total portfolio mix.
John Stokes has been working with cryptocurrency since 2015. The investment advisor at Haywood Securities has been focused on the space long enough that he’s become the seasoned accredited crypto expert at his firm. Serving a base of high net worth clients he tends to cater to clients who already want some crypto exposure. In the past month he says those clients portfolios have been rewarded significantly even from smaller allocations.
Stokes says that the current rise in Bitcoin can be partly explained by its near-collapse at the end of 2022. The FTX scandal was, in his eyes, a black swan event that pulled a lot of leverage out of the system. All the bad news hit all cryptocurrencies at once and expectations were that Bitcoin would fall below $12,000 — when it reality it only fell to around $15,000. Since then, Stokes says, investors have initiated new positions and regulatory landscapes have shifted somewhat, precipitating the start of a move higher for the asset class.
“There has been a lot of hype around US ETFs coming out, and while there still isn’t one available for Americans it would just be a huge validation for Blackrock and other asset managers to launch these ETFs, which should send crypto higher,” Stokes says. “I think a [US-listed] ETF has always been inevitable.”
Despite their bullishness on Bitcoin, both Zagari and Stokes argue for a forthright discussion with clients about risks and bad actors in the space. Stokes may think that the FTX crash set the stage for this current run, but he’s also willing to discuss the intricacies of that scandal in detail. He outlines, though, that a large-scale fraud on the back of cryptocurrencies was more of a failure in regulation and oversight than a failure of the asset class itself. It was not as though individuals were transacting two payments with the same coin — which would fundamentally undermine its value. Rather opacity on an exchange was used to defraud investors.
Zagari, too, will bring up FTX and other risks even if his clients don’t. He frames it in the context of economic history, however, and highlights how every nascent industry and asset class has arrived at a scam or scandal of a similar nature. Out of those crises, typically, regulators step in and legitimize the space, ensuring greater consumer safety while allowing business to function.
“The CEO of Coinbase has been pushing for regulation and for clarity,” Zagari says. “Some of why Sam Bankman-Fried was able to do what he did was because of delays on the political side.”
Zagari believes that as advisors begin to look at cryptocurrencies again, they can parse through the risks and opportunities inherent in these assets by taking the time to properly educate themselves.
“Advisors need to do their homework and understand the utility of the technology, just as they would work to understand how Uber or Amazon make money,” Zagari says. “Once they can really understand how Bitcoin works, what its features are, what risks it’s associated with, then they can up their game in this space. If they’re not willing to put the time and effort into learning the technology, then they shouldn’t comment. That would be no different than blindly buying Uber because the price looks good.”
John Stokes is an Investment Advisor with Haywood Securities Inc., a Canadian based, independent investment dealer and a member of the CIPF. Any information presented in this interview is for informational purposes only and is not a solicitation or an offer of securities. The views expressed are those of John Stokes and not necessarily of Haywood Securities Inc. Readers are cautioned not to act on any information without first obtaining the advice of a licensed investment professional.