What Advisors Should Know About Cryptocurrency

Apr 26, 2022 Share This 

4.26_CryptocurrencyYou’ve seen the articles online. You’ve heard about it on the news. You maybe even saw some commercials related to it during the big game.

We are, of course, talking about cryptocurrency. Have your clients asked you about this yet? While it didn’t just arrive on scene this past year or two, cryptocurrency picked up traction recently, especially as the U.S. continues to experience financial stress and market volatility.

What should advisors know about cryptocurrency, and how can you steer your clients in the right direction?

Before we get into what advisors need to know about cryptocurrency, let’s define it first. The idea of a currency that a client can’t physically hold or put in their real-life wallets can be hard to grasp, but the IRS offers a solid explanation. Cryptocurrency falls under the umbrella of virtual currency, which the IRS defines as follows:

“Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.”1

Some of those currencies can be substituted for real currency or have an exchange value.1 

Cryptocurrency, more specifically, is a kind of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, like a blockchain.1 

Cryptocurrency is not regulated, so transactions can be completed digitally without a middleman. Often, people will use cryptocurrencies to make quick online payments without transaction fees or with added anonymity, while others save theirs to see if the value increases.2

While that may sound appealing, it doesn’t come without risks. The risks here are quite high, as cryptocurrency is kept in a digital wallet, and if anything happens to it, such as if a payment is sent to the wrong person or the digital wallet is compromised, there likely won’t be a way to recover it.2

How Can Advisors Offer Guidance About Cryptocurrency?

Unregulated. High risk. Those are the key words your clients might need to keep top of mind. Because of its nature, the cryptocurrency world is replete with ill-intentioned scammers and con artists. So, one of the first things an advisor might want to tell a client who is interested in looking into cryptocurrency investments is, if you’re going to proceed, do so with caution.

This isn’t to say that the hammer should necessarily be thrown down altogether on cryptocurrency. Enthusiasm around cryptocurrency is growing and becoming more serious.3 Discussions are happening all across the country, and it’s in your clients’ best interests to stay informed rather than mindlessly walking into the buzzsaw of a potentially ruinous financial scam.

Scams are common with cryptocurrency. You may want to relay to your clients the advice from the Federal Trade Commission, which warns that if anyone sees a tweet, text message, email or other message on social media that tells them to pay with cryptocurrency, it’s a scam.2

Define cryptocurrency to your clients, and emphasize that as of right now, it’s completely unregulated and unbacked by the government. Whereas a credit card payment that goes awry is required to be handled and corrected, that’s not the case with a cryptocurrency transaction. If such a transaction goes wrong for a client, they’re likely left on their own.2

Clients could purchase cryptocurrency themselves, but that could mean adding more risk to an already risky situation. Clients interested in making any kind of risky cryptocurrency investment would probably benefit from doing so through a reputable brokerage firm. Whether they make that choice is ultimately up to them, but your guidance can play a role in their decision.

These are volatile waters, and many questions remain unanswered. That’s why it’s important for you and your clients to keep an eye on any credible news about cryptocurrency — which, these days, seems to appear almost daily.

Behavioral Finance Advice

With all the buzz around cryptocurrency, clients may be eager to jump right in, which isn’t the best idea. It’s important to help clients make sound financial decisions that are appropriate for them using a rational approach rather than entertaining every impulse and simply following the crowd.

That’s where our Behavioral Finance Advice Program can provide essential tools to help you help your clients. Click the link below to learn more.

AN ADVISOR'S GUIDE TO BEHAVIORAL FINANCE

 

SOURCES
1Internal Revenue Service, Frequently Asked Questions on Virtual Currency Transactions
2Federal Trade Commission, What to Know About Cryptocurrency and Scams
3CNBC, Financial advisors struggle with putting their clients into cryptocurrencies, November 2021

 

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Topics: Economic Commentary