As the global cryptocurrency market cap balloons to an eye-popping US$1.2 trillion and the market cap of all stablecoins surpasses $137 billion as of February 13, 2023, a frosty condition known as a “crypto winter” has taken over. Despite significant gains, the market has shown considerable volatility. In 2021, prices spiked in early May only to drop by 40% within the same month. By the end of the year, Bitcoin peaked at over US$65,000 only to lose around 70% of its value by September 2022.
Opinions among financial professionals, such as Noah Billick, Partner and Director of Regulatory, Funds and Compliance from Rennoco & Co., suggest that to deal with this changing environment, advisors need a sound awareness of the risks and benefits of investing in cryptocurrency. In Billick’s perspective, it has become a professional obligation for advisors to continually update their professional knowledge of this emerging asset class and educate their clients making sure their investment portfolios reflect the current phase of the market.
In the past five years, investing in cryptocurrencies has evolved from a risky fringe activity to a mainstream practice. Advisors who are unable to discuss cryptocurrency’s role in a client’s portfolio face the risk of failing their fiduciary duties. The U.S. Department of Labor (DOL) even issued a compliance assistance warning to 401(k) plan fiduciaries emphasizing ‘extreme care’ while considering adding cryptocurrencies to client portfolios, pointing out areas including the speculative nature of crypto investments, difficulty in informed decision making, custodial concerns, and evolving regulatory environment.
On the brighter side, the industry is progressing steadily. Despite being inherently speculative, crypto’s potential is becoming more evident as advisors are getting more insight into what factors make some coins more appealing than others. Custodial and recordkeeping practices have improved significantly, and regulated service providers are becoming the norm.
Regulatory developments are surfacing, with Canada leading, likely due to the collapse of QuadrigaCX, a Canadian-based exchange. Also, the approval of regulated products and services stands as a testament to crypto becoming a mainstream investable asset class. In 2019, Ontario Securities Commission approved a bitcoin ETF by 3iQ, and U.S. SEC in July 2023 approved spot bitcoin ETF applications from giants like BlackRock, Bitwise, and Fidelity.
Despite the volatile nature, the likelihood of cryptocurrencies playing a bigger role in future personal and institutional investment portfolios is high. Thus, advisors and financial professionals must continue to adapt and educate themselves about this maturing industry to meet their ongoing professional obligations. With a fifth of Americans already holding some form of cryptocurrency, it seems that the crypto winter may be thawing faster than expected.
Source: Coindesk
