How to Advise Clients When Bitcoin and Other Cryptos Crash

By Ross Snel

Ric Edelman

Financial advisors likely are fielding calls from clients asking about Bitcoin’s gut-wrenching selloff on Wednesday, which saw the cryptocurrency plumb a low of $30,200—less than half the all-time high it notched in April. 

Clients may have anxiously sought advice on a crypto bet gone wrong in a “play money” account or enthusiastically asked whether now is the time to get into crypto. 

But good financial advice doesn’t waver during eruptions of volatility, no matter what the asset is, say some advisors and crypto experts.

“This is no different than any other crash,” says Ric Edelman, founder of Edelman Financial Engines, Barron’s top-ranked RIA firm.  

“A year ago when the stock market fell 35%, advisors most likely told their clients to stay focused on the long term and regard it as a buying opportunity. 

The same thing applies here.”

A cryptocurrency enthusiast for years, Edelman started buying Bitcoin on his own back in 2014. 

Yet he has long tempered his optimism about the potential of blockchain technology with realism about Bitcoin’s extreme volatility and prudence when it comes to its appropriate place in an investment portfolio. 

A 1% allocation is about right, he says. (His firm doesn’t yet allocate to crypto because it uses only mutual funds and ETFs.) 

Edelman isn’t the only crypto advocate quick to stress the importance of diversification and asset allocation. 

“Our research shows that crypto allocations between 1% and 5% of a portfolio are the appropriate areas to be considering as an investor,” says Matt Hougan, chief investment officer at Bitwise Asset Management, which offers crypto index funds targeted at investment professionals. 

“Once you get above 5%, the kind of volatility we’re experiencing today can lead to negative behavioral outcomes.” 

In other words, investors can rashly sell when prices crash, locking in their losses.

In the past few months, some retail investors have thrown the wisdom of diversification to the wind, making overweight bets on cryptocurrencies partly in reaction to herky-jerky announcements from Tesla and its serial tweeting CEO Elon Musk  about the company’s involvement in crypto. 

Those announcements helped lift Bitcoin to a zenith of nearly $65,000.

“Too many investors have been acting like lemmings not understanding the technology, trying merely to get rich quick by riding the coattails of one of the world’s richest men,” Edelman says. 

“And it’s not at all a surprise to see this absurd level of volatility.”

As if to provide an example of its wild swings, Bitcoin staged a bounceback from its low Wednesday that added more than $8,000 to its value by about 2:15 p.m. ET. 

It was still down more than 9% for the past 24 hours but had significantly pared its losses.

Helping clients understand and accept that volatility, while viewing crypto as a long-term investment, is crucial for advisors, says Hougan.

“There’s nothing about this selloff that’s surprising to people who have been involved in the crypto market for a long period of time,” he says. 

“Volatility is an important feature of the crypto markets. 

You don’t get the upside without the risk.” 

Of course, some advisors are skeptical about whether crypto deserves even a small place in a portfolio. 

Among them are those at independent broker-dealer Kestra Financial, says CEO James Poer.

“Our investors are far more stay-rich investors rather than get-rich investors,” he says.”

There are plenty of other ways to build out a portfolio,” he says. 

“It’s fun to watch something go up and be a part of it, but the downside risk is very real.”

In the wake of Wednesday’s selloff, Edelman bluntly says advisors and clients—whether they’re crypto enthusiasts or skeptics—should follow an evergreen rule: Stick to the plan. 

“If your strategy was to have 1% of your portfolio in Bitcoin, due to the decline, you probably have less than 1%, which means this is now a buying opportunity to build the portfolio back up to 1%,” he says. 

“If you do not currently own Bitcoin, you probably had a good reason for that. 

So again, I’ll say, stick to your strategy.” 

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