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Since its inception in the depth of the great financial crisis, bitcoin’s price has increased by thousands of a percent, withstanding exchange hacks, theft, criminal busts, and heated debate in household discussions. You’ve probably gotten several client questions over the past few years about using their portfolio to invest in bitcoin.
I’m here to tell you why they shouldn’t do that.
If you’re not sure what bitcoin is, this article isn’t for you. Whether you see it as an investment asset, currency, digital gold or a tool for illegal activity is beside the point. It’s been the best performing investment of the past decade, so naturally people want it in their portfolio.
Investor demand hasn’t gone unnoticed, and virtually every bank/investment company is offering high-net worth clients access to bitcoin. Like the old Wall Street saying goes, “If the ducks are quacking, feed ’em.”
I disagree: Here are my top five reasons clients should buy bitcoin on their own, if at all, outside of their portfolio.
- Fees
Like most alternatives Wall Street offers, bitcoin access isn’t too good to be true, it’s too good to be cheap. With rampant industry fee compression, firms have found a new offering on which they can upcharge. Morgan Stanley requires a 3% upfront “placement fee,” while the Grayscale Bitcoin Trust charges 2% annually to run their multi-billion-dollar fund. Buying bitcoin through an exchange requires a small one-time commission, which you then hold in your wallet for free as long as you’d like.
Costs matter, and avoiding unnecessary ones is part of an advisor’s value-add.
- Taxes
Cryptocurrencies are treated as capital assets, subject to the same short- and long-term capital gain tax rates that apply to stocks. However, there are no wash-sale rules for crypto. When you sell a stock at a loss, you must wait 30 days to rebuy it if you want to realize that loss on your taxes.
With crypto, you can lock in a loss immediately, and start a new position (with a new cost-basis) seconds later. With how volatile crypto assets are, this can be valuable for tax planning… and something not available through a securitized fund in one’s portfolio.
- Liability
If your recommendation is for a client to own bitcoin in their portfolio, and you’re charging a management fee, you can and should be held responsible as a fiduciary. Everything in a client portfolio can be litigated. This is the reason we have trade tickets that indicate whether the trade was solicited or unsolicited.
Bitcoin has had three 80% drops since 2012 and is in the middle of a 40% crash this year. Are you prepared to have that risk tolerance discussion every year?
And how do you benchmark portfolio performance if it has a sleeve of cryptocurrency?
- Centralization
Bitcoin was born out of the financial crisis as a decentralized solution to the monetary system. Fanatics claim bitcoin solves several problems with the highly regulated (and manipulated?) banking system.
By design, payments are virtually anonymous, have no transaction limits, and digital wallets are not linked to individuals. Transactions aren’t reported to the IRS by anyone except the taxpayer.
Now imagine securitizing that asset into a product with a record of shareholders, 1099 issuance, and ownership in investment accounts attached to Social Security numbers and identity verification. At the very least, bitcoin funds would be become part of the very “problem” it was created to solve.
- Possession
I realize the irony of discussing the possession of an intangible asset. Like gold, bitcoin is seen as a currency, meaning it can act as a store of value. Unlike gold, you cannot hold it in your hands.
I’m not a doomsday type, nor are most successful investors. Crypto advocates, on the other hand, can be. Several bitcoin proponents envision a future where worthless dollar bills float through empty streets, and wheelbarrows full of cash are required to buy a banana. In this fantasy, bitcoin holders have the most valuable currency and use it to transact daily.
Now, imagine “owning” bitcoin in your portfolio; You’re stuck with transacting during market hours, T+2 settlement time, conversion back to dollars, ACH/check processing times and a 1099 awaiting next January every time you withdraw. Whether the apocalypse comes or not, the extra steps between you and your currency must be acknowledged.
If your client wants to own bitcoin, skip the portfolio placement and encourage them to get their feet wet at a popular crypto exchange (like Coinbase or Gemini). You’ll leave a little AUM on the table, and the headaches that go with it.
Joe Sweeney is a founding partner at Sweeney & Michel, LLC, a California-based registered investment advisor, and has been with the team since 2010.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
