A survey by global market research company CoreData found that seven in 10 advisers believe there will be more cryptocurrency failures in 2023 than last year, and more than a quarter (26%) expect to see the asset class collapse on a larger scale than that caused by FTX and Sam Bankman-Fried in November 2022.
“These findings show that advisors are approaching cryptocurrencies with the utmost caution in the wake of the collapse of the FTX exchange and amid expectations of further failures,” CoreData founder and principal Andrew Inwood said in a statement.
The study surveyed 250 advisers in February: 84 wirehouse advisers, 126 independent broker/dealers and 40 registered investment advisers.
Advisors at wirehouses expressed more pessimism about a potential for a major crash in 2023 — a third of wirehouse respondents believe it will happen, compared to just 18% of RIAs.
“I don’t know if it will be anything as big and centralized as the fallout from FTX, even though Binance hasn’t fallen yet and was the biggest competition to FTX,” said Saira Rahman, VP of new investor initiatives for Fundrise, an online alternative investment platform.
While they may be less concerned about a major collapse, RIAs also see less utility for crypto in portfolio construction. Only 6% of all respondents agree that the asset class has a role to play in client portfolios, falling to 3% for RIAs and climbing to 10% for wirehouse advisors. Meanwhile, 68% of all advisors said they disagree. Only 5% see cryptocurrency as an effective inflation hedge, while 72% do not.
“Citrine is of the belief that crypto can play a small role as a hedge in a portfolio, but only when using well-established cryptocurrencies – like Bitcoin – at this point,” said Kiersten Peshek, lead wealth advisor at Citrine Capital, a San Francisco-based RIA with $167.5 million in assets. “As a firm, we are very focused on ESG and doing right by people/planet, so our founder wrote an article last year arguing for the ESG side of Bitcoin discussing that side of crypto.”
A majority of all advisors – 69% – agree that the FTX debacle reduced client appetite for cryptocurrency investments. On average, advisors reported that only 4% of their clients are currently invested in crypto. This ticks up to 5% for wirehouse advisors, but drops to 1% for RIAs.
Only 12% of all advisers see increased client interest in cryptocurrencies.
“I agree that the circumstances surrounding FTX have led to a slowdown in demand and a reduced excitement for digital assets including cryptocurrencies,” said Kristian Mtetwa, an associate VP and private wealth advisor at 49 Financial, an Austin-based RIA with about $230 million in client funds.
Noting that his customer base is largely made up of young and entrepreneurial investors, Mtetwa estimates that around 35% are invested in a cryptocurrency. He said inflationary pressures drove these investors to move crypto assets into “cold storage” wallets kept away from mainstream exchanges even before FTX hit the headlines.
“Because of this, many of the crypto bulls have not changed their feelings regarding the long-term viability and opportunities surrounding cryptocurrencies, especially Bitcoin,” he said.
Among all advisers surveyed, less than a fifth (18%) believe that cryptocurrencies will become more attractive when interest rates retreat.
Only one in 10 believe the asset class will outperform the benchmark S&P 500 in 2023, and only 8% believe the “crypto winter” of 2022 is over. Conversely, more than a third (37%) of advisors say the crypto bull market of 2021 will never be repeated.
Advisor respondents are also skeptical that digital currencies will gain widespread acceptance in the short term, with only 9% believing they will become mainstream within the next five years.
“There is a case to be made for the expectation of future rallies in that market because of the unique utility and limited nature of some of these digital assets,” Mtetwa said. “It would be naive of us to write off cryptocurrencies and other digital assets as relevant five plus years from now. They certainly have a role to play in the future for our economy and for our customers.
“However, at this time we are limiting our advice to areas where we have a deep level of confidence based on academic and historical data,” he added.
“My experience with the crypto market is that every few years something revives its popularity,” said Fundrise’s Rahman. “In 2021 there were NFTs; in 2020 it was Bitcoin; in 2017/2018 there were ICOs; in 2015/2016 it was Coinbase, and there are more to come. It just depends on how the technology changes.”
While 37% of respondents see the prospect of high returns as the biggest potential benefit, 31% identified fraud and scams as the biggest risk to investing in crypto and seven in ten said they would not recommend it due to increased regulatory scrutiny.
But insufficient regulation can also act as a deterrent, according to Devon Drew, a former Vanguard broker/dealer turned CEO of AI-based distribution platform Diligence Fund Distributors.
“They’re still considered a relatively new and unproven investment,” Drew said. “Financial advisors may be hesitant to recommend cryptocurrencies as an investment due to their volatility and lack of regulation.”
At the end of the day, the same number of advisers who believe a major collapse will occur in 2023 (26%) said they do not understand cryptocurrencies well enough to allocate assets to them. A number of advisers contacted for this story declined to comment, saying they are “steering away” due to both insufficient knowledge and a lack of client interest.
“There are financial advisors who recommend cryptocurrencies as part of a diversified portfolio as they can provide opportunities for growth and potentially higher returns,” Drew said. “However, it is important to note that investing in cryptocurrencies carries significant risks and should only be done after careful consideration and research.”
“The first few months of 2023 illustrate the rollercoaster-like volatility of crypto and serve as a timely reminder that investing in the sector represents a high-risk venture,” said CoreData’s Inwood.
