Crypto has had a terrible, not good, very bad year. What advisers say to do now.

No one claims that crypto is an inflation hedge anymore – in fact, the classic inflation hedge, gold, has beaten digital currencies this year. On the other hand, aspiring investors may see crypto as a bargain right now. And owners who were holding it when it crashed are probably wondering what to do with it. So for this week’s Big Q, we asked advisors what they tell clients about crypto.

Andy Wang, Advisor, Runnymede Capital Management: There have been fewer customer inquiries this year than 12 months ago. Last year there was a degree of fear of missing out, which has not been the case this year.

What does a financial advisor tell clients about crypto? It’s a bit challenging because of the volatility and concerns about how crypto is valued and regulated. Cryptocurrencies have not acted as a hedge against inflation or acted as digital gold. They are speculative, and they tend to move directionally with other risk assets: when there is a bear market in stocks, there tends to be a bear market in crypto. So the cycle matters, and because of that, right now is probably not a good time to add more risk to a portfolio. When the time comes, if it suits a client, a small allocation to crypto may make sense. If a client has a large percentage of their portfolio in crypto, they may want to consider calling back.

Does crypto have intrinsic value? I think there is a potential for something to really be there. I have not advocated for clients to own crypto to date, but it is an area I am following very closely. While not expecting another speculative crypto bubble in 2023, there is a possibility that crypto will be integrated into major platforms, and blockchain may find its way into social media apps, banking, logistics and other areas. However, in my view, it is still early days to view crypto as an asset class.

Chris McMahon, Managing Director, Aquinas Wealth Advisors: Even with the halving of its value, crypto has a market cap of trillions of dollars. I don’t think there is any possibility of it going away. I think that in a 60/40 type of allocation, investors should have 6% of their portfolio in aggressive growth, and half of that could go to crypto, because that’s exactly the kind of opportunity there. The technology surrounding blockchain may be even more important than the crypto game.

You know, a lot of companies fell away after the dot-com bubble burst. But it turned out there was an underlying value there. For most, ETFs are the way to go for crypto exposure; the coins themselves are too expensive. I personally had an account with (cryptobroker) Voyager. And Voyager exploded, which was frustrating. I’m still getting papers from the class action. But if you buy an ETF, you don’t have to worry about any of that.

Mark Matson, CEO, Matson Money: We believe crypto is extremely dangerous for people. They call it a currency, but that’s a misnomer. You simply cannot consider an asset that can lose 50% as a currency. It is not a good hedge against inflation, which is one reason why some people buy it. When I buy a stock or bond, at least I have a company with real assets backing it.

And it’s not just crypto; you have NFTs, which are just art on the internet. You have the metaverse, where someone paid $450,000 to buy a virtual plot of land next to Snoop Dogg. All this is just madness. It’s another way for people to speculate and gamble their money and get hurt.

If you bought crypto at a high, the emotional tendency is to want to wait to sell it until you break even. But like a Vegas gambler, there’s no guarantee you’ll ever break even. So the best approach as an investor is to ask yourself: When is the right time to be cautious? Buying it in the first place was a careless, speculative move. And the best thing you can do is sell it. You have to ask, “How can I allocate my money for the future and take my lumps and not get emotionally attached to a loss?”

George Schultze, managing member, Schultze Asset Management: We tell customers who are interested in buying crypto that it may sound like a good deal right now because it has fallen so much. But at times like this, it’s best to be patient and then reconsider. Although we have seen so much value lost in the last year, crypto would have to go lower before it becomes an interesting asset class. I don’t think we’re there yet; I don’t think there has been enough capitulation.

And if you’re looking for a hedge against inflation, it’s probably much safer to look to precious metals that have stood the test of time. Crypto, on the other hand, is a new market exposed to all kinds of different risks right now. There is a risk of fraud. We’ve seen crypto platforms implode and coins get stolen. There is regulatory risk: the IRS now requires taxpayers to include gains from crypto on their tax returns, and the SEC has begun saying that certain coin offerings are security offerings, and therefore subject to all the rules that come with a securities offering. There are big changes. And some countries simply make crypto illegal.

John Thiel, Advisor, Wealthspire Advisors: Crypto tokens and coins are highly speculative investments where wild fluctuations in price can be expected. For example, Bitcoin is down over 50% so far this year. But cryptoassets and the blockchain are a truly innovative technology that will transform the financial landscape over time. I think Bitcoin and Ethereum have the strongest track record for security, stability and have the best long-term use cases. I also believe in buying and holding for the long term and not trying to trade the volatility.

Most of the conversations I’ve had with clients about crypto are educational, but the tax element is important, especially considering how much prices have fallen this year. Crypto can be tax-loss-harvested in the same way that stocks can, except that crypto-assets are not currently subject to the wash sale rule. This allows holders to harvest tax losses more aggressively if desired. Most of the clients I work with who have crypto assets only own a small amount relative to their total asset base, so there are usually not huge tax savings opportunities.

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