Bitcoin: what do your clients need to know?

In 2021, 94 per cent of financial advisors fielded client questions about cryptocurrency.

If this doesn’t indicate that it’s a firm part of the financial zeitgeist, then the fact that approximately 59.1 million Americans owned some form of cryptocurrency in the same year probably will.

But let’s not get ahead of ourselves. Some of your clients will still be in the dark about crypto and Bitcoin. And those that aren’t, need to know if it’s right for them.

That’s why it’s more important than ever for financial advisors to know the hard facts —  starting from the beginning. 

What is Bitcoin?

Cryptocurrencies are a type of decentralized digital currency that are verified and maintained through cryptography and computer networks.

Bitcoin was the very first cryptocurrency and is the most well-known. It was created in 2009 by Satoshi Nakamoto, a name shrouded in mystery; it is unknown whether Nakamoto is a single person or a group of people. 

More than a decade since its inception, a large portion of the world’s money is invested in Bitcoin.

In 2021, it was estimated that all the Bitcoins in the world were worth roughly $1.03 trillion. And now, there are more ways than ever to invest in Bitcoin.

But are any of them right for your clients?

How do you invest in Bitcoin?

Bitcoin is created, traded and stored through a blockchain, a decentralized ledger system and a shared database that stores data.

While the process of “mining” allows anyone to create crypto by solving a series of digital puzzles, Bitcoin can be bought using a cryptocurrency exchange.

The first Bitcoin transaction took place in 2010 and saw the exchange of 10,000 Bitcoin for two Papa John’s pizzas worth $25.

However, these days one Bitcoin alone costs thousands of dollars — meaning most people that invest will only be purchasing a portion of one Bitcoin. 

Buying Bitcoin — or a portion of Bitcoin — isn’t the only way to invest, though.

Other ways include:  

• Using a cryptocurrency exchange and wallet provider such as Coinbase 

• Trading via Cash App, which supports bitcoin trading 

• Investing in companies that have large Bitcoin investments on their balance sheet 

• Investing in crypto-related exchange-traded products 

If you have invested in Bitcoin directly though, you can hold onto it as an investment and wait for it to climb in value, before selling it or using it to buy goods and services wherever it’s accepted. 

In 2021, it was estimated that all the Bitcoins in the world were worth roughly $1.03 trillion

The pros and cons of Bitcoin

Crypto remains on the lips of many investors in the US, so it makes sense to have a firm sense of the benefits and drawbacks surrounding Bitcoin.

That way, you can offer a measured view of the trade-offs and give each individual client the best advice on whether Bitcoin investment is suitable for them.  

Pros of Bitcoin 

• Accessibility: There are no borders or barriers to investing in Bitcoin. You can invest as much or as little as you like. Plus, it’s easy; you can log in and trade in Bitcoin with minimal effort 

• Decentralized: With no single point of failure, such as a large bank, there is no single point of failure should something go wrong, eliminating the chance of financial crises 

• Privacy: With anonymity at the fore in Bitcoin trading, there is an increase in trader privacy. Transactions are permanently visible for transparency; they’re still kept safe through blockchain technology. Plus, there’s no public tracking, so transactions can’t be traced back to the user 

• Returns potential: It’s no secret that Bitcoin traders have won big on crypto if they’ve played their hand well. The exponential rise in crypto prices saw some traders make enormous profits — though there is also potential for significant losses, too  

Cons of Bitcoin 

• Unregulated: The trade-off with having a decentralized system is that there is no legal protection on the blockchain, so you’re not protected from scams like you would be with a central bank   

• Volatility: Investing in Bitcoin is high risk, high reward because of its volatile nature. You only have to look at the price fluctuations in 2022 to see the evidence; in January, one Bitcoin was worth $37,983 – by September, it dropped to $19,563    

• Security: Blockchains are widely considered to be secure. However, some instances of successful hacking have seen millions of dollars’ worth of Bitcoin stolen from traders 

• Limitations: While crypto becomes an increasingly mainstream financial mode, ultimately it is still limited in its usage because it is not yet a widely accepted form of currency  

The current state of crypto

Volatility is part and parcel of cryptocurrency. It’s easier than ever to buy and sell Bitcoin, but the wider economic landscape will no doubt influence its value as an asset for investors.

With interest rates high and the cost of living soaring thanks to macroeconomic issues like the Russia-Ukraine conflict and the pandemic aftermath, the trading environment may not appear particularly attractive. 

What’s more, governments around the world are looking into how they can regulate cryptocurrency, with President Joe Biden signing an executive order calling for a broad review of digital assets, including cryptocurrencies.

Plus, the environmental impact of “mining” adds further controversy to the crypto world.  

However, keeping your finger on the pulse of Bitcoin and other cryptocurrencies could put you a step ahead.

As a financial advisor, it’s important you keep informed on the day-to-day changes in crypto — and if one thing’s for sure, it really does change from day to day.

But if you’re already required to keep on top of crypto, then you may be in a good position to invest yourself.

Your expertise will give you an upper hand since you’ll be more attuned than most on when to buy and sell.  

What should you be asking your crypto-curious clients?

Naturally your clients will have plenty of questions about Bitcoin and the wider cryptocurrency world.

But if you’re advising them on whether it’s right for them, you’ll want to ask some questions of your own.

Some helpful starter questions to establish whether Bitcoin investment is right for them are: 

• Why do you want to buy Bitcoin? (Are the reasons valid, or does your client just have a fear of missing out) 

• What is your risk tolerance? (If your client is risk averse, then Bitcoin — or any other cryptocurrency — is probably a bad move)  

• Do you have an emergency fund? (If not, this should be the priority for your client) 

The financial world is always in motion, and investors will turn to you to help them navigate it.

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