The Challenges and Opportunities for Crypto Investors
Investors who purchased Bitcoin in the past year have faced a difficult period, which might come as a surprise given the optimism that surrounded the digital asset market last year. It seemed like a significant turning point for cryptocurrencies, with the Trump administration taking a pro-digital-asset stance. This led to the passage of the Genius Act, which established a federal framework for stablecoins—cryptocurrencies pegged to traditional assets like the U.S. dollar. Additionally, President Donald Trump signed an executive order that created a Strategic Bitcoin Reserve and a U.S. Digital Asset Stockpile.
During this time, crypto continued to gain traction among Wall Street institutions and corporate treasuries. There were also various public offerings, including those from companies such as Circle Internet Group, Gemini, and Bullish. However, since Bitcoin reached a record high of $126,273 in October, the environment for crypto has turned increasingly bearish. As of now, Bitcoin is trading around $66,000, marking a nearly 50% drop from its peak.
For financial advisors managing clients with crypto allocations, one of the primary goals should be helping them avoid selling at a low. Here are some strategies to consider:
Focus on the Long Term
In harsh bear markets, it can be easy to lose sight of the long-term perspective. Stu Bradley, a wealth advisor at Hightower Signature Wealth, emphasizes the importance of a high-conviction framework: “Holding Bitcoin for five to 10 years, plus.” He notes that while Bitcoin is prone to leverage in the ecosystem, which can amplify selloffs, this does not diminish its role in a diversified portfolio.
Revisit the Initial Investment Reasons
It’s crucial for clients to remember why they initially invested in crypto. Besides growing institutional adoption and positive regulatory developments, there are several other reasons investors may choose to hold digital assets:
- Diversification: Crypto can behave differently than stocks and bonds. Even a small allocation can help improve portfolio diversification.
- Currency Hedge: Fiscal and monetary policies of governments can greatly impact the value of one currency compared with another. This isn’t the case with crypto.
- Access to Innovation: The blockchain is the foundation of trends like tokenization, digital payments, and decentralized finance. Advances in these areas can help bolster demand for cryptocurrencies.
Consider Tax-Loss Harvesting
According to Christopher King, founder and CEO of Eaglebrook, a crypto investment platform for wealth managers, tax efficiency is a key advantage of cryptocurrencies. “Unlike equities, crypto isn’t currently subject to the wash-sale rule in the U.S., which creates opportunities for active tax-loss harvesting in volatile markets,” he says. “For taxable investors, that tax alpha can materially improve after-tax returns over time.”
Keep in Mind Bitcoin’s History of Rebounding
Advisors with clients allocated to crypto should share historical data. Investors will see that while there have been multiple bear markets in crypto, all of them have been followed by strong recoveries.
“The headlines tend to treat drawdowns as proof-of-failure,” says Bradley. “As regards the flagship digital asset, Bitcoin, investment practitioners who analyze activity on the Bitcoin Blockchain generally treat drawdowns as the market doing what it always does: Testing conviction, flushing leverage, and redistributing coins from weak hands to stronger hands.”
Bradley adds that the February plunge coincided with drawdowns across other asset classes. “The plunge changes the time horizon of the conversation, not necessarily the thesis,” he says.
Remember to Rebalance
King suggests that advisors are generally recommending allocations for clients in the 1% to 2% range. Over time, this can grow to a 3% to 5% allocation, which is best for clients with higher risk tolerance or longer time horizons.
“Advisors are increasingly treating crypto like any other asset class—rebalanced, risk-managed and integrated into the broader portfolio,” said King. That’s how advisors should talk to clients about their own crypto investments. “The conversation has shifted from ‘should clients own crypto?’ to ‘how should crypto fit responsibly into a well-constructed portfolio?’”
Understanding How Clients Hold Crypto
Finally, advisors need to ensure they know how clients hold crypto, especially if it isn’t part of the accounts they directly oversee. Generally, investors use two main methods: indirect and direct.
With indirect exposure, a client will purchase publicly traded securities like ETFs, miners, and exchanges. “These vehicles can be familiar and operationally simple, but they come with trade-offs including tracking error, fees, structural constraints and limited tax flexibility,” says King.
Direct exposure means that the client owns the digital asset. This can be through a self-custodied wallet, on an exchange, or in a separately managed account (SMA). For the client, owning directly can provide more transparency and control over tax consequences.
Tom Taulli (@ttaulli) is a freelance writer, author, and former broker. He is also the founder of EmbedCalcs, which is a provider of online financial calculators. He is a long-term holder of crypto assets.