Cryptocurrencies Haven't Been Relevant in Portfolios. That Might Be About to Change.

Many people believe that a stable and predictable number of coins suggests that Bitcoin represents a "store of value," or "digital gold." The store-of-value philosophy, however, is a long-term view. Cryptocurrencies currently experience wild market swings, but the store-of-value philosophy suggests that once cryptocurrencies reach market saturation, people will recognize that the limited supply puts a stable value on the exchange of labor over time. 

For instance, let's say that today I agree to charge you X dollars to build a dock, but between today and tomorrow, X dollars can no longer buy what I planned to buy with it. Those dollars weren't a great mechanism for exchanging labor or storing the value of labor exchanged in the past. One line of thinking suggests that once Bitcoin is fully mature, it will be a better option for exchanging labor or storing value over time given its stability.

At the same time, though, Bitcoin detractors have pointed out that the Bitcoin network simply isn't fast enough to support a decentralized payment network at scale. Other cryptocurrencies such as Ethereum have emerged as options for a medium of exchange by solving some of the transaction speed problems surrounding Bitcoin. The ultimate question is how these altcoins will perform and interact with Bitcoin, with one another, and with traditional fiat currencies, and how each technology evolves over time.   

What's Coming

What does all this mean for your clients? Right now, there are only a few ways to get exposure to crypto in client portfolios without buying crypto-assets directly. The goal of these products is to wrap cryptos in familiar structures for tax reporting and regulatory compliance.

Here's the challenge today: Many of these products can trade at significant premiums or discounts to the net asset value, making the risk discussion highly relevant for advisors who are working with any amount of crypto-assets. If more products receive regulatory approval, we are likely to see crypto as an asset class in far more client portfolios.

Financial advisors need to become knowledgeable about cryptocurrencies. It is likely that we will start to see them in client portfolios more frequently going forward. We're going to need to plan for them, or at least be able to plan around them to help our clients reach their financial goals.

Joe Elsasser developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn't find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Joe later founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model "what-if" scenarios with account positions and align a client's risk tolerance with their portfolio risk. In January 2019, Covisum launched Income InSight, an income planning tool.

Covisum powers some of the nation's largest financial planning institutions and serves more than 20,000 financial advisors.