Advisors don’t just need help with crypto education, they need to understand what is most important to learn, where they can learn it and how to parse that information to clients. In the process, the wealth management industry may have to navigate a confusing web of conflicted information, some of it offered by highly biased or otherwise untrustworthy sources.
The majority of quality crypto education now being offered comes from companies within the crypto industry, said Blake Richman, senior portfolio manager at Sarson Funds, an asset manager and educational resource for advisors in the digital assets space, but that doesn’t mean it isn’t quality information.
“A lot of us have spent the past few years evangelizing this stuff to our friends and family with varying degrees of success, but we do it because we believe there’s a global benefit to investing in this technology,” said Richman. “We find it important and we want to shepherd people through the education and at the same time advocate for active management.”
Active managers understand what’s happening in the crypto space, said Richman, and are familiar with the key players involved in the day-to-day news and the innovations that are happening. By learning from active managers in the industry, such as Sarson Funds, advisors may develop a better sense of how the cryptocurrency market behaves.
These managers have become trusted partners to advisors, but the digital assets industry still struggles with a perception problem. When Richman first came into the space, Ethereum was just being launched, and Bitcoin was primarily used as a medium of exchange for shady or explicitly illicit transactions within the darker corners of the internet.
“If you show up to a digital assets conference now, there are a bunch of people in suits exchanging business cards,” said Richman. “This change is a symptom of the market maturing. The crypto industry used to have a conception of being in the shadows. Now it has to emerge out of the old conception and shake off the reputation. The way to do that is by delivering new technology and accruing value for investors. The case for digital assets is getting stronger and stronger over time.”
There’s still a caveat—advisors should also think critically about where their information is coming from, Richman said.
“Navigating material on crypto should be undertaken the same way someone looking for objective information navigates the media – with critical thinking and an understanding that a journalist’s views may impact their writing,” said Richman. “You have to consciously crowdsource both sides of a topic. that’s getting easier and easier to do every day in crypto.”
Another note to advisors is rather than focus on the day-to-day volatility in digital assets and the drivers of that volatility, it’s more important for advisors to understand and to communicate the broader underlying trends driving the value of cryptocurrencies.
Part of being able to communicate the value of cryptocurrencies is having a familiarity with the ongoing development of blockchain technology. It is important for advisors to ensure they are staying educated and informed with the technology.
“I think the most elemental, driving force behind change in the industry is innovation,” he said. “Everything coming is a derivative of that. Now, the technology and development to date has drawn the attention of regulators, governments and traditional finance, who have all recognized that blockchain technology to some degree presents a threat to their influence.”
Different regulators have had different responses. While American regulators like Finra, the SEC and the CFTC have taken a measured approach to controlling the development of blockchain technologies, in other countries, China in particular, cryptocurrencies have come under closer scrutiny.
“The Chinese Communist Party banned cryptocurrencies and bitcoins. Again. At this point you need two hands to count how many times they’ve cracked down on digital assets, this isn’t even the first time this year,” said Richman. “It’s part of a larger economic effort to shift away from their brand of capitalism towards more government control in more of a balanced-type of economy. The administration of fiat currency is a huge part of that.”
China, along with some other countries, see cryptocurrencies as a threat to their sovereignty, said Richman. The results of such crackdowns are usually short-lived bouts of volatility.
Any advisor who wants to closely follow digital assets not only needs to understand the local approach, but also needs to take a global perspective. In recent weeks, El Salvador has adopted Bitcoin as an official currency, U.S. regulators squashed CoinBase’s effort to launch a high-yield crypto product, the UK’s Financial Conduct Authority moved to assume more control over the digital assets market, and all of that occurred before China’s latest crackdown spurred a new round of volatility across Bitcoin and most major altcoins.
Blockchains have the potential to disintermediate and “compress” some power stacks in government, business and finance, said Richman, leading some regulators to become hostile, or at the very least critical, of the technology.
“The innovation just doesn’t stop,” said Richman. “We’re seeing innovation with financial products and services, which are now delivered on a decentralized basis, permissionless and immediate, which can achieve aims like providing banking for underserved communities and credit availability in emerging markets. To that extent, the implications of this technology are endless.”
Over the past two years, cryptocurrencies have come out of the laboratory and into the real world, said Richman, blossoming into scores of well-constructed, trustworthy products, hundreds of thousands of daily active users and hundreds of millions of dollars being generated by blockchain protocols.
Two major areas to watch are tokenized securities and non-fungible tokens, or NFTs.
“The NFT theme is huge with the art and community aspects of it, but also with more immersive fan experiences,” said Richman. “It’s creating expanded bandwidth for creators to connect with their audience. It also has in-game applications, like play-to-earn with economics systems enabled in-game using that type of technology.”
With NFTs, artists can access a global distribution platform for their work without having to seek permission or have relationships. Success in the art world was once, in part, a function of where you live and who you know—but with NFTs, artists can sell their art using blockchain technology and create ongoing connections with patrons of their work.
While NFTs are already being popularized, in some cases selling for millions of dollars at auction, tokenized securities have been slower to develop.
“There is a lot of regulation that goes into this rapidly evolving space,” said Richman. “These things are securities and this impacts the way securities are traded by broker-dealers. How do brokerage custody laws apply to this? How will rule 15c-3 work with tokenized securities versus a paper security? There’s so much innovation that’s going on and there’s a lot to be excited about.”
Advisors should also understand the mathematical logic of investing in cryptocurrency, said Richman.
“There is now a more technology-enabled population than there was in previous generations, and this stuff is more comfortable for them and easier to adopt,” said Richman. “At the same time there’s been a destruction of trust in public institutions and finance. Those are the broader themes for people investing in the long-term.
“If you believe in the technology, the day-to-day news becomes a little less relevant.”