Ready For The World Of Cryptocurrency?

Interest in cryptocurrencies is intensifying again, as some investors take another look at digital assets as a store of value.

This comes after Bitcoin’s wild ride between 2017 and 2018, when it rose to nearly $20,000, only to fall to under $3,000 a year later. By mid-2019, it had risen to $10,000, aided in part by the June announcement that Facebook plans to launch its own cryptocurrency, Libra, in 2020. Among Libra’s backers are Visa, Uber and venture capital firm Andreessen Horowitz.

Cryptocurrencies remain a relatively new asset class, but Bill Taylor, chief investment officer for Fintek Capital, says the space is evolving. A few years ago, virtual coins “were basically a token attached to a project—or a dream—with no intrinsic value,” he says. “Think of cryptocurrencies of a few years ago as penny stocks of years past.”

But since then, they have matured. Now most security token offerings (STOs), which are a more credible and regulated form of initial coin offering (ICO), are backed by real assets such as gold, real estate and, in the case of Libra, a group of global fiat currencies, Taylor says.

Additionally, there’s now a futures contract on Bitcoin. Meanwhile, the Securities and Exchange Commission now considers Bitcoin and its competitor, Ethereum, to be currencies as opposed to securities.

Still, most financial advisors familiar with cryptocurrencies, as well as professionals focusing on securities law, say advisors should remain cautious about holding any client assets in digital currencies. These experts recommend that advisors get comfortable with the concept by learning about the major crypto names and how they work. Although it might be too soon now to invest in digital assets on behalf of clients, these assets are not going away and someday will likely play a role in client portfolios.

Custodial Conundrum

Aside from acknowledging that Bitcoin and Ethereum are currencies (not securities), the SEC hasn’t given advisors much more guidance than that, says Marta Belcher, intellectual property litigation attorney at Ropes & Gray.

“There has been regulatory uncertainty for years regarding whether—and under what circumstances—digital assets are securities, and that uncertainty has often been cited as hampering the growth of the industry,” Belcher says.