Why aren’t more financial advisors taking the time to truly understand bitcoin and other cryptocurrencies or the blockchain technology they are built on? Advisors might be dismissing bitcoin as a fad or are intimidated by trying to understand the technology behind it. And they might not realize how much that technology — the blockchain — could influence numerous other areas of our lives beside the ability to create and trade cryptocurrencies and tokens.
But financial advisors need to start taking these new technologies seriously, for three big reasons.
1: Clients want to learn about bitcoin and cryptocurrencies from a trusted source
With the increased mainstream media exposure bitcoin and other cryptocurrencies are receiving, more clients or potential clients are considering whether to get involved or simply want to better understand what it’s all about.
Not withstanding the regulatory uncertainty, the fact that most broker-dealers, banks and other financial institutions have strict rules governing an advisor’s ability to discuss cryptocurrencies, that is no excuse for an advisor not spending the time necessary to familiarize themselves with the basics of bitcoin, blockchain and digital currencies in general.
Now is not the time to be putting your head in the sand or clinging to uninformed opinions regarding bitcoin or other viable cryptocurrencies that may come back to haunt you someday if you end up on the wrong side of the digital innovations taking place today.
Ken Olson, founder of computer company Digital Equipment Corp, said in 1977 “there is no reason anyone would want a computer in their home.” By 2012, nearly 80% of all American households owned a computer.
To set your mind at ease, and perhaps that of your compliance department, we’re not talking about advisor’s providing advice on whether to buy, hold, or sell bitcoin, or any other digital asset. What we’re talking about is taking an academic approach to learning and understanding why bitcoin was created in the first place, what problems it was trying to solve, how it actually works, and in turn being able to share that information with clients so they can make their own informed decisions.
Rather than fight clients about the topic, or simply fail to discuss it when brought up, advisors should ask them what they know about it, and what is prompting them to want to talk about it. Share with them the history of bitcoin and how it relates to the overall evolution of money and technology.
Bitcoins launch in 2009, marked the first time in history that people across the globe can transact with each other in a peer-to-peer network, nearly instantaneously, with little cost, without relying on an intermediary. Bitcoin is the ”Internet of Money” as Andreas M. Antonopoulos, well known bitcoin advocate, aptly describes it, and is the title of a book he authored, which I highly recommend reading.
Take the time to learn the facts about bitcoin rather than accepting the myths circulating. Like bitcoin is dead. Since its inception, media outlets have declared bitcoin dead 278 times. Take with a grain of salt the overhyped, sensationalist news coverage that tends to only focus on what draws in viewers, including the favorite bitcoin punching bag line that bitcoin is only for drug dealers, money launders and the like, isn’t that what they said about the internet when it was first invented?
2: Blockchain technology is here to stay
I know what you’re thinking, I thought the same thing when I first heard the word blockchain, it sounds complicated and not worth my time to even begin to understand it.
But trying to understand bitcoin without knowing anything about blockchain would be a fruitless effort and miss the whole point of the importance of each. Bitcoin can’t exist without blockchain, but blockchain can exist without bitcoin.
So what exactly is blockchain technology?
Blockchain was invented by the mysterious person or group of people using the pseudonym Satoshi Nakamoto in 2008 and was the technology used to create the peer-to-peer electronic cash system named “Bitcoin.”
Blockchain is essentially a distributed, or shared, programable ledger of transactions (grouped into interconnecting blocks) which no single user controls (public blockchain) and that can be inspected by anyone.
Transactions on the blockchain are digitally signed, cryptographically secured, and transmitted over a global network of computers that collectively verify each transaction to ensure its authenticity and integrity. Every ten minutes the verified transactions are bundled together (in the case of the Bitcoin blockchain), and cryptographically added to the previous block of transactions. Hence the term “blockchain.” (This is the job of “miners” in the bitcoin blockchain network for which they are rewarded 12.5 bitcoins for every successfully “mined” block – we will cover bitcoin mining in a future article)
The ability for a blockchain to operate in a trustless, consensus environment with no central authority is what makes blockchain such a disruptive technology. Industries that make money by being trusted intermediaries will need to find new revenue sources, with blockchain technology middlemen won’t be necessary.
Industries that will see the greatest disruption could be financial services, publishing, real estate, title companies, and payment processors just to name a few. Existing disrupters will likely be disrupted themselves like Airbnb, Uber and even Netflix, by serving up digital media directly to viewers and paying royalties directly to creators.
3: Big names in finance and technology are getting on board
Venture capital firms are pouring money into blockchain technology startups. The number of large companies also funding promising startups in this area include Google, Citigroup, Goldman Sachs and Cisco Systems just to name a few, according to research firm CB Insights.
Blockchain technology has also generated interest from Fidelity, Vanguard, Microsoft, Intel, Sony, IBM, Nasdaq, Santander, and Visa, among others. And some of the greatest minds of our generation — Sir Richard Branson, Bill Gates, Blythe Masters, and Marc Andreessen — see the blockchain’s potential.
New ETF’s are being created, such as innovation shares NextGen Protocol ETF (KOIN), and Realty shares NexGen Economy ETF (BLCN) that focus on investing in companies involved in blockchain technology.
To best serve their clients, Financial Advisors should be aware of the investment opportunities blockchain technology is creating, and be able to discuss them as potential alternatives to investing directing in cryptocurrencies.
The Bitcoin Bottom Line
Financial advisors who are seen as not getting it — as not staying up to date with new technology, new thinking, and new paradigms — may lose existing clients and fail to attract new ones. And they are doing their clients a disservice by not understanding cryptocurrencies or blockchain technology and not being able to provide education or advice about them. Meanwhile, the incentives to get up to speed are great: the potential to better serve your existing clients, attract new clients that other financial advisors can’t serve, and grow your clients’ portfolios, as well as your own, by understanding the investment opportunities being created by blockchain technology.