At 74, Cumberland Advisors’ David Kotok has guided wealthy clients through a long career’s worth of bubbles and crashes. Now he is being inundated with questions about the latest soaring asset to confound investors -- bitcoin.
“Clients bring up bitcoin all the time,” said Kotok. “They think it’s cool. It has the newness, which is attractive to some people, though others would say newness is a risk they don’t want to take.”
Wealth managers across the U.S. are fielding calls and emails from clients worried they’re missing out on something big by not owning bitcoin. While most advisers don’t recommend buying such a volatile asset with no intrinsic value, they do have tips for clients who have taken the plunge, or are dead set on doing so.
The cryptocurrency has been whipsawing Wall Street: UBS Group AG, the world’s largest wealth manager, is shunning bitcoin allocations because of a lack of government oversight, while Michael Novogratz is starting a $500 million hedge fund to wager on digital assets.
As bitcoin mania moves to Main Street, thanks to its spectacular rise from about $750 to $8,200 in a year, five advisers offer some suggestions.
Kotok, whose Sarasota, Florida-based firm manages about $3 billion for high net-worth clients, warns them off bitcoin, calling it a classic momentum trade.
But for investors who own it and brag about the gains, he advises them to take their original investment off the table. Better to gamble with house money.
Skin in Game
To Kevin Grimes, president of Westborough, Massachusetts-based Grimes & Co., the best way to learn about the market is to have some skin in the game. So he bought a couple bitcoin on Coinbase Inc. earlier this year.
"Laughing off bitcoin could wind up being a big mistake,” Grimes, 42, said.
Yet at this point he sees buying bitcoin as a Vegas-style gamble. Clients who buy it should do so with money they don’t mind losing.
"Bitcoin could go to zero and be a scam, and it could go up to numbers no one has conceived of yet," he said.
Sam Boyd, senior vice president at Capital Asset Management Group, takes a more tactical view. While Boyd doesn’t recommend buying bitcoin, he said it could work as a non-correlated alternative asset in a portfolio much like real estate investment trusts or hedge funds. But keep the stake small.
“You don’t want more than 5% in alternative investments of any kind,” said Boyd, 30, whose Washington-based firm manages about $500 million.
Boyd, who owns bitcoin in what he calls a “long, long, long-term investment,” also warns clients not keep their wallet on the platform where they bought a digital currency. Wallets secure the private key that bitcoin owners need for transactions.
Those who bought assets on Mt. Gox and left them in a wallet on the cryptocurrency exchange in Japan lost their investment when the platform was hacked.
Boyd suggests transferring bitcoin into a so-called desktop wallet like Exodus. These are as secure as the computer they’re stored on, he said, so back up your machine and safeguard your data.
Supply and Demand
Greg Sullivan, chief executive officer of Sullivan Bruyette Speros & Blayney, steers clients away from bitcoin by telling them to think about supply and demand. Unlike other assets, cryptocurrencies have no barriers to entry, he said, so new ones could easily siphon off demand.
Sullivan tells clients to focus on blockchain technology, an encrypted, real-time digital ledger of transactions, that could eliminate many middleman roles. Investors should look for companies able to use blockchain to be more efficient as well as technology firms that can help meet blockchain’s need for processing speed.
"This isn’t something you need to have figured out today," said Sullivan, whose firm is based in McLean, Virginia, and manages $3.3 billion. "But you need to be watching because it will unfold over the next five years or so and could be a game changer."
Wealth managers also remind would-be bitcoin buyers that the first mover in a new technology is often not the big winner.
“Right now you’re not only speculating that people will continue to pay more for bitcoin in the future, based on no reason tied to intrinsic value,” said Michael Kitces, a partner at Pinnacle Advisory Group in Columbia, Maryland, which manages more than $1.8 billion.
“You’re also gambling that bitcoin is the one that survives in a blockchain future. And that assumes no one finds some magic flaw in blockchain that makes it unravel.”