Why We Have Never Recommended Crypto to Our Clients
BY: BILL STORDAHL, CFP®
When approached by curious clients about the world of cryptocurrency, we want to make our message loud and clear: Crypto is not a safe investment, and we do not recommend including it in your portfolio.
While some economists insist it’s here to stay, other financial professionals claim it’s a fad that’s likely to end. Either way, we aren’t in the business of trying to predict the future—especially the future of something as volatile and reactive as cryptocurrency.
Below are a few reasons why we do not advise our clients to include Bitcoin, Ethereum, or other cryptocurrencies in their portfolios.
Lack of Regulation
Currently, cryptocurrency is not regulated by the federal government or any central bank. Even though it has risen in popularity over the last few years, many still consider it uncharted territory.
With no set of standards or regulations for this “currency,” investors who participate in crypto exchanges are left unprotected and vulnerable. This also means trades are not backed by the federal government or large financial institutions.
Prone to Cybersecurity Risks
Just as there are stock exchanges, there are now crypto exchanges that allow investors to trade cryptocurrency online. Unfortunately, these exchanges are vulnerable to cyberattacks. Several large breaches have caused investors to lose their money or have their digital currency stolen in recent years.
Less Control over Assets
Cybersecurity concerns aside, many people aren’t comfortable storing their cryptocurrency on crypto exchanges.
Doing so offers investors a lack of control over their assets, and they could lose access to their money. For example, if the exchange goes bankrupt, as FTX did in November 2022, investors may lose any assets tied to the exchange without a chance for recovery.
What Happened to FTX?
Virtually overnight, mega crypto exchange FTX went from having a $32 billion valuation to going bankrupt.
Before its abrupt downfall, FTX was revered by the crypto community and endorsed by celebrities including Larry David, Kevin O’Leary, Tom Brady, and Shaquille O’Neal. But when an article reported that founder Sam Bankman-Fried was using native crypto tokens from FTX to pad the balance sheet for his other company, people grew concerned about volatility and unpredictability. A rival exchange, Binance, announced it would sell about $530 million worth of these crypto tokens, ultimately leading to mass investor panic and pullout.[1]
When investors tried to withdraw around $6 billion in a matter of days, FTX could not meet the demand for withdrawals. Soon, the company had to file for bankruptcy and pause withdrawals altogether. Put simply, FTX collapsed in less than a week, and it all began with one negative article published.
General Volatility
All this to say, cryptocurrency is volatile and especially susceptible to large ups and downs. In the span of a year, Bitcoin has dropped from a value of $47,634 to around $16,864 (as of December 2022).[2] Of course, past performance doesn’t indicate future trends. But a year of sustained decline with substantial swings may be concerning for investors, especially those who don’t have time to recover from downturns.
Increase in Scams and Hoaxes
A growing problem with cryptocurrency is the scams and hoaxes associated with it. Scammers are eager to take advantage of people’s lack of knowledge about crypto and use it to offer too-good-to-be-true deals to eager investors.
In common crypto scams, the scammer may pose as an investment professional or celebrity and present the target with the opportunity to invest in crypto with guaranteed returns. They say they’ll be able to grow the target’s money in ways that aren’t possible through traditional investment vehicles. They may share phony testimonials of other investors they’ve “helped” and assure the target that there’s no risk involved.
Other scammers may pose on dating sites as potential love connections, or they may even call or email you posing as government officials. In either case, they’ll demand crypto. If you’re ever concerned that a fraudster is targeting you or a loved one, you can report them to the FTC for investigation.
Because there’s a sense of anonymity and lack of traceability, it’s very hard (often impossible) to recover your money after losing it in a cryptocurrency scam.
We Help You Achieve Your Goals in Safer Ways
Whether cryptocurrency is here to stay or on its way out the door, we believe “investing” in cryptocurrency is speculative. If you decide to buy it, we advise against using money earmarked for retirement plan contributions or other essential spending. It should only be from extra cash that you don’t mind losing.
Because of this, our investment recommendations do not include cryptocurrency. There are plenty of other investment vehicles that offer less volatility and more regulation to help meet long-term goals such as retirement. We advise clients on their portfolio allocations as part of our overall retirement planning.
Please reach out to us to schedule a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
Sources:
1What Happened To Crypto Giant FTX? A Detailed Summary Of What We Actually Know So Far
This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.