It's Cold Outside: How to Stay Warm in the Blockchain Space

In the North Country of New York, during winter, the temperature can be extremely low. It is so cold that even with rising global temperatures, it can stay below freezing for a whole month or more, as the sun's rays are faint and howling winds blow along the St. Lawrence River.

In the past, it was not optional for children to remember their hats and gloves, waterproof boots and wool socks were necessities to avoid potential loss of limbs due to frostbite.

As the crypto winter hits, I will be able to draw on my previous experience. Not only have prices fallen across the board in all sectors of the crypto market, but also, some businesses and projects are failing.

Three Arrows Capital, a hedge fund based in Singapore, was ordered to liquidate after facing several weeks of difficulties. Before the liquidation, crypto exchanges BlockFi and Voyager Digital took out huge loans to help them through the crunch, as both had participated in financing Three Arrows. Sam Bankman-Fried, founder of FTX who became their creditor, went on to say that he believes many crypto exchanges and firms are already "secretly insolvent."

The financial future of Voyager, a cryptocurrency firm, is uncertain after it froze its services and filed for bankruptcy protection following the market downturn.

Coinbase said that investors at crypto brokerages don’t necessarily have the same liability protections and insurance as they would at traditional brokerages or banks.

The advisor's question

How can advisors respond to the situation? We’ve already explained that clients want access to crypto and that advisors are slowly integrating digital asset investing and management into their services. These trends aren’t easily reversed, no matter how much prices fall.

Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, told an audience at Financial Advisor magazine's recent Invest in Women conference in Atlanta to keep up their spirits.

"As an advisor, you don't have to like crypto," he said. "But you want to help your clients manage it." In recent weeks, Edelman has noted that as institutions get involved in crypto, it's trading like a technology stock as they buy and sell in response to daily volatility.

If you want to benefit from the growth of crypto, you need to be able to endure the swings, said Edelman. If you wait until crypto is a "safe" investment, you will miss out on that growth.

I believe financial advisors have a responsibility to assist their clients who are already involved in crypto and those who are interested in crypto to avoid losing their toes in the crypto winter. The following are some of the ways they can do that:

 1. Stop the panic.

The value of crypto assets is more volatile than that of other financial assets, and a “crypto winter” was to be expected as the economy rarely goes for more than a decade without experiencing a recession.

Investors with a diverse portfolio and a healthy risk tolerance should be able to withstand the drop in crypto asset prices. Those who have extra cash and are willing to take on more risk might even want to buy more when prices are low.

Make sure to understand the dangers, and clearly communicate them.

Advisors are already comfortable discussing risk in equities, real estate and other assets - they should treat cryptocurrencies and digital assets in the same way. A common practice is to prime clients for market volatility - extra care should be taken to prime them for volatility in their crypto holdings.

You can also tell them about some of the issues being worked out in crypto custody.

When assessing a client’s risk capacity and risk tolerance, rely on your knowledge of the client.

Some clients will need more support than others. Some clients may even be eager to invest more in crypto, while others might actually be better off reducing their allocations or dropping out of the asset class due to their reaction to the current volatility. Don't forget these lessons!

When you’re done, there could still be some dust in the air.

For those clients who are more willing to take on risk, following Warren Buffett's advice to "buy when there’s blood in the streets" may be a good idea. They will need help allocating their assets appropriately. This is an opportunity for you to demonstrate your value as an advisor, so do not ignore them.

If the weather is warm, will there be a spring?

I'm a writer, not a prognosticator. I don't know how long this winter will last, or whether we'll ever emerge. What I can say is that capital continues to be invested in crypto technology and infrastructure, and innovative new projects continue to be launched. The metaverse is under construction. Not only that, but the rails for institutional involvement in crypto and digital assets are still being built despite the downturn.

I think that the smart money expects a "crypto spring" to happen. The ones who can be patient and keep their wits about them will benefit from any rise in the digital assets sector.