As Bitcoin breaks records again, advisor makes the case for education

When assessing the prospects of bitcoin for clients, Zagari accepts that it should not be viewed as a traditional security like a stock or bond. Bitcoin does not itself represent a cashflow generating body, the way the share of a company or a government bond does. Rather it functions like a commodity, with a fixed supply built into its code. Just as one might look at tensions in the Middle East to understand the supply security of oil as a commodity, Zagari says looking at the “hashrate” or the speed at which bitcoin can be mined, to understand the security of the bitcoin supply. Price discovery then comes down to a simple question of supply and demand for this commodity.

Some of the demand on the market now is a product of the fear of missing out (FOMO). Bitcoin is up over 50 per cent YTD, and up almost 200 per cent over the past 12 months. That kind of price increase will cause FOMO among investors who don’t necessarily understand the dynamics. They get in because it’s going up. Zagari acknowledges that this does have an impact on the market, but says that advisors should caution against that impulse when they explain bitcoin to their clients. They should instead outline the more fundamental idea of Bitcoin as a store of value that exists outside of mainstream fiat currency systems. If clients accept that premise and see that as enough of a long-term value driver, a bitcoin investment may be right for them.

Even on that more fundamental level, history has shown that Bitcoin is a risky and volatile asset. Zagari thinks that by focusing on those fundamentals, investors are less likely to panic when there is a dip in price. He says its on advisors to build a proper investment framework for their clients’ bitcoin holdings, one that takes into account their own risk tolerances and incorporates only a small percentage of bitcoin within a much wider diversified portfolio.

“In addition to educating them on the underlying technology, you need to create a suitability framework to understand that if your client should be involved in this or not,” Zagari says. “At the end, once they’ve gone through all those filters and they say they’re comfortable to proceed, then you start with a prudent approach, a one to three per cent allocation in their in their asset mix.”

To become educators on the subject Zagari believes advisors need to educate themselves. He recommends the original white paper on bitcoin by Satoshi Nakamoto, the pseudonum of the individual or individuals who developed bitcoin. Beyond that he recommends additional reading on the use cases of bitcoin and the underlying use of blockchain technology, as well as wider reading on tech innovations like quantum computing which could have an outsized impact on cryptocurrencies in the future.