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In times of great technological change, there is never a shortage of naysayers.
Weâre all familiar with these folks, quick to dismiss new technologies as âpassing fads,â ill-conceived creations that have âno practical applicationsâ or are âfatally flawedâ in some way.
Our past is littered with quotes from naysayers. In 1964, Darryl Zanuck, the head of Fox Studios famously made a bold prediction about television:
Sorry Darryl, but my entire childhood would have to disagree.
No group is more familiar with naysaying than tech investors. Think back to Google being derided for not having a sustainable model because of its lack of cash flow. Amazon, Netflix and Facebook all faced this same sort of short-sightedness, and it continues today, just as it will tomorrow and the day after.
For all the doubters, however, there are plenty of folks on the other side, those that see great opportunity in new technology. Nowhere is this truer than in the cryptocurrency and blockchain space, which is presenting real opportunities long-term investors can no longer ignore.
But how can investment advisors and wealth managersâââas stewards for individual investorsâââhave serious conversations about this new technology? The terminology aloneâhash functions, cold storage, proof of workÂâis in itself a challenge. And what about all the price volatility, the hacks, the nefarious underworld activity? How should advisors approach these difficult conversations with clients?
Weâve been thinking a lot about this, and just recently put together a detailed guide that addresses many of the questions we continue to get from financial advisors.
In the guide, we recommend three simple ways advisors can approach these conversations:
1. Focus on the Past
First, ask your clients to flash back to what they thought of Google et al. ten years ago. Then ask them what they think of these tech giants now.
A much different story Iâm sure.
Itâs important to encourage your clients to think about where these companies once were, and how today they have become mainstream components of any investment portfolio.
The biggest winners were the investors with the foresight and the appropriate risk tolerance to invest in these companies early. Asking your clients to think about cryptocurrencies and blockchain in the context of past innovations will help put them in the driverâs seat with a comprehensible framework for how this new industry will evolve.
2. Specificity is King
Itâs also important to focus on real cryptocurrency and blockchain use cases, which will help your clients recognize the potential endgame.
- A lot of advisors understand the basics of cryptocurrencies and blockchain, but they donât know enough specific examples to understand the sectorâs end game. For example, value investors might have a hard time thinking of bitcoin and other cryptocurrencies as anything more than a non-cash flow generating inflation hedge.
- Using real life case studies can help demonstrate that blockchain technologies offer distinct advantages for businesses and governments. These include tracking supply chains and collectibles, vote auditing, land registries, creating local or product-specific currencies and much more. Cryptocurrencies are the way forward to capture value from these new blockchains.
- Another way to drive this point home is to compare crypto assets to more liquid versions of the shares that are held privately for early-stage startups. Cryptocurrencies allow access to an asset class that previously was almost entirely network-based and insider-based. Imagine investing in Facebook early on as opposed to during the IPOâwhich would have been the difference between making a billion-dollar return (as in Peter Thielâs case) and merely making a few thousand.
In other words, thereâs an endgame that goes way beyond virtual gold for this new asset class. Being specific about uses of the technology will help support its attractiveness as an investment.
3. Identify a Framework
Finally, talk to clients about a systematic way to evaluate new blockchain and cryptocurrency projects without the hype of short-term price fluctuations.
A framework for evaluating projects might include the following:
- Consider the team: Are there strong business, design, and technology players in the space? Do they have proven track records for building impactful companies?
- Consider the funding: Have they raised a traditional round of venture capital or are they associated with a high-prestige accelerator in the crypto realm (e.g., Consensys)? These are both strong positive signals.
- Consider the business model: Does the landing page and whitepaper describing the project simply explain a viable business model and a realistic paying customer?
That saidâââeven with the above roadmapâââthereâs more noise than you can shake a stick at in the crypto space. Telling the chaff from the wheat is no easy task. If youâre overwhelmed by the noise, start focusing on 3 core fundamentals:
- Is the asset mature enough to respond to effective trading strategies.
- Are developers building on the blockchain itself (follow the developers, right?)
- Is the token actually being utilized. This canât be overstated enoughâââthere isnât a business that can succeed without actual customers1
It might go without saying that investing in cryptocurrencies at this point isnât for everyone. If youâre an advisor, you should make sure you understand your clientâs overall risk tolerance, comprehension of the utility of the technology, and comfort level with volatility.
And there are certainly a lot of other factorsâthe regulatory environment being a big oneâthat shouldnât be ignored.
There is no escaping the fact that the blockchain and cryptocurrency sector still has a lot of risks. However, there is a way to paint a picture of the upside while reasonably managing expectations on the downside (e.g., focusing on projects that are going to create long-term value and avoid those with scanty thinking about their business model).
Fear shouldnât be driving client conversations about investing in the crypto space and the voices of naysayers should only be part of the discussion. As more investors become educated about cryptocurrencies and blockchain technologies, conversations should be focused on separating the good from the bad, not about avoiding the space all together.
For a free 30-page eBook on cryptocurrencies click here.
Facing the Fear Factor: Talking Crypto with Clients was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.