In recent years, it's logical to expect that financial advisors have had more conversations with clients about cryptocurrencies, namely bitcoin, and it's not a stretch to say that many of those discussions were initiated by clients themselves.
That's what happens when an asset surges from around $1,200 to $20,000 in just eight months as bitcoin did from May through December 2017. And when bitcoin tumbled to around $3,300 late last year, some clients may have been inquiring about value in the largest digital currency. Although bitcoin is off its 2019 highs, it has roughly tripled from its 2018 lows, likely renewing some of the interest seen in the halcyon days of mid- to late 2017.
Regardless of an advisor's personal feelings about the viability of bitcoin or its pros and cons as a store of value, it's safe to say digital assets are not suitable for all investors. Thing is, conversations about this asset class aren't going. They're likely to increase over time and advisors need to be prepared for these chats.
One way of doing that and helping investors mitigate some of the risk associated with digital assets is with blockchain, which acts as a decentralized documentation and recording infrastructure for transactions dominated in cryptocurrencies.
Banking On Blockchain
“Any party is able to both review previous entries and record new ones, although most blockchain networks have complex rules for the addition of new groups of records, 'blocks,' to the chain of previous records,” according to Investopedia .
The chart below illustrates blockchain's ease of use in transferring money.Courtesy: Thomson Reuters
While bitcoin and blockchain are seemingly joined at the hip, but blockchain's applications and the corresponding investment opportunities span far beyond bitcoin. In short, blockchain is viewed as a game changer for data encryption.
Current global spending on blockchain business solutions is just $1.5 billion, but that number is expected to swell to $11.7 billion by 2022, representing a compound annual growth rate (CAGR) of 73.2 percent, according to the Worldwide Semiannual Blockchain Spending Guide from International Data Corp. (IDC).
Advisors don't need to become blockchain experts, but chances are they will become conversant in the technology as firms such as Schwab and Vanguard experiment with blockchain on advisor platforms. In fact, the financial services industry is one of the largest adopters and growth drivers of blockchain.
“We see more clearinghouses, custody providers and others looking at what blockchain can bring to clearing, settlement, and other intermediated functions,” said PwC . “Look for blockchain use cases spreading into more mainstream financial market utilities.”
Over the near- to medium-term financial services, be it through asset management, claims processing in insurance, cross border payments or enhanced security in non-conventional lending , will lead blockchain growth, but there are myriad other opportunities for advisors to discuss with clients.
Those include blockchains intersection with digital record keeping, supply sensors, healthcare, entertainment and Internet of Things (IoT). Consider the opportunity set in IoT.
“On the enterprise side, the IoT will help businesses collect vast amounts of data that can be used in varying capacities, from predicting consumer behavior to reducing supplier risks,” according to Global X . “Forecasts expect 20.4 billion connected devices to be online by 2020 with $1.4 trillion in worldwide annual spending on IoT hardware, software and services by 2021.”
That's just one group of data for one industry, but it underscores the point that advisors should be having the blockchain conversation with clients and should be the ones initiating it.Related: The Fee Conversation: Your Clients Are Having It, Make Sure It’s With You