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How to handle questions about cryptocurrency from your customers

Feb 2, 2018 / Digital Banking / Payments / Technology

If you talk to your customers for any length of time, the topic of cryptocurrency invariably comes up. You even know how this scene goes because it probably played out more than once in your office, or that of a colleague, just last week.

Your client perches in a chair, idly fingering your latest brochures that promote offerings of mutual funds, bonds and your institution’s mortgage rates. You’ve known your customer for years: Your bank has his mortgage and you helped him build a decent-sized portfolio, better than anything he could have fashioned from an office 401(k). You have him securely diversified. You rebalance each year. You’ve taught him everything he knows about exchange-traded funds. You’ve got him on track to retire in seven years.

But today, his mind is elsewhere—and here comes the question: “So,” he asks, “What do you think about bitcoin? Pretty exciting stuff, right?”

“Exciting.” Well, that’s one word for it.

Cryptocurrency—including the oldest, biggest and most well-known name out there, bitcoin—might as well be the third rail for intrigued investors these days. Despite being a mocked as a mirage by Berkshire Hathaway’s Warren Buffett and shunned as a fraud by JPMorgan Chase’s Jamie Dimon, the value of bitcoin grew by more than 1,000 percent in 2017, climbing from $800 in January to a peak of $19,200 in mid-December.

The cryptocurrency fell below $10,000 in late January and fell even lower after India’s finance minister Arun Jaitley reiterated the government’s position that it will “take all measures to eliminate the use of crypto assets in financing illegitimate activities.”

Speaking of illegitimate activity, you’ve also got the very real possibility of theft. In January, one of Japan’s biggest cryptocurrency exchanges, Coincheck, lost 500 million NEM coins valued at $400 million. NEM is the 10th-largest cryptocurrency on the market, with a market capitalization of about $7.1 billion. Hackers also have been known to hijack computers to mine another cryptocurrency, monero, and send the profits to North Korea. (North Korea in fact has an advanced cryptocurrency hacking operation, as detailed in this BAI article.)


“When a bank gets robbed, depositors don’t lose their money because its insured,” says Chad Leat, retired vice chairman of global banking at Citigroup. “But in bitcoin, if someone cracks into your secure holding you can lose money and there’s nobody there [to help you].”

How’s that for exciting?

“I don’t have a conversation where [bitcoin] doesn’t come up,” says John Traynor, chief investment officer at People’s United Wealth Management. “If you think your clients aren’t aware of it, you’re wrong. They’re all aware of it, they’re all listening to it. Most of them are skeptical, but they are really looking to see what my reaction to it is.”

The explosion of interest and breaking of the bitcoin bubble comes despite—or perhaps because—bitcoin and other cryptocurrencies have nothing to back them. No government. No commodity. No central bank. Bitcoin doesn’t even have a known creator: just a person named “Satoshi Nakamoto.” Wild guesses as to his identity include Tesla’s Elon Musk, a cabal of coding nerds, and an actual dude named Satoshi Nakamoto—a California systems engineer who, it is thought, had his name borrowed by a neighbor who may have been bitcoin’s real inventor.  If that’s true, it qualifies as the weirdest case of financial identity theft ever.

Despite its B-spy-movie origins, cryptocurrency still inspires dreams of sudden riches that make it a glamorous play. Bitcoin millionaires include Cameron and Tyler Winklevoss, who invested the money they famously won from Mark Zuckerberg in their lawsuit against the Facebook founder; and rapper 50 Cent, whose other financial claim to fame is his continued failure to unload his 21-bedroom mansion in Connecticut. (It can be yours for $5 million, or about 550 bitcoin.)

Some financial experts compare today’s cryptocurrency investments to the dot-com boom and bust of the 1990s. But while the underlying principle of investing in the internet and online growth was sound (even if many of the companies were not), skeptics argue that cryptocurrency can’t be considered an alternative asset class or even a speculative investment.

The most compelling thing about cryptocurrency is blockchain, the digital ledger system first developed to trade bitcoin, and used today to record everything from medical records to “smart contracts” that control the exchange of assets between parties.  

But blockchain’s promise doesn’t mean it’s a good idea to hoard some of the hundreds of virtual currencies out there. And the real threats of theft, fraud and extreme volatility should signal danger to any investment advisor.

“You have to keep in mind your personal reputation as the financial advisor, and also the reputation of your firm and business,” says Markus Veith, a partner in the financial services practice at Grant Thornton. “What’s your benefit? If your institution doesn’t offer the product and you’re trying to be on the forefront of development, you [still] don’t have a direct financial benefit because you’re not going to get a commission on something that you don’t sell. And on the downside, if something goes wrong, it harms your reputation.”

Tom Potter, a partner in Burr & Forman’s office in Nashville, Tennessee, takes it another step. “I think if I were a banker or an investment advisor approached by a retail investor with that question and found myself really having to give advice—even if it’s this cautionary discussion that we’ve had—I would want to document that I had done that,” he says.

“Because (investing in cryptocurrency) is either going to go really, really well or really, really poorly,” Potter adds. “And if it goes really well, the customer is likely to believe that it was their idea and they were really smart, despite your cautionary advice. And if it goes really, really poorly, its equally likely that they will remember, even wrongfully so, that you encouraged them to do it.”

Dominic Marella, principal the Chicago-based investing firm Icon Alternatives, says his company brokers who work in the futures market have some customers playing cryptocurrencies. “I have a lot of friends who are financial advisors and very few of them would even allocate money to the futures industry because it’s riskier than what their philosophy is,” he says. “For traditional financial advisors, I think it’s going to be a long time before they embrace bitcoin or cryptocurrencies as a real part of investments.”

And that likely won’t change soon.

“I’m optimistic about cryptocurrencies—maybe bitcoin as the market leader, maybe not—but in where they are going to go,” Marella says. “But there’s going to be continued volatility and wild swings for the foreseeable future.”

Which brings us back to our customer, still sitting in your office chair, waiting for your bank’s best cryptocurrency advice. What are you going to say?

“If I were running a brokerage firm, I would tell my financial advisors to tell people that bitcoin investing is not something that is suitable for something that is an alternative to their investment portfolio,” Leat says.

He adds: “It’s just as though a client said, ‘I was thinking about going gambling this weekend. What do you think about doing that instead of owning stocks?’”

Interesting question. Why not ask Satoshi Nakamoto?

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Based in Maryland, Patrick Sanders is an assistant managing editor for U.S. News & World Report and formerly worked as an editor for The Associated Press and at newspapers in West Virginia, Connecticut, Pennsylvania and Indiana. 

If you enjoyed this article, check out: Why North Korea’s cyber army threatens banks worldwide  and AI, as in actionable insights: The future of artificial intelligence in payments.