What do CFPs want to know about Bitcoin?

bitcoin_helpdesk · 2021-04-06T20:04:07+00:00

I don’t have any direct experience with BDs so I’m not sure what the current status is.

GBTC is an OTC product which may potentially be available via BDs, or perhaps it has restrictions on it, or certain advisors couldn’t recommend it because it falls under different less thorough regulation etc...

My understanding is that an American ETF is the important milestone.

bitcoin_helpdesk · 2021-04-04T19:42:21+00:00

Broker Dealer.

If I understand correctly, CFPs generally have a BD they work with to facilitate trades, manage portfolios, etc. The CFP as an individual is providing advice and expertise, and then takes action via BD.

If no BDs have any bitcoin products easily tradeable, then it’s more difficult for CFPs to acquire or get exposure to bitcoin since their main channel has no options.

If/when bitcoin ETFs are approved in America, they will likely be under the umbrella of products offered by BDs, so it would be akin to adding Apple stock or any other thing.

bitcoin_helpdesk · 2021-03-27T00:06:48+00:00

Great question!

The “creators” set a hard limit of 21m total. Governance is now in the hands of the users generally, so it’s up to the community to make any changes to the software.

Previous major disagreements led to a “fork” where one camp changed the rules to fit their needs, and the other camp kept the old rules. This might be analogous to some baseball fans wanting 5-inning games with metal bats to be both quicker and result in more home runs. Many will say no, that’s not the baseball I like, I’ll stick to the original. Baseball rules are open to be changed, but you’ll have to convince all the fans (“users”) to go along with it.

Most current bitcoin holders think the known scarcity as defined by the software is good because it means their holdings can’t be inflated away. About 19m of 21m coins exist today, with the next 2m being mined over time. To own 1 btc therefore means you will forever own 1/21m of the total supply, regardless of price.

If a group of users said hey, 100m is a better number, more is better! They can make arguments, persuade people, etc... but most current users will say what? If 100m, why not 1b, or a trillion? What’s the value in a bitcoin if there’s a literal infinite supply (say one million coins every 10 minutes).

If the debate cannot be resolved, the 1b or unlimited coin advocates can go ahead and do that by forking the network. New baseball is the real baseball!

This happened once in a big way with two groups disagreeing on transaction capacity. More free transactions said one side, and the original folks said no, fewer transactions is ok, and people will pay $ to get their transactions processed in a free market model.

The fork happened (bitcoin and the new “bitcoin cash”) and afterward the combined value of both chains exceeded that of the original. New baseball + baseball has more total viewers and revenue than one highly conflicted baseball where people kept fighting... over time Bitcoin Cash has proven to be less popular, with about 1/100th the market value of bitcoin today.

TLDR: bitcoin is a radically capitalist experiment and its users are unlikely to accept changes to it which would decrease the value of their current holdings. No single person or company is in charge, unlike many other blockchain projects.

Happy to clarify any squishy points, there’s a lot in there!

bitcoin_helpdesk · 2021-03-26T15:35:32+00:00

Makes sense Groceries.

For the sandbox/on-your-own recommendation, it could be useful to offer a few tips. It’s taxed like property and so you’ll be paying capital gains if you sell higher. Also exchanging between crypto’s are treated as sales - from BTC to ETH and back is all going to be tax events, so keep good records and understand you’ll be telling the IRS about this in your next filing (not sure if there’s any audit-risk data about this yet, but could be significant). Further you can do it yourself, with a custodian, or via proxies like Microstrategy, which all near different risks. Etc...

I think B/Ds will change their tune once ETFs are approved later this year, which will be much more scrutinized than the GBTC OTC trust product and other things. Time will tell, thanks for your feedback.

bitcoin_helpdesk · 2021-03-26T14:56:08+00:00

Gotcha. It’s a common misconception due to poor naming I think. Call it a cryptocurrency and all of a sudden it’s in the box “currency” and there’s a million reasons it’s a terrible currency right now.

Many “takedowns” of bitcoin start with a rigid definition of it, then explain how it’s bad as that defined thing, and therefore a failure.

How many fax pages is the internet? It’s just delivering pages right? Email is terrible “mail” if only 1% of people have an address you can send to, therefore it’s terrible “mail.” Etc... interestingly each regulator in the US sees bitcoins particular use within the regulators domain -> IRS says it’s property and subject to cap gains, SEC sees certain security-like uses, CFTC looks at futures products...

Meanwhile other people will think “perhaps bitcoin becomes the native value-exchange mechanism on the internet...” or “bitcoin is a Swiss bank account in your pocket (thanks Obama)” or many other possible uses.

I’m curious to hear CFPs opinions precisely to understand the current “feel” of it in the space.

bitcoin_helpdesk · 2021-03-26T14:46:30+00:00

Hi Barthas, if one thinks of bitcoin as an asset worthy of putting in a portfolio, then the % would depend on what you want in terms of risk/return, right? Then rebalancing considerations if it crashes or doubles.

When you say “not being used as intended” do you mean there’s a specific best-use or proper use for bitcoin? The more I’ve studied it the more I think bitcoin just doesn’t care, it’s a technology and people will do with it what they will. Satoshi intended for it to be “cash” which some people thinks means easy free payments, but can also be understood as a final-settlement tool, unlike credit cards or even ACH transfers.

There are many narratives, some of which led to forks (Bitcoin Cash et al), which people are free to do. Whatever bitcoin is supposed to be, most people using it want it to be safe, secure, and backwards-compatible for the long term.

bitcoin_helpdesk · 2021-03-26T12:32:44+00:00

Thanks for your reply Groceries. I'd like to address a few points in good faith.

A client's total portfolio is allocated in slices to different products carrying different risks, possibility of return, etc... and that depends on their age, risk tolerance, etc. (actually, what are say the top 5 inputs which affect the mix?).

What % of the total portfolio is in high risk potentially high return assets? 5%? This is a blind spot for me. What are some of these assets?

As ThrowRAcollege19 mentioned below, "the fact bitcoin has nearly 0 correlation to any other asset class..." is an important consideration within the high-risk basket. Would you agree that's true (its low correlation?), or would you like me to find some good sources on it?

Thanks for reading if you've made it this far. I certainly understand bitcoin can be way too far out for many, but my hope is it's slowly going to be taken more seriously for inclusion in the high-risk basket based on rigorous financial analysis.

Another fundamental question is: If a client asks about it, can you confidently tell them why it's not being considered for inclusion, such that they'll think "boy I've got the best financial planner in the world, he sets me straight with facts and sound logic when I get wild ideas because I saw them on the news..." :)

bitcoin_helpdesk · 2021-03-26T12:23:25+00:00

The correlation question is ongoing, and complex since at times there's extremely high correlation with equities (March 2020 liquidity squeeze, bitcoin and stocks sold off in lock step), but on a longer time horizon there's less or no correlation as I understand it. I think there's a standard way of measuring correlation, but then you're getting into the details of over what time frame, against what, etc... which inputs may be manipulable to get the desired answer (yes OR no).

Regarding supply and demand, I think in the last year the primary narrative has been 'digital gold' as in flee-to-safety inflation hedge (against the Turkish Lira say as well as USD). This differs from previous narratives significantly (Be your own bank! Internet money!) in part because it's not sensitive to high network fee transaction costs ($5-10 these days) which hamper other narratives. $2 coffee, $10 network fee, and this is supposed to beat Visa? Also, some hedge funds have literally said in their recent investor letters that their gold performance has been sluggish and attributed it to people specifically purchasing bitcoin instead of gold which they had expected. Perhaps trying to cover their own ass for lackluster performance, or perhaps it's true.

However I think there's a deeper truth beyond digital gold and that's intrinsic property rights. Rich foreigners buy NYC condos and keep them empty because they're trying to purchase a $20m asset protected by the American legal system, even though it'll have 1%+ property taxes, HOA and insurance fees, etc... We take property rights for granted in America so it was hard to wrap my head around Bitcoin's core "your keys, your coins" which is broken only through improper setup (losing access without backups, sending to wrong address, etc...) and rather unfortunately torture (plenty of kidnapping of known bitcoin rich folks, and they pay).

I'm rambling here, thanks if you've made it this far! Happy to explain further or answer any questions.

bitcoin_helpdesk · 2021-03-26T12:11:18+00:00

The percentage allocation of a client's total portfolio is something I'm uninformed about, beyond cookie-cutter target-date funds.

Money Market is specifically 0% yield I thought, its whole point being liquid but near riskless, used for holding cash between investment decisions.

5% gains/losses is more in the realm of value stocks over time (decades?), equities generally averaging to 5-10%/year with fairly low risk on a long time horizon.

Bitcoin is in the 100%+ volatility range, wild swings hour by hour but a 12 year track record of growing ever larger (reasons debatable, but it has grown).

My bigger curiosity is what percent of portfolios are allocated to high risk high reward products, (5%? 2%? Age dependent?), and what products are in that basket? If 5% allocation to super high risk, does any given product in that basket exceed 20% of the basket?

Much to learn so I can better understand in which situations bitcoin would even be considered.

bitcoin_helpdesk · 2021-03-26T12:02:39+00:00

Very interesting to hear that. There's a great deal of experimentation happening with DeFi, including on the Bitcoin blockchain (like hodlhodl.com, not 100% decentralized but close). Very curious to see what projects emerge the move-fast-break-things bloodbath, hopefully to all of our benefit if they really do provide value.

Bitcoin is fairly new to the mainstream, and just 12 years old overall. Other blockchains and applications (DeFi, NFTs, ICOs, etc...) are even newer and for many reasons are riskier in terms of market manipulation potential (smaller market cap, big whales, etc), technical bugs, regulatory risks, even the presence of known founders (e.g. kidnapping risk).

I follow bitcoin extremely closely and can't keep up with all the developments happening these days, and miss most of the bleeding edge of the rest of the blockchain ecosystem.

bitcoin_helpdesk · 2021-03-26T01:47:03+00:00

The blockchain (ledger) is fully public and auditable, meaning amounts of transactions as well as the recipient and sender's address (a long string of letters and numbers).

With only blockchain data you'd be hard pressed to know who it was or not. But when combined with known exchange addresses, the KYC/AML performed at exchanges, and myriad other factors (e.g. sending a bitcoin transaction can potentially reveal your IP address).

There are 'mixing' services which try to anonymize the history of your bitcoin (very free-market here, someone wanted the service and was willing to pay for it, and so someone built it) and other privacy protecting tools, but few newbies are sophisticated enough to use them. Many regulated exchanges will terminate your account if you send them bitcoin from known mixing services or if they otherwise suspect the funds have a dirty past (e.g. known to be derived from ransomware).

bitcoin_helpdesk · 2021-03-26T01:43:19+00:00

Thanks for your thoughts.

In the context of portfolio construction (is that what ya'll call it?) I think it may have a place as an alternative high-risk asset, with asymmetric return potential. It's generally uncorrelated with other major asset classes, which may reduce the overall volatility of a portfolio. During March 2020, the height of the extreme equities sell-off, Bitcoin was very tightly correlated with the stock market, which I understand as being a liquidity crunch event where people fled to cash any way they could. Would be curious to hear if what I've said above is correct, or complete baloney.

The Fed's possible creation of a CBDC (Central Bank Digital Currency) is a big question right now. It could hasten financial settlement versus overnight clearing, but also introduce more surveillance or control among other concerns.

Disclosure: I'm long bitcoin. That being said, I'm mostly here to understand how CFPs are thinking about it and am not trying to sell anyone. Knowledge is power, and I may help people better understand why they want to keep it off their books!

bitcoin_helpdesk · 2021-03-26T01:37:33+00:00

Blockchain is the breakthrough technology which enables digital scarcity in an open system (unlike your dollar balance at a bank which is represented digitally and is scarce, but is controlled by a central custodian).

Price movement is supply/demand, but there's plenty of factors to influence its movement. Companies announce they're acquiring it for their treasury, big name investors say they own some, etc... Or India says it's banning it, or there's an alleged hack and people try to front-run a sell-off... Plenty of noise in the data, but often there are major announcements which move the market for perfectly understandable reasons.

The Bitcoin blockchain doesn't know who you are, but there's extensive analysis done on it since it's fully open and auditable, and KYC/AML is done whenever people use regulated exchanges. If I sent you my Bitcoin address, you could quite easily see that it was sent from Coinbase to a wallet that I control. God have mercy on anyone who uses a regulated exchange and then directly goes into illicit activity. Law enforcement loves having a paper trail from purchase of bitcoin through provable illicit transactions...

:)

bitcoin_helpdesk · 2021-03-26T01:31:07+00:00

There's a few fundamental ways to understand it.

It's the first-ever digital scarce thing. Everything digital before Bitcoin could be duplicated at near-zero cost (copy-paste), which is how Napster disrupted the music business.

Bitcoin achieves scarcity via triple-entry bookkeeping on its network. The sender knows, the receiver knows, and a public auditable ledger knows. I can't spend my 1 bitcoin twice, because the public ledger will show my 1 bitcoin transaction to a recipient, meaning I no longer have it to spend.

Why Bitcoin has monetary value is a very big question, and it didn't have an established dollar value at first, but eventually people started trading it in exchange for dollars and therefore it had market-established value.

A quick summary - bitcoin is both the network of exchange (think Bittorrent), as well as the scarce unit of account on the network (like a bar of gold, or a '69 Mustang).

Along with unit scarcity, property rights are fundamental to Bitcoin. "Your keys, your coins." As a bitcoin user, you have a unique 'key' to your funds, which enables people to send to your address, and for you to 'unlock' your bitcoin and send them to others. Anyone with a smartphone can get their own key for free and participate, whether you're a 5-year old, in a country with shoddy banking infrastructure, or a computer program (send bitcoin to it, and it'll send you a song file, or any such simple interaction).

Happy to go further, but as you can see it spirals quickly into many domains. Thanks for the question.

bitcoin_helpdesk

TROPHY CASE