Are crypto assets useful for wealth creation? An approach to opportunities and risks

Bitcoin: A technological innovation with a long history

The relatively new asset class of crypto assets actually offers interesting return opportunities: Bitcoin has achieved an almost fabulous nominal return of over 800% in US dollars in the last five years. Bitcoin is also highly interesting from a technological perspective, as it spectacularly combines various innovations from cryptography, computer science and monetary theory. However, the history of ideas is much older: Bitcoin had prominent intellectual pioneers long before the invention of the blockchain: F.A. Hayek was already skeptical of the central banks' currency monopoly and favored competition between free, private currencies as early as the 1970s - his theories are once again highly topical in view of the ongoing excessive creation of fiat money on both sides of the Atlantic.

Institutional acceptance: crypto has arrived in the financial industry

After standing on the sidelines for years, institutional adoption is now progressing ever faster: "big money" apparently has hardly any doubts, even major US banks have recognized the value of Bitcoin and Co. First and foremost the world's largest asset manager Blackrock, which issued spot ETFs on Bitcoin and Ethereum. The inflow of funds since the beginning of 2024 has been considerable; crypto-assets have evidently arrived in the financial industry.

The intentions of the still anonymous creator or collective ("Satoshi Nakamoto") of Bitcoin were of a completely different nature: an alternative electronic payment system for everyone was the vision of the creators: hard money (fixed amount of money) that can be moved globally, easily and securely from user to user ("peer to peer"). Without the need for banks or other expensive intermediaries.

Self-custody or custody by third-party providers?

Private investors in Switzerland are also familiar with overpriced fees: in the crypto space, interested investors should always keep an eye on the investment costs. The financial industry, for example 21Shares or VanEck, offers crypto securities for private investors, conveniently with an ISIN for the home custody account. The risk of self-custody is eliminated, but investors should check the fees carefully, as even simple ETPs often come with a proud TER of over 1.4%.

Self-custody of crypto-assets is therefore still attractive and possible - if you are prepared to take the necessary security precautions and acquire the necessary knowledge. This is where an experienced financial plannercan offer reputableassistance in a rapidly growing market.

It's simple, straightforward and decentralized

Decentralized financial protocols: new opportunities for investors

Decentralized solutions for crypto-assets avoid counterparty risk through direct interaction between participants. This allows private investors to interact with each other, with a low entry threshold worldwide - all you need is a smartphone, a wallet and an internet connection. There is also a choice when buying cryptos on exchanges: centralized providers such as Coinbase or Kraken versus decentralized exchanges such as UniSwap, where algorithms take over the function of market markers, so there is no longer any need for an order book like on a traditional exchange. In addition, the world of decentralized finance offers real transparency in real time thanks to blockchain: anyone can check how many fees a protocol (rule system) generates, how much capital is currently invested (total value locked, TVL) and how quickly user adoption is progressing - what a difference to various nebulously structured products ("multi-barrier reverse convertible with knock-out") in the traditional financial world, where transparency, benefits and comprehensibility raise many questions.

The attractive returns on crypto-assets will probably continue to lure private investors into the highly volatile and comparatively unregulated crypto market. It is therefore essential that financial planners provide serious information about the opportunities and risks. Especially as a contrast and counterweight to the vociferous "finfluencers" who are regularly up to mischief on social media, especially in the crypto space.

In terms of a holistic approach, interested investors should also think about custody and, last but not least, the digital estate - the best returns are of no use if the non-technically savvy surviving dependants do not have access to the wallet. But good advice is also needed on the tax side; the correct and optimized taxation of capital gains from staking (depositing tokens to secure the network), lending (crypto lending) and liquidity mining (providing liquidity) should be part of the repertoire of a modern financial planner or trustee in the future.

Conclusion: The role of the financial planner in the crypto market

Thanks to the internet, informed customers can easily compare conditions and returns. The financial planner of the future should therefore complete the transformation from a financial product salesperson to a holistic financial coach; in my opinion, only this person can advise savvy customers authentically and free of conflicts of interest on an equal footing. And artificial intelligence will not take the thinking about investment decisions away from us, but will (hopefully) streamline technical processes and administration in the best case scenario. The financial coach of the future should have wallet setup, crypto-asset assessments and digital estates in their advisory arsenal. Because if you don't move with the times, you move with the times.

Four key takeaways for private investors

• From a sober financial planning perspective, crypto assets are a highly volatile asset class with a short track record. Attractive returns and growth opportunities are offset by high risks - this generally applies to all financial instruments.

• Due to their low correlation to traditional investment instruments, crypto-assets already offer an opportunity to diversify investment portfolios in most market phases(!).

• Healthy skepticism: Beware of dubious market participants! Unfortunately, fraud is still a regular occurrence. Investors without market experience should not invest relevant sums in the crypto market.

• Decentralized finance protocols (DeFi) offer attractive returns via liquidity mining with medium entry hurdles. However, caution is advised and experience is required: valid knowledge is necessary to achieve and secure returns on a regular basis.

Note Webinar "Taxation of crypto assets in Switzerland" on Tuesday. 22.10.2024 at the IfFP

Uwe Scheunemann CFP® is an independent financial planner and Chartered Digital Asset Analyst (CDAA®). He holds a Master in Business Communication, is a graduate of the CAS Crypto Finance & Cryptocurrencies (HSLU) and owner of Progressive Finance, his own consulting firm based in Zurich, as well as a speaker at the IfFP Institute for Financial Planning, Zurich.