Adam Blumberg

<div id="highlights-block_603e552d17fdf" class="highlights">
 <ul>
 <li>NFT art is creating a great example of the verifiable scarcity that bitcoin has been preaching</li>
 <li>Advisors would be wise to look at growth trend as more than a short-term speculative bubble</li>
 </ul>
 
</div>



Non-Fungible Tokens, NFTs for short, have been on a tear lately. Digital art has recently sold for seven figures and Christie&#8217;s is <a href="https://onlineonly.christies.com/s/beeple-first-5000-days/lots/2020">auctioning</a> work by the digital artist <a href="https://www.beeple-crap.com/">Beeple</a> from February 25 to March 11.&nbsp;



At the same time, collectibles from <a href="https://www.nbatopshot.com/">NBA Top Shot</a> have skyrocketed in value, while the platform has seen record engagement and revenue. Music creators 3Lau and RAC are contributing with NFT music. Last week, <a href="https://edm.com/gear-tech/3lau-record-breaking-nft-sale">3Lau</a> netted over $11.7 million as part of a sale of 33 unique items, which included a collection of limited edition NFTs that sold for $3.6 million.



<h3>The NFT boom&nbsp;</h3>



So many articles and videos have explained how NFTs work, and why they have value but that is not my focus here. My goal is to explain why I feel the current NFT boom is important for financial advisors and the wealth management industry.



Surely, many, if not most, in financial services dismiss this growth as a bubble, a fad and something that will certainly pop or deflate soon, leaving thousands and millions of dollars lost.&nbsp;&nbsp;



There is a decent chance that the current parabolic rise cools off, but the interest has brought so much interest, and the requisite funding and infrastructure. This is an idea and an investment area that isn’t going away.



While the idea of digital assets, like bitcoin and ethereum, is a little esoteric, and many investors and advisors have a difficult time understanding and explaining them, NFT art and collectibles are relatively easy to understand.&nbsp;&nbsp;



<h3>Verifiable scarcity</h3>



Having its technological roots in blockchain and DeFi, NFT art is creating a great example of the verifiable scarcity that bitcoin has been preaching.



Investors get it. There is one, or only a few of these pieces or collectibles — and I definitely own one. The scarcity not only aids in the understanding and adoption of crypto and digital assets overall, but investors are also learning how the scarcity is verified and limited, aiding in the adoption of DeFi.



<figure class="wp-block-pullquote is-style-default"><blockquote>At the same time, the NFT market has a low barrier of entry and is attracting a new set of investors.</blockquote></figure>



For example, the data has already shown that millenial and Gen X investors are interested in alternative investments like art, real estate and crypto. However, when they have tried to invest in real estate, private equity, or hedge funds, they have been shut out due to accreditation needs or illiquidity.



These younger generations of investors are tired of being talked down to when it comes to investments. NFTs allow them to easily choose a place to allocate some of their funds, in an area where they have as much, or more understanding than their advisors.



Now, they can invest in NFT art and collectibles, participate in the conversations, understand and drive the market. They don’t have to be accredited and there almost always exists a secondary market.



<h3>The financial advisor connection</h3>



As an advisor, it would be best to understand this market. In the past, if a client had an investment in art or baseball cards, valuation of the asset was a struggle. In addition, the ability to quickly and easily liquidate investments meant these rarely made it into a financial plan.&nbsp;&nbsp;



The advisor and client couldn’t always include the collection in discussions of cash flow needs, emergency funds, etc. Now, with on-chain valuation and 24/7 NFT markets, advisors will have to account for the NFT collections when determining where they might need to go for cash needs.&nbsp;



For example, if a client needs funds for a car, home repair or college and the rest of the portfolio is down, there is merit in looking to appreciated NFTs for cash.



<h3>Going beyond art and collectibles</h3>



NFTs are going to go far beyond simply art and collectibles. They will represent real estate, music and movie royalties, cash flows and private investments. Investors who are looking for even more non-correlated assets can more easily add any NFT-based investment to a portfolio.



In addition, since the value is verifiable, advisors may more easily be able to include the value in AUM calculations.



The DeFi nature of NFTs also makes them available as collateral for borrowing. This frees up more cash flow options for investors, which advisors will need to understand as most investments do not provide a readily accessible borrowing option.



Again, when looking for cash flow, borrowing against NFTs — art, collectibles, real estate or income streams — provides another avenue. It also potentially changes the risk profile of NFTs and alternatives as there is a chance to derive cash from the investment.



While most in the financial services industry have been slow and reluctant to adopt and recommend digital assets, the market has shown that investors are interested in NFT art and collectibles. As a result, advisors would be wise to look at this growth trend as much more than just a short-term speculative bubble, but more as a sign of a new asset class to learn and understand.

Why NFTs are Important for Financial Advisors

<div id="highlights-block_60098e7106481" class="highlights">
 <ul>
 <li>There is $97 Trillion of AUM parked with Registered Financial Advisors that is slower to adopt digital assets because of logistical reasons</li>
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There is so much more acceptance of cryptocurrency as an investment now.&nbsp; Hedge fund giants, public companies, and even insurance companies are holding Bitcoin.&nbsp; They are using the Cryptocurrency as a store of value and inflation hedge.&nbsp;&nbsp;



More recently, crypto-related firms like exchanges, custodians, and funds are reaching into the RIA and Financial Advisor market.&nbsp; The obvious prize is to get a piece of the <a href="https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/resources/Evolution_Revolution_2020_v8.pdf">$97 trillion</a>&nbsp; controlled by SEC-Registered Financial Advisors.



The crypto-native are appalled at the lack of knowledge and lack willingness of the RIA’s to get on board with Digital Assets.&nbsp; There are a few important things the Digital Asset industry should know about Financial Advisors and their practices.



Regulation



Whether you like it or not, and whether you agree with it or not, advisors are subject to regulations they NEED to follow, or risk fines, lawsuits, and losing their securities licenses.



These regulations come from several governing bodies, and many of them actually do serve important purposes.



For the most part, the regulations exist to keep the advisors, and the financial services industry from taking advantage of investors.&nbsp; The investors often count on their advisors to provide guidance, advice, research, recommendations.&nbsp; These advisors have been “blessed” by the government to provide these services, since most investors don’t have the time or expertise to manage their financial investments themselves.&nbsp;&nbsp;



Since this trust is based on the blessing of the regulatory bodies, those same bodies need to make sure that trust isn’t violated.&nbsp; They err on the side of safety in investments for the average investor.&nbsp; They offer more flexibility to the investors with more money &#8211; accredited and qualified investors &#8211;&nbsp; because the assumption is that those investors can afford the risk, and can afford their own diligence.&nbsp;&nbsp;



Advisors just need to adhere to these regulations, as they are in place to protect most investors from financial harm.



How Allocation Affects Action



The risk and volatility of Bitcoin and Crypto means that, at most, advisors would recommend a 5% allocation to Bitcoin.



That means 95% of the portfolio is dedicated to other strategies, which generally have a longer track record.&nbsp; Moving 5% of client assets in Crypto takes quite a bit of time, education, risk, and usually higher fees.&nbsp; That just isn’t worth the effort for a 1% fee of 5% of the portfolio &#8211; having to move funds to a different custodian, explain to the client why it doesn’t show on the standard reports, determine AUM of an asset that is traded 24/7, etc.&nbsp;&nbsp;



This means Crypto is probably not something advisors are going to push on clients for quite a while.&nbsp; It actually increases their risk and liability, while not increasing their revenue.



Role of the Advisor &#8211; The Human Factor



The Financial Advisor is there to provide guidance for a client’s financial life, and the clients are generally human.&nbsp; This means the same behavioral issues apply when it comes to Crypto investing.



While clients are willing to invest in something more risky, like bitcoin, during a bull market, they will question the investment during a pullback.&nbsp; Advisors need to be ready to have those conversations with clients, and without those years of experience with bitcoin, those advisors might not be prepared themselves.&nbsp;



There is no amount of expectation-setting with clients that prepares them for a 25-30% pullback, even with only 5% of their portfolio.&nbsp; As an advisor, having your day filled with emails and calls from frustrated clients after bitcoin goes through some of its negative volatility is not productive, especially if you didn’t fully understand Crypto to begin with.&nbsp;&nbsp;



The advisor’s job is not always to get the highest possible return for clients.&nbsp; It is to address the needs and goals of the clients, and fit the available investment options into those needs and goals, based on the client’s risk profile.&nbsp;&nbsp;



The Ethos vs. The Returns



When advisors have clients that want to invest in Bitcoin and Crypto, those clients are usually looking for returns.&nbsp; Most clients don’t really care much about the ethos of bitcoin, cryptocurrency, and Decentralized Finance.&nbsp; They don’t care about banking the unbanked, disintermediating, or seizure-proofing their money.&nbsp; They care about growing their wealth from where it is now.&nbsp;&nbsp;



Long diatribes on the history of Austrian economics don’t matter much, as the advisors can’t usually take those same explanations to clients.&nbsp;&nbsp;



The advisors really care about an investment that can go up in value over the long term, is safe, and relatively easy to fit into their current workflows, fee structure, and reporting.



Explanations and Education



Advisors need to be able to easily explain bitcoin, crypto, custody, wallets, keys, etc. to clients.&nbsp; Clients aren’t going to read 4,000 word blog posts about bitcoin and why it is a great inflation hedge.&nbsp;&nbsp;



Therefore, advisors need to be able to give simple explanations as to how it works, why they chose the custodial or fund solution they did, and how the client’s money is safe.&nbsp; Monetary policy rarely comes up in account reviews.&nbsp;&nbsp;



Likewise, expecting a client to have control over private keys is a difficult concept.&nbsp; In traditional investments, the advisor, and the custodian, are counted on to keep the investors’ money safe, with insurance, and even government backup.&nbsp; Telling a client to keep these 24 words safe and secure, and if you lose them you lose your money is not acceptable.&nbsp; Many clients forget most of what advisors tell them within a few hours of leaving the meeting.&nbsp; Why?&nbsp; Because investing isn’t their job.&nbsp;&nbsp;



In summary, Digital Asset exchanges, funds, custodians, and the like need to give RIA’s and Financial Advisors a break, and time to learn this new asset class.&nbsp; It is unlike anything they’ve seen, and has been through so much in terms of regulation and volatility in its short life span.&nbsp;



The client demand is growing, which is feeding the desire of advisors to learn, especially to address the next generation of clients.&nbsp;



This will take time, and it will take a willingness of the Crypto community to develop easier and safer systems and processes to bring advisors and their clients into this new investment class.



Financial Advisors have gone from stock-picking to mutual funds, to index funds, to ETF’s, to actively managed passive investments, to ESG, to algorithmic portfolio management&#8230;and they have had to do so while attempting to keep client money safe and growing to meet needs and goals.&nbsp; All those investments survived and have grown handsomely.&nbsp; Digital Asset investing will do the same, as long as we give the RIA and Financial Advisor community the time and help in building it into their practice.