Why Financial Advisors Struggle to Embrace Bitcoin’s Rise

Introduction

Bitcoin is one of the most powerful technologies of our time and has delivered financial freedom to millions and disrupted established financial players. Yet, many of my fellow financial professionals remain deeply skeptical of its worth.

This skepticism is starting to shift as seen in recent headlines. The rise of Bitcoin exchange traded funds (ETFs) and the marketing push from giants like BlackRock are softening attitudes. BlackRock’s IBIT has received $100bn worth of flows, making it one of the most successful ETFs in history, so clearly many investors are taking notice. JPMorgan said last week it would allow institutional clients to use Bitcoin as loan collateral. The Trump Administration is examining adding crypto to the list of approved 401-k investments. To be sure, challenges and resistance remain.

And for many, everyday conversations with financial advisors still feel like hitting a wall. Young financial professionals tell me all the time, “If I mention Bitcoin at the office, people glaze over…”

So why the resistance?

Tech Friction                                                   

With any shift from old to new, there will always be resistance. There is a learning curve to the internet, to artificial intelligence, or to any other breakthrough technology. These changes can be particularly challenging for older generations, but age alone is not the obstacle.

Crypto’s user interface has presented additional challenges for the masses. Dealing directly with crypto assets onchain through hardware wallets and seed phrases is not particularly difficult but there are large swathes of the population that have neither the technical knowledge, nor the desire to up-skill sufficiently to feel safe enough to store significant portions of their net worth in these assets.

The launch of ETFs in the US in January 2024 changes this dynamic, allowing anyone with a brokerage account to invest. I expect there will be other solutions which make self-custody security (security without a third-party intermediary) easier for non-technical users, allowing users to utilize the technology day-to-day, but it takes time for all these functionality layers to be built.

We must also appreciate that there is a difference between using the internet to search for a product online or using AI to plan a business project, versus storing significant portions of one’s wealth in a new financial technology. The stakes are higher with crypto, and this could be hampering financial professionals’ approval. The higher stakes draw in some investors but are off-putting to others who would rather wait until the risks have declined and the technology is second nature.

But financial professionals are smart, tech savvy people. Technical friction does not explain the visceral reaction when speaking to your resident economist.

Economic Ideology

Bitcoin is a non-state monetary asset. Its monetary policy is determined without a central bank. “Chancellor on the brink of second bailout” was embedded by its creator Satoshi Nakamoto into the blockchain’s first block, highlighting concern of overusing monetary and fiscal policy. The mindset required to understand its value and its unique proposition runs directly against economic orthodoxy.

Source: The Times of London

By contrast, traditional economists assume that central banks are necessary to set interest rates and manage inflation. In fact, most economists work at central banks, treasury departments, or private banks. They have a personal stake in maintaining the status quo. These same institutions dominate not just the profession, but also economic academia. As a result, this line of thinking is what gets taught to 95% of economics students around the world, which becomes the foundation for most financial professionals.

Economic ideology is similar to political ideology and religion – it is deep-rooted and difficult to change. Once we have been taught that this is the way the world works, and we have espoused the virtues of that school of thought, we are deeply entrenched in its continuity. Financial professionals probably have far stronger ideological bias than we would like to admit.

Financial Valuation

Investments are grounded in quantitative methods – and for good reason. We want substance behind these particularly important decisions. As the field of finance has developed, a set of generally accepted valuation methodologies has emerged. That makes complete sense.

For example, dividend discount models, discounted cash flow models, credit spreads, and option-adjusted spreads are all well-established approaches to valuing different asset classes. But Bitcoin doesn’t have earnings, dividends, yields, or interest rates. The many ways to think about valuing Bitcoin does not neatly fit into traditional methodologies. It requires more abstract thinking.

One may need to question the long-term sustainability of the dollar monetary system or the inherent value of our current forms of money. This kind of conceptual thinking, and its clash with conventional valuation methods, fuels both ideological and technological friction.

How do you explain to Warren Buffet that the valuation methods he relies on do not apply to this asset? It sounds suspicious. From his perspective, skepticism makes sense.

Regulatory Restrictions

Finance is a heavily regulated industry. Professionals have significant reporting requirements and are often mandated to hold specific approved assets. Regulators are almost always behind the ball when it comes to innovative technology, so it has taken them a long time to respond to Bitcoin. Bitcoin has been around for over 15 years now and still regulated Bitcoin instruments are not available to many investors in various jurisdictions.

Financial professionals are incentivized to promote the products that they manage and are licensed to sell. If Bitcoin is not on this list, then there is a major incentive misalignment. Even if a financial professional had a constructive view on Bitcoin in their personal capacity, their views might be tied when speaking to clients or in the media.

With the advent of the Bitcoin ETFs in the US and the GENIUS Act, which regulates stablecoins, regulatory restrictions are shifting. But regulations take time and they still serve as another barrier hindering support from the financial institutions.

Career Risk

Financial professionals have spent years studying – achieving honors and master’s degrees at university, Chartered Financial Analyst certifications, MBAs, CFPs, CPAs, and more. We have built a major barrier to entry for the powerful industry over which they are custodians. And for good reason: there is a lot of knowledge required, and we invested a lot of time and energy in accumulating it.

Serious and highly educated financial professionals are now confronted by 20-year-olds in their basements who have made $1 million in a few months. Not only that, but they are shouting it from the rafters, posting it all over Twitter, and driving Lamborghinis around town.

That sounds too good to be true! And often it is! There are many swindles in crypto. Sam Bankman-Fried’s infamous blowup at FTX set the industry back a few years.

Then there are the many news stories of people making poor investment decisions and losing their life savings. They just do not shout about it as loudly as the “crypto bros” scream about their winnings! It only takes one of these stories for a financial professional to label crypto a “scam.”

As custodians of client money, reputation is everything to us. We cannot be associated with scams!

Performance Pressure

The reality is that there are numerous reasons why it has historically been challenging for many financial professionals to embrace Bitcoin. But there is another reality that we must simultaneously confront.

Bitcoin has returned 50% annually over the past five years. Simply buying and holding Bitcoin would have outperformed most time horizons. Bitcoin outperformed the S&P500 by 40% over the past year (to the end of October) and by almost 300% over the past five years.

Source: Sound Money

Of course, buying and holding Bitcoin is harder than it sounds. It requires patience and a reasonable appreciation of the risks of central banking. But it does not necessarily require 10, 15, or 20 years of study. And yet, the outcome: a simple strategy dramatically outperforms the work of highly credentialed professionals.

From a financial professional’s perspective, that is a difficult pill to swallow – and it naturally leads to reticence in green-lighting the asset class.

Overcoming Our Biases

There are structural factors that make adoption and support from the financial industry more challenging. It’s not just the technological leap. It’s the economic ideology that runs contrary to Bitcoin. It’s the financial models built in a fiat era, centered on assumptions of monetary continuity. It’s the way this technology sidesteps the traditional halls of power, raising questions for bankers, asset managers and regulators.

Bitcoin, with all its flaws, questions our assumptions. History suggests that when our assumptions are challenged, and we remain open to change, we usually come out stronger on the other side.

With all the time, evidence, and adoption increasingly weighing in Bitcoin’s favor, the question is not whether financial professionals will embrace Bitcoin, but for how long we can afford not to.