Ric Edelman, founder of the Digital Assets Council of Financial Professionals.
Heidi Gutman | CNBC
Bitcoin’s recent slump — including its drop below $20,000 — has given some cryptocurrency opponents a “I told you so” moment.
A panelist joked at a conference for financial advisors earlier this month, causing the crowd to laugh.
Ric Edelman, a former independent financial advisor and founder of Edelman Financial Services, delivered a different message in a separate session at the same Wealth Management EDGE conference.
“A lot of people believe it’s a fashion or a hoax, it’s a tulip bulb or a Beanie Baby,” Edelman said. “I’m not here to tell you that you have to fall in love with bitcoin.”
“I mean you have to be knowledgeable about it because you get customer questions,” he said about crypto.
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Edelman founded a new company, the Digital Assets Council of Financial Professionals, to help the financial industry train in the subjects he calls himself. “The first major new asset class in 150 years.”
However, he left his post as chairman of Edelman Financial Engines last year – worth a reported $270 billion at the time – and is still its largest individual shareholder. It also gave up all securities licenses.
CNBC.com spoke with Edelman to learn more about his new book “The Truth About Crypto” and what he sees ahead for bitcoin and cryptocurrencies.
“Bitcoin, along with many other elements of the digital asset community, will likely be much more valuable than it is today,” he told CNBC. “It represents an opportunity to create wealth that we haven’t seen in 35 years.”
(Editor’s note: This interview has been shortened and edited for clarity.)
‘Big drops’ aren’t unusual for emerging tech
Lorie Konish: What is the crypto winter and what does it mean for investments in digital assets?
Richard Edelman: The crypto winter refers to the massive drop in the prices of bitcoin, Ethereum, and other digital assets. Seven times in Bitcoin history, its price has dropped 70% or more, making it known as a crypto winter.
It is not uncommon for emerging new technologies to experience large declines of this degree or frequency. If you look at the first 12 years of Amazon, Apple, Google, you will see very similar price performances of their stocks in the early years of their development. As you develop a new technology, gain market share, and mature, it’s routine to see tremendous price fluctuations on the way to generating unprecedented profits.
Although Bitcoin has experienced these big drops many times, it has delivered a total of 40 million percent returns since its inception. Even since 2018, while bitcoin has dropped 70% since November, it has increased 7 times since 2018 – not 7% - 7 times. That’s what innovation is about, and you need to have a long-term perspective and be willing to tolerate such incredible fluctuations.
LK: Prior to this, there were many dissenters in the financial advisor community who would see this as proof of what they already believed. What would you like to say to them?
AGAIN: He said that if customers expressed this opinion about the stock, they would not tolerate that feeling. In the early days of the pandemic, the stock market fell 35% in six weeks. If you look at such a short-term timeframe and use it as an argument that stocks are risky, too risky to invest in, advisors will say it’s an artificial timeframe. You’d have to look at a longer period of time to come to a more legitimate conclusion.
The same goes for crypto. You can easily look at the last nine months and say that the 70% drop in bitcoin has proven to be very risky to invest. But if you look at the last four years with 7 times the return, you have a very different perspective. What I’ve found is that people using this latest drop as an argument against bitcoin are just confirmation bias and innovation bias, with advisors grabbing a unique data point to prove an argument that was deceptive in the first place.
‘I propose a very low single-digit allocation’
LK: What are the risks of not investing in crypto?
AGAIN: In my new book “The Truth About Crypto”, I recommend 1% asset allocation to digital assets. This is a very new asset class. It develops, matures and faces many risks. You have the potential for regulatory risk. You run the risk of fraud and abuse. There is a technological risk. There is always the potential for a decrease in market demand. Therefore, I recommend a very low single-digit allocation to this asset class as part of a diversified portfolio.
Dave Pope (center) works at the Digifox booth at the Bitcoin 2021 Convention, a cryptocurrency conference held in Miami on June 4, 2021.
Joe Raedle | Getty Pictures
However, if you make zeros instead of 1%, you run the risk of making a 100% mistake. Bitcoin’s price history has proven that a very low asset allocation of 1% or 2% or 3% is sufficient to significantly improve the overall return of the portfolio. If Bitcoin breaks down and becomes worthless, a 1% loss will not cause you significant financial damage. The risk of not investing means you could be 100% wrong.
LK: As you state in the book, investing in digital assets does not mean cryptocurrencies directly. So you could be exposed to this elsewhere?
AGAIN: Absolutely right. Just because you’re a fan of the auto industry doesn’t mean you have to buy stock in General Motors. Instead, you can buy shares in companies that produce asphalt, because these cars will need roads to drive. Or you can invest in companies that produce white paint because those roads need to be painted. Or you invest in companies that make traffic lights and stop signs. There are many ways to invest in an industrial sector without direct investment. It’s called the pick and shovel approach, made famous by Levi Strauss, who didn’t mine any gold during the California gold rush and instead sold jeans to gold miners.
This same approach can be used in crypto. Instead of buying Bitcoin, invest in companies that facilitate and build the technology. You can invest in public bitcoin miners or crypto exchanges that allow investors to buy and sell crypto. You can invest in Nvidia, a computer chip maker that provides the chips that bitcoin miners use to mine bitcoin. You can invest in blockchain development companies like IBM or Silvergate Bank, a digital bank chartered by the government. There are many ways to invest in this asset class thematically without directly owning Bitcoin itself.
Bitcoin is a ‘network’, not a product
LK: What are the most common misconceptions you hear about crypto?
AGAIN: The most common is that there is no way to value bitcoin, that bitcoin has no real value. This is an extraordinarily common mistake, often perpetuated by highly respected financial figures such as Jamie Dimon and Warren Buffett. Jamie Dimon is famous for saying that bitcoin has no real value.
The problem with economists and market analysts making this statement is that they apply traditional economic modeling of stocks to crypto. What they don’t understand is that digital assets are a whole new class of assets that have nothing in common with the stock market. And trying to apply traditional stock valuation methodologies to digital assets will lead you to the wrong conclusion.
As a market analyst, you look at a company’s product, its competition, its management, its products. You examine their income and profits. But if you try to do this with bitcoin, you discover that there are no companies, no employees, no products, no income and no profits. All these numbers are zero and this would lead you to conclude that bitcoin has zero real value and you will come to the wrong conclusion.
A flag at the 7-Eleven gas station in Lawrenceville, New Jersey, advertises the Cash2Bitcoin ATM in March 2021.
Suzanne Barlyn | Reuters
Instead of trying to compare bitcoin the way you compare IBM stocks, you have to accept that bitcoin is a network rather than a product. And networks are valued by the number of users in the network and the growth rate in user adoption. From that perspective, you can compare it to AT&T as a network or Netflix or Facebook as a network. You start to realize that the Bitcoin network is growing so fast that the increasing value of the network itself has an exponential effect, which is growing exponentially faster than the number of user adoptions on the network. This is a fundamental basis for accepting that while bitcoin has no value, it certainly has a market-determined price.
LK: Where do you see crypto in 10 years?
AGAIN: It will become a routine element of commerce on a global scale. McKinsey says 70% of global GDP will be digital by 2030. Every central bank in the world will offer a digital currency, and the functionality of our personal finances through digital assets will be routine.
It’s hard for us to remember that the iPhone is only 14 years old. Yet today, we couldn’t imagine leaving home without it. Most of us are within a meter of our phones 24/7. Blockchain technology will become pervasive and routine as part of our lives. The sooner people begin to realize this, the sooner they will be able to seize the economic and investment opportunities this represents.