Best way for you to start trading in cryptocurrency
Yahoo Finance’s Brian Cheung, Brian Sozzi and Julie Hyman speak with ShoreHaven Wealth Partners Co-Founder Michael Durso on how people should approach crypto investments.
Video Transcript
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BRIAN CHEUNG: Well, the interest in crypto is underscored by the hot Bitcoin futures ETFs. And people want crypto products, and they want them now. But how are financial advisors handling the demand, given regulatory ambiguity and just the general risks that's associated with the volatility of these things?
Let's bring in Michael Durso, co-founder of Shorehaven Wealth Partners, for this conversation. Michael, someone comes into your office and says, hey, I want that parody coin of the parody coin of the cryptocurrency called Shiba. What are you going to do? Are you going to say yes?
MICHAEL DURSO: That's one we will say no to. Typically, if we're talking about crypto to clients, it's going to be Bitcoin or Ethereum are the two that we're focused on right now.
JULIE HYMAN: And Michael, to the bigger point, though, I mean, for example, we talked to a strategist at one of the bigger banks the other day, and he said the problem is, people ask us about it, but there's not-- from a sort of big institution perspective, there's not always something we can do to fulfill that demand. From a financial advisor perspective, how do you tell people to get out there and buy this stuff?
MICHAEL DURSO: Yeah, so it's interesting. The demand has, obviously, been there a couple of times. You know, 2017, when the market ticked up, and then more so in the past year. One of the things that we always discuss upfront is, obviously, the risk of the asset class. It's one of those things where you need to understand the amount of risk you're taking on, the amount of drawdown that can take place in the asset class.
That being said, if you're comfortable with that and you are looking to get exposure in Bitcoin or Ethereum, like I mentioned, we typically recommend using a separately managed account manager. And a few reasons for that is, one, you're getting direct exposure to the coin. So I know there's been some ETFs that have come out recently, but you're getting futures exposure there and not direct exposure. And so there's big price differences between spot and futures.
The other thing that's interesting about the managed account is, it's held in cold storage, so you don't have to worry about some of the hacking issues that you might see with people owning it in other apps that are out there. And then the most important one and the one that we've been speaking a lot to clients about is some of the tax benefits of owning it in a separately managed account.
Since there is no wash sale rule in place for crypto currently, you can actually take advantage of that volatility. And if there is a move of 5% to 10% from your cost basis, the managed account manager that we will use will actually harvest those losses immediately, lock them into your portfolio, and you can use them to offset other gains you might have in your accounts.
BRIAN CHEUNG: And Michael, this is a really interesting question for the advisory space, just because there is guard-- there are guardrails on the industry about the way that you provide investment advice, right? The fiduciary rule from the Department of Labor, other types of regulatory guardrails as well.
What types of challenges do you face when you have people coming in, asking about these types of very volatile instruments? And you know that people do have different risk tolerance levels that they're willing to have in their portfolio. How do you make sure that you're following the law, making sure you're within those regulatory guidelines, but then also delivering what the clients are asking for?
MICHAEL DURSO: It's a great question, Brian. It's something that we grapple with every day from a standpoint of individual stocks or cryptocurrency, right? A lot of clients get interested when they see the hot dot, whether it's a Tesla or whether it's Apple or cryptocurrency. And so, we like to begin every conversation with risk. So we take clients through a full risk assessment, through a quantitative research tool that we use to make sure that they really understand the risk from an upside standpoint, but more importantly, from a downside standpoint.
Once that conversation has been had-- as you mentioned, we are fiduciaries, and so we always do what's in the best interest of our clients. And so, we would be very conservative in regards to an allocation towards the space. The most we would ever recommend to someone would be 1% to 3% of their investable net worth and make sure that they're very comfortable with that risk. As I mentioned earlier, we would take them through that risk analysis, show them how it's going to affect their portfolio from a standard deviation standpoint, as well as from a potential return standpoint.
Make sure they're comfortable with that risk. And then, obviously, when we do our quarterly reviews, we're going to discuss that every quarter. We're going to look at it in the aggregate of the portfolio. We're going to say, OK, here's your traditional asset allocation. Here's the crypto exposure. This is what it looks like from a risk standpoint. Here's what it looks like from a return standpoint. And make sure they're continually comfortable with that.
And then, more importantly is just to realize that they have a long-term approach to it. We certainly don't want to be trading this for clients, be buying in and out on a weekly basis. We're looking at this from a buy and hold standpoint, take advantage of some of the tax opportunities that are there, and for clients who really believe in the cryptocurrency long-term.
BRIAN SOZZI: Within that 1% to 3% framework, how would you recommend one go about it? Is it through a Bitcoin, or would you rather them have more exposure via these new futures ETFs?
MICHAEL DURSO: Right, so we typically recommend using a split between Bitcoin and Ethereum that we discuss prior. And most of the time, it's clients coming to us with the demand. And so they have an opinion on Bitcoin or Ethereum prior. We haven't gotten to the point where we are going out to clients unsolicited and putting this in client accounts. In regards to using some of the altcoins and DeFi coins that are out there, I'm just not fully comfortable with that space yet. So I would say that Bitcoin and Ethereum would be how we'd recommend it.
The issue with using the ETFs right now, it's similar to any of the commodity ETFs. It's just that you're getting futures exposure versus getting the traditional coin spot exposure. And if you look at USO, for example, which is the oil ETF, you can see that over the past five years, oil prices have gone up from a spot standpoint. And if you look at the five-year returns from a futures standpoint, you're down in the 50% to 60% range. And so, you need to be really careful understanding of what you own and the underlying.
And the futures vehicles are great as a trading vehicle. But if you're going to be a buy and hold investor, we suggest doing it through the managed account from a standpoint that you can own the coins directly, hold them in cold storage, and then take advantage of some of those tax loss harvesting opportunities.
BRIAN CHEUNG: All right, but no Shiba, at least, for the time being. Michael Durso, co-founder of Shorehaven Wealth Partners, thanks so much for stopping by this morning.
