Bitcoin’s recent rout — including its recent drop below $20,000 — has given some cryptocurrency naysayers an “I told you so” moment.
“How do you make a million? Invest a billion in bitcoin,” one panelist joked at a conference for financial advisors earlier this month, which drew laughter from the crowd.
Ric Edelman, a former independent financial advisor and founder of Edelman Financial Services, presented at a separate session at the same Wealth Management EDGE conference with a different message.
“A lot of folks are convinced it’s a fad or it’s a fraud, it’s a tulip bulb or a Beanie Baby,” Edelman said. “I’m not here to tell you that you should fall in love with bitcoin.”
“My point is you need to be knowledgeable about this, because you’re getting client questions” about crypto, he said.
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Edelman has founded a new company, the Digital Assets Council of Financial Professionals, to help the financial industry get educated on what he calls “the first major new asset class in 150 years.”
With that, he stepped away from his chairman role at Edelman Financial Engines last year — which was worth a reported $270 billion at the time — though he is still its largest individual shareholder. He has also renounced all of his securities licenses.
CNBC.com caught up with Edelman to find out more about his new book, “The Truth About Crypto,” and what he sees ahead for bitcoin and cryptocurrencies.
“Bitcoin will very likely be massively more valuable than it is today, along with a great many other elements of the digital asset community,” he told CNBC. “It represents a wealth creation opportunity that we haven’t seen in 35 years.”
(Editor’s note: This interview has been condensed and edited for clarity.)
‘Major declines’ aren’t unusual for emerging tech
Lorie Konish: What is the crypto winter and what does it mean for investments in digital assets?
Ric Edelman: A crypto winter refers to a major decline in the prices of bitcoin, Ethereum and other digital assets. Seven times in bitcoin’s history, it has fallen in price by 70% or more, and that has become known as a crypto winter.
It is not uncommon for emerging new technologies to experience major declines of this degree or of this frequency. If you look at the first 12 years of Amazon, Apple, Google, you’ll see very similar price performance of their stocks in their early years of development. It’s routine as you’re innovating a new technology, gaining market share and achieving maturity that you see massive price volatility along the way to producing unprecedented levels of profits.
Even though bitcoin has experienced these massive declines many times, it has generated a 40 million percent total return since inception. Even since 2018, even though bitcoin is now down 70% since November, since 2018, it’s up 7x — not 7% — 7x. This is what innovation is all about, and you need to maintain a long-term perspective and be willing to tolerate this kind of incredible volatility along the way.
LK: There were many naysayers in the financial advisor community before this, who may take this as proof for what they already believe. What would you have to say to them?
RE: That they would not tolerate that sentiment if clients were to express that view regarding stocks. In the early days of the pandemic, the stock market fell 35% in six weeks. If you look at a short-term time period like that, and use it as an argument that stocks are risky, too risky to invest in, advisors would say that’s an artificial time period. You need to look at a more lengthy period of time to reach a more legitimate conclusion.
The same thing is true about crypto. You can easily look at the past nine months and say the 70% decline in bitcoin proves that it’s too risky to invest in. But if you look at the past four years, with a 7x return, you would have a very different perspective. What I find is that people who are using this latest decline as an argument against bitcoin is merely confirmation bias and recency bias, advisors with a preconceived notion grabbing at a unique data point to prove an argument that is specious in the first place.
‘I recommend a very low single-digit allocation’
LK: What are the risks of not investing in crypto?
RE: In my new book, “The Truth About Crypto,” I recommend a 1% asset allocation to digital assets. This is a very new asset class. It’s developing and maturing, and it faces a great many risks. You have the potential for regulatory risk. You have the risk of fraud and abuse. There’s technological risk. There is always the potential of decreased market demand. Because of that, I recommend a very low single-digit allocation to this asset class as part of a diversified portfolio.
With that said, if instead of doing 1%, you do zero, you run the risk of being 100% wrong. Bitcoin’s price history has proven that a very low asset allocation, 1% or 2% or 3%, is enough to materially improve the overall return of the portfolio. While if bitcoin goes broke and becomes worthless, a 1% loss isn’t going to cause you significant financial harm. The risk of not investing means that you could be 100% wrong.
LK: As you point out in the book, investing in digital assets doesn’t necessarily mean directly in cryptocurrencies. So you can still get exposure to this elsewhere?
RE: Absolutely correct. Just because you’re a fan of the automotive industry, doesn’t mean you need to buy stock in General Motors. Instead, you might buy stock in companies that manufacture asphalt, because those cars are going to need roads to drive on. Or you might invest in companies that manufacture white paint, because those roads have to be painted. Or you invest in companies that build traffic lights and stop signs. There are a great many ways to invest in an industrial sector without a direct investment. It’s called the picks and shovels approach made famous by Levi Strauss, who never mined for gold during the California gold rush but instead sold blue jeans to the gold miners.
This very same approach can be used in crypto. Instead of buying bitcoin, invest in the companies that are facilitating and building the technology. You can invest in publicly traded bitcoin miners or in crypto exchanges that allow investors to buy and sell crypto. You can invest in Nvidia, which is a computer chip manufacturer that provides the chips that bitcoin miners use to mine bitcoin. You can invest in blockchain development companies, such as IBM, or Silvergate Bank, which is a digital bank chartered by the government. There are a great many ways you can invest thematically in this asset class without directly owning bitcoin itself.
Bitcoin is a ‘network,’ not a product
LK: What are the most common misconceptions around crypto that you hear?
RE: The most common is that there’s no way to value bitcoin, that bitcoin has no intrinsic value. This is an extraordinarily common mistake, often perpetuated by very well-respected people in the financial field, such as Jamie Dimon and Warren Buffett. Jamie Dimon is infamous for saying bitcoin has no intrinsic value.
The problem with economists and market analysts who make this statement is that they’re applying traditional economic modelling of stocks to crypto. What they fail to understand is digital assets is a brand-new asset class that has nothing in common with the stock market. And trying to apply traditional methodologies of stock valuation to digital assets leads you to the wrong conclusion.
As a market analyst, you would look at a company’s product, you would look at its competition, at its management, at its products. You would examine its revenues and its profits. But if you try to do that with bitcoin, you discover that there is no company, there are no employees, there is no product, no revenues and no profits. All of those numbers are zeroes, and that would lead you to conclude that bitcoin has zero intrinsic value, causing you to reach the wrong conclusion.
Instead of trying to compare bitcoin the way you would compare shares of IBM, you need to recognize that bitcoin, rather than being a product, is instead a network. And networks are valued based on the number of users on the network and the rate of growth of the user adoption. When you look at it from that perspective, you can compare it to AT&T, which is a network, or to Netflix or Facebook, which are networks. You begin to realize that the bitcoin network is growing so rapidly that there is an exponential effect of the increased value of the network itself, which grows exponentially faster than the number of user adoption on the network. This is a fundamental basis for how you acknowledge that while bitcoin may not have a value, it very certainly has a price, which is being set by the marketplace.
LK: Where do you see crypto in 10 years?
RE: It will be a routine element of commerce on a global scale. McKinsey says that 70% of global GDP by 2030 will be digital. Every central bank in the world will be offering 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. And yet today, we couldn’t imagine leaving home without it. Most of us are within three feet of our phones 24/7. Blockchain technology will be as pervasive and routine a part of our lives. The sooner people begin to realize this, the sooner they will be able to capture the economic and investment opportunities this represents.