We are still living through the crypto-history. Regulators have recently pushed forward with major initiative within the cryptocurrency space. It’s important to understand the details, so I won’t go into them. However, these developments allow the industry to have meaningful conversations with the SEC regarding the future of cryptocurrency. The courtroom could be the forum the industry needs in order to move forward.

It’s almost expected. Crypto investors suffered a tough 2022. Faced with early-stage innovations and the shameless opportunists who always appear in emerging markets, many felt effects of mismanaged money and elite fraud. Investors who had put all their eggs in one basket were heard at bankruptcy hearings, telling the court that they lost millions of dollars in cryptos with high yields. The industry may have found its feet, but the SEC might feel a little hesitant after being bitten twice.

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The question is: how do we guide our clients through this turbulent time? Investors’ interest in digital assets has not cooled down despite the recent lawsuits filed by SEC. We see on-chain traffic flocking towards DeFi protocols, which support staking as well as decentralized trading.

In contrast to past disruptions, where centralized exchanges have been challenged, the outflows of institutions such as Coinbase seem to have stabilised quickly. This shows that investors may be staying put, and therefore need more guidance than before.

Advisors should be more cautious when discussing or investing in cryptocurrency with clients.

Apps that hold-away and use cryptography are important

Blockchain offers investors a high level of autonomy. The ability to trade wherever and whenever is a powerful tool that can democratize investing. While there are some trade-offs with the inherent responsibility, overall, this is a step towards financial equality.

Even though FAs and RIAs are well aware of this responsibility, they don’t want their newfound independence to be completely crushed (and no one could). Investors learned last year that the freedom to trade on mobile apps was so great, they felt no need for outside advice. However, unfortunate circumstances made it clear that this was not the case.

Hold-away is the answer. This new hybrid style managed investing, where custody is retained by a third-party, can be supported with tools that allow you to view your client’s held-away accounts (through Gemini or Cobase ), to provide insight when your clients decide to take control.

Taking a qualified, multi-custodial approach

Diversification is another important lesson from the exchange failures of the last year. Investors who invested their entire college fund in a single application to earn interest have been the victims of poor lending practices. Diversifying your holdings is a great way to reduce risk and invest intelligently.

You should also know the custodians who hold your money. Qualified custodians offer investors the ability to use different forms of custody, including hot wallet and cold wallet technologies. We carefully vet our custodians to ensure they offer qualified investment solutions. However, when investing for clients it is important to understand how the exchanges operate.

Maintain a diverse portfolio

Digital asset management still follows the Modern Portfolio Theory. Investors who suffered major losses were not only all-in with specific apps, but also on specific cryptocurrencies. Many investors put large amounts of money into a single vehicle because they were attracted by the high return potential on assets that are traded and yielding. (Think: Terra Luna). It’s easy to fall for the hype, just like in the early days of technology. Clients can easily be swept up by the hype and buy assets that are inflated with high risk profiles.

In a rapidly evolving space, DYOR (doing one’s own research) is crucial. In these situations, experts in the digital assets space are able to provide a wealth of information through their indices and model. You can then spread your investment capital among different digital assets based on market research and analyst’s advice.

Diversification is not limited to crypto. There are many ways to use blockchain to diversify, which is why we call them “digital assets”. Tokenized assets, also known as tokenized securities (or tokens), are a way to diversify your portfolio. Tokenized assets (also known as real-world Assets), such as private equity, art, and real estate are among the alternatives that allow investors to expand their digital asset exposure by accessing otherwise restricted investment vehicles.

Keep your finger on the pulse

You must evolve with the regulatory landscape. The wheels of legislation move slowly and court cases can take years to be resolved. However, real dialogue and the chance to solve problems collectively and with clarity will help to bring about a better understanding in the industry. To ensure you are investing in a compliant and intelligent manner, keep an eye on the asset designations.

50 million investors have already made crypto investments. Advisors can offer their knowledge, experience, and financial education to guide clients when they are most in need. I am convinced that RIAs are going to pave the path for digital assets. You have the ability to bring the best out of this new space and make it do what was intended – to make the financial system function for all.

Pete Pachal is the editor.