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Answer Your Clients' Questions About Cryptocurrency

What you need to know to navigate this emerging territory

The buzz around cryptocurrency keeps intensifying—and some investors want in or are curious. But before answering the siren call of Bitcoin, blockchain, NFTs, and the other instruments of this global financial revolution, an understanding of the rules—and risks—of engagement is imperative. It's a steep learning curve, so here are some essentials for helping keep you and your clients on terra firma—especially important when headlines make it clear, as they did last May, that the ground under crypto can often seem shaky and precarious.  As it happens, and as you’ll see throughout this guide, crypto—like the stock market—will have its ups and downs. And this, notes Anand Sithian, counsel at the law firm Crowell & Moring, “highlights the importance of understanding any given client’s risk profile and tolerance, particularly as it relates to a highly volatile asset class such as digital assets.” 

“If you don’t offer crypto, they might walk and seek it elsewhere”

Upsides and downsides

For veteran financial strategist Sid Miramontes, founder and CEO of acclaimed Newport Beach, California–based financial services and retirement planning firm Miramontes Capital, Bitcoin is currently his limit for crypto-curious clients.

“We started our homework about four years ago when customers first began asking about crypto,” said Miramontes, who is renowned for his studied, responsible client-first approach to investing. 

After interviewing dozens of crypto fund managers, finance professors, economists, and other professionals, Miramontes came to an unambiguous conclusion.

“Clients were investing blindly in an asset class with high front-loaded risk and no downside protection. Affluent as they are, they could not afford the high percentage pullbacks, to say nothing of getting crushed entirely. I saw the significant upside potential though. The challenge was to build a downside hedge.”

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His solution was to create a Bitcoin-only derivates fund. “Bitcoin, along with its derivates, is the only cryptocurrency regulated by the Commodity Futures Trading Commission (CFTC), which recognizes Bitcoin as a commodity. That allows for option puts and calls on the Chicago Mercantile Exchange (CME). Our proprietary algorithmic derivative trades limit the downside while maximizing the alpha.”

Protecting the client relationship is also key. “If you don’t offer crypto, they might walk and seek it elsewhere,” he says. “You can also lose a client by exposing their capital to more risk than they can withstand.”

Demystifying and decoding crypto

Cryptocurrency is reshaping the world. From the dominance of crypto ads in Super Bowl LVI to 24/7 crypto chatter on social media platforms to headline coverage on major media outlets, the messaging can seem omnipresent and mythic. It should come as no surprise that FOMO, or the Fear of Missing Out, is one catalyst and driver of curiosity and participation in this encryption-based monetary revolution.

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"Fortune favors the brave" advertises fast-growing app, likening investment in crypto to nautical and space exploration with actor Matt Damon as its celebrity shill. “Caveat emptor” could be another slogan. The risks are often greater than the returns, which can be off the charts. Volatile and erratic, the crypto universe is rife with scammers, hackers, and crooks. A firm understanding of crypto projects can be elusive, and not everyone is sold on the fast money gold rush hype.

On the other side, crypto offers proven profitability and potential that far surpass the pitfalls. The gains can be life changing. There is no diving head-first into this marketplace, however. While mirroring other asset classes in certain ways, crypto’s unique dynamics require, if not demand, that financial professionals and their clients venture in one studied, pragmatic, and strategized step at a time.

New building blocks for the democratization and distribution of money

“If there was ever a time that Silicon Valley believed it could revive the long-deferred dream of reinventing money, this was it,” wrote New York Times journalist Nathaniel Popper in Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, his 2016 bestseller on crypto’s origins and evolution. “A virtual currency that rose above national borders fitted right in with an industry that saw itself destined to change the face of everyday life.”

As transformative as the internet itself, crypto, which is rooted in ideology around the corruptibility of money, debuted as the new currency of the global realm in 2009 with Bitcoin. Developed by a presumed pseudonymous individual or collective known as “Satoshi Nakamoto,” this flagship project introduced an egalitarian money alternative outside the controls of governments and central banks. The crypto universe now includes numerous alternative coins (“Altcoins” or non-Bitcoins) and other innovations.

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Crypto projects operate on a blockchain, a global shared network of autonomous computers supported by an underlying database. Predating Bitcoin and offering other industry applications, blockchain, or distributed ledger technology, immutably time stamps and encrypts all transactions. Cryptocurrencies are denominated as “tokens” for investing, trading, purchasing, or storing value. 

Each successive transaction creates a new “block” which is cryptographically validated by algorithmic consensus methods including “Proof of Work,” “Proof of Stake,” and “Proof of Authority.”

“Chained” together to form an irrefutable chronology of ownership, completed blocks inherently safeguard transactions, since altering data in any one block would change all subsequent blocks. No single person or entity controls this purpose-designed peer-to-peer system, which is fully transparent and viewable by anyone. Layered atop certain blockchains, the Lightning Network makes transactions faster and more reliable.

Unlike traditional investments or payments, crypto is irreversible — transactions cannot be undone.

Owners typically store tokens in an exchange account, such as Coinbase or Gemini, or digital “wallets” that interact with the blockchain. These include hardware wallets and privately keyed “cold storage” wallets. Don’t lose your password — otherwise you will likely be locked out.

For investors, understanding the underlying technology is important, but not imperative. What counts most is knowing the value proposition and heeding the risks.

The glitter and gloom of digital gold

“Untethered to traditional markets, crypto is not commonly evaluated like equities, bonds, or conventional assets,” says Anand Sithian, a counsel in the New York office of the law firm Crowell & Moring. Sithian’s wide-ranging practice in the firm’s International Trade and White Collar & Regulatory Enforcement groups includes virtual currency and digital assets. “Unlike traditional investments, crypto is not about studying earnings and cash flows and figuring out dividends and yields. Instead, market participants delve into crypto research and analysis websites, white papers, or messaging apps like Telegram and Discord, or Twitter, to follow discussions about a given token or protocol.”

Key intelligence includes blockchain activity; the scarcity, abundance, and release dates of a given token; and how the market perceives the thesis, investors, developers, and advisors behind a given crypto project. 

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The chatter can create crypto boom or bust in the same day. Bitcoin has seen an astronomical 2,300% rise in valuation since late 2019. Other cryptos have sunk like the Titanic, taking investors with them.

As financial content platform Blockworks states, “Price and value are inextricably co-dependent in crypto … everything is worth only what people think it’s worth, so valuation doesn’t matter.”

For Sithian, crypto is fundamentally a risk proposition. “Financial professionals should always first ask their clients how much risk they are they willing to entertain.”

Functionally speaking, the interrelated protocols of “mining” and “halving” are central to the value proposition.

The former is the process of adding new blocks to the chain, which introduces new tokens into circulation. Relying on powerful, costly computers that controversially require excessive energy to run, “miners” compete individually or in pools to solve complex mathematical puzzles. Winners receive a set amount of Bitcoin.

In 2020, the reward was 12.5 coins. It is now 6.25. In 2024, it will be around 3.125. This is the halving protocol, which also applies to multiple other cryptocurrencies. Unlike traditional money printing, Bitcoin issuance is finite, with a fixed supply cap of 21 million coins—with a built-in deflationary control that creates value through scarcity

Every four years, the system is coded to reduce the available mineable supply by 50% (on average, some 210,000 new blocks are created every four years, at roughly one every 10 minutes). With 19.2 million Bitcoin currently in circulation, the supply is projected to end by around 2041.

Before you invest

Sithian recommends these critical first steps before putting client capital into crypto.

Do your research: Financial professionals should understand crypto before offering it to their clients. “Knowing how crypto works, including buying and selling cryptocurrencies and even NFTs myself, has made me a better lawyer for my clients. Same goes for the financial professional. This is not an asset class to ‘fake it’ or figure out with your client as you go along,” he says.

Advise on the risk: Inform clients up front that crypto is a still-developing marketplace with shifting regulations and volatile value that can jump 50% or drop 90% in one day for any given token or individual asset.

Build an investment thesis: As with any investment, this falls under the all-important area of due diligence. Study and assess every aspect of a target crypto asset and its blockchain, including its performance history and changing values. Decide on your investment priorities, risk tolerance, and goals.

Secure your assets: As hedge funds, pension funds, investment banks and other financial institutions are required to have a custody partner, having a crypto custody plan—a cybersecurity protocol for the private key that proves ownership of funds in a crypto wallet—is imperative for safeguarding your clients' money. Registered investment advisers and broker-dealers should be aware that the SEC’s Division of Examinations has placed custody arrangements, as well as offer, sale, recommendations, and advice on crypto assets as part of its 2022 Examination Priorities

Forays into crypto

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While crypto’s inherent volatility might seem suitable for older, higher net worth investors who are better able handle the heat, Bitcoin and other currencies are making inroads with younger investors. According to a Quinnipiac University national poll released in March 2022, 43% of Americans, more than half of them under 50, think that cryptocurrencies will become a dominant long-term economic force.

Crypto can be tailored to shorter- and longer-term priorities as part of a broader investment strategy. For more cautious, savings-minded investors, stablecoins are a less risky option that are pegged to a fiat currency like the U.S. dollar or a commodity like gold. Investment in crypto technology and infrastructure is another buy-and-hold strategy.

Cryptocurrency ETFs (Exchange-Traded Funds) offer a versatile option that resembles stock market investing by offering a mix of managed stocks, bonds, crypto assets, and crypto companies and technologies.

Through activities including lending, staking, pooling, and trading, investors in the emerging area of decentralized finance (DeFi) can earn periodic interest for participating in the overall ecosystem.

Non-fungible tokens (NFTs), which prove ownership of unique digital works created on the blockchain including art, photographs, music, games, and more, can produce astronomical returns.

Tax time

The Internal Revenue Service handles the trading or other uses of crypto in much the same way it handles traditional capital assets such as equities and bonds. With IRS oversight—and enforcement activity—intensifying, here are some key compliance considerations to follow.

According to its Notice 2014-21, the IRS defines cryptocurrency assets as property, not securities. As such, earnings and net losses from selling or exchanging crypto are treated like regular capital gains, with the same differentiated tax rates for short-term versus long-term gains.

Like equities, held crypto assets are only taxed when sold.

Absent IRS guidance or statutory prohibition, crypto investors use wash sales for tax loss harvesting or strategically selling assets at a loss to reduce their total capital gains. Congress continues to discuss this hotly contested topic, which is included in the currently stalled Build Back Better Act legislation.

For older clients considering gifting or bequeathing their cryptocurrency holdings to children or heirs, traditional inheritance and estate taxes apply.

Red flags

Anyone anywhere can create and host a crypto project on the blockchain—malicious actors included. Be vigilant to these common swindles and traps.

Initial coin offering (ICO) scams: Fake projects that are aggressively promoted to attract early investors and their money.

Rug pulls: A similar ruse in which scammers announce a fictitious project, create major buzz, and then abscond with investors’ funds.

Phishing scams: Unsolicited e-mails or messages to get in on a pre-sale opportunity, or join a private trading group, or anything that sounds too good to be true.

Pump and dumps: A classic coordinated manipulation of the market in which a private or public group simultaneously buys coins at one price and then attempts to lure non-members in before exiting once they have made a profit.

Mainstream momentum

Commensurate with increasing consumer confidence and broadening institutional adoption of digital assets, crypto’s growing presence in the global financial ecosystem includes traditional financial products, services, and activities. This can only benefit the market going forward. As NASDAQ has stated, “Large institutional investors are adopting cryptocurrencies more widely, and their participation will benefit the long-term stability and growth of the cryptocurrency ecosystem.”

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On the payments front, more sectors of the global economy are accepting crypto for the purchasing of goods and services. These include travel and hospitality; sports and entertainment; real estate; restaurants; and phone, TV, and computer providers.

Venmo and PayPal are among the payment apps getting into crypto. Headed by former Twitter CEO Jack Dorsey, Block (formerly Square) allows users to buy and sell Bitcoin using Bitcoin’s Lightning Network on its popular Cash App platform.

According to digital asset manager Galaxy Digital, venture capital firms invested close to $33 billion in crypto and blockchain startups in 2021. In March 2022, Galaxy participated in the first over-the-counter (OTC) crypto transaction with a major U.S. bank when it partnered with Goldman Sachs on a cash-settled Bitcoin option trade.  

Mastercard is expanding its consulting services to “help businesses and banks better understand the evolving digital asset and financial landscape.” Specific areas include crypto credit cards and crypto loyalty programs, as well as NFT and digital currency risk assessment programs. In 2021, Mastercard partnered with Coinbase to facilitate the purchasing of NFTs without having to first purchase Ethereum or have a digital wallet.

Visa has partnered with on its own prepaid debit card, with cashback rewards in Coin, and another card with crypto exchange BlockFi.

Bitcoin is legal tender in El Salvador, with at least eight other nations pursuing crypto legislation.  Countries at the forefront of crypto adoption include the U.S., the UK, Canada, Spain, South Korea, and Singapore.

Regulatory and legal considerations

Calling Bitcoin “the only secure, compliant, and fundamentally sound asset” within the crypto space, Miramontes wants to see more regulatory structure before diversifying client investment in other digital currencies and assets.

“Until these alternatives reach the same high standards of compliance, security, and fundamentals that we would apply to equities, bonds, or commodity investing, we believe that it is inadvisable to actively manage what are essentially venture projects,” he says. “Additionally, we have determined that Bitcoin along with other alternative asset classes should represent no more than 5% of a client’s asset allocation.”

The regulatory framework is taking shape, however. In early March 2022, President Biden signed an executive order calling on the U.S. government to examine the risks and benefits of cryptocurrencies. Focal areas include consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion, and responsible innovation. The order also calls on federal agencies to take a unified approach to the oversight and regulation of digital assets.

The highly publicized crash, in May, of Terra, the South Korean crypto project with two stablecoins, undercut some investor confidence in cryptocurrency. But chances are, notes Sithian, the “events” will have a silver lining, “leading U.S. and perhaps global regulators to further examine stablecoins. I wouldn’t be surprised if regulators establish some type of framework to regulate stablecoins, such as requiring certain minimum fiat or fiat-equivalent collateral and investor protection requirements.”

NASDAQ, for its part, named 2022 “A Year for Change” in the regulation of cryptocurrency, and is advocating for “a 24x7 technology-based surveillance program that is highly resilient and has sophisticated crypto-specific pattern detection capabilities that will hold up under regulatory scrutiny… to combat spikes in volatility.”

The Securities and Exchange Commission, which is yet to approve a Bitcoin exchange-traded fund, is currently in hot debate on crypto rules and enforcement. The sale of crypto is regulated by Regulation Best Interest.

“Investment professionals should consider their obligations as a broker-dealer or otherwise under the SEC and Financial Industry Regulatory Authority (FINRA),” says Sithian. “Financial professionals should ensure that they are compliant with whatever anti-money laundering obligations they may have. Additionally, they should consider whether they may be viewed as being in the business of sending, receiving, or otherwise transmitting crypto assets for their clients. This type of activity, known as money transmission, falls under the Bank Secrecy Act, which involves a slew of regulatory obligations established by the Financial Crime Enforcement Network.”

12 key crypto terms to know

(Source: Coindesk,

Altcoin: “Alternative coin” or any cryptocurrency other than Bitcoin.

Bitcoin: Introduced in 2009 by the pseudonymous “Satoshi Nakamoto,” the world’s first and largest cryptocurrency by market cap, with a fixed supply. 

Blockchain: Similar to a traditional bank ledger, a digital distributed ledger technology for immutably recording crypto and related transactions.

Coinbase: Launched in 2012, this is the largest U.S. crypto trading exchange. With its user-friendly interface and roster of leading listed cryptocurrencies, the platform is a popular starting point for new investors.

Halving: The coded, built-in control that reduces by 50% the available supply of a given cryptocurrency on a set timetable (in the case of Bitcoin, every four years) to counter inflation and create scarcity. 

Mining: The process of adding and verifying new transactional data to a blockchain ledger, adding new coins into circulation.

Non-Fungible Tokens: NFTs for short, are digital tokens used to prove ownership of art, music, and other unique tangible and intangible digital content created on the blockchain.

Private Key: A passcode that proves ownership of, and allows access to, funds held inside a crypto wallet (defined below).

Public Key: An encoded address for banking crypto transactions.

Stablecoin: Less volatile cryptocurrency that maintains value with 1:1 pegging to a government-issued currency such as the U.S. dollar or gold.

Token: The denominated unit of a cryptocurrency used for investing, trading, purchasing, or storing value.

Wallet: Hardware or software with a blockchain interface that stores a user’s private and public keys.

Major league metrics

Nearly 170 national currencies circulate as legal tender around the globe. Various sources estimate the existence of between 8,000 and more than 18,000 cryptocurrencies and counting, with several hundred thousand more that are frauds or discontinued. 

Between January and early May 2021, the global crypto market cap surged to an all-time high of $2.5 trillion. As of late March 2022, the market remained bullish at $2.14 trillion.

Currently priced at nearly $48,000 per token, market leader Bitcoin has a cap of $900 billion and daily trading volume of nearly $34 billion. Second is Ethereum. Priced at around $3,400 per “Ether” token with a market cap of $396 billion, Ethereum is distinguished by the use of highly valued smart contracts on its blockchain, enabling people to execute contracts digitally, without third-party involvement.

Leading sites such as and—both favored by Nathaniel Popper—list and track hundreds of cryptocurrencies and other products of the expanding crypto universe.

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