Ric Edelman: What Investors Really Need to Know About Crypto

“Bitcoin is the most volatile of all assets.”

“Bitcoin is the most profitable asset in history.”

Digital assets “are the most significant new investment opportunity of a lifetime.”

So says crypto expert Ric Edelman, prolific author and founder of the RIA Edelman Financial Engines, in an interview with ThinkAdvisor.

As for the crypto meltdown last week, he argues: “There’s nothing new about this market decline; we’ve seen this happen seven times in Bitcoin’s history. Crypto prices have dropped by more than 50% in the past eight months.”

The rout “will not change anyone’s views,” he said. 

Edelman, with wife Jean, founded Edelman Financial Services in 1986, ultimately turning it into a $300 billion business after merging with Financial Engines.

At the end of 2021, as chairman of financial education and client experience, Edelman walked away from the mega-RIA (“The time is right for us to start our next chapter,” he had said) and reinvented himself as the leading force in educating the industry and consumers about crypto.

Edelman, who Barron’s named the #1 Independent Financial Advisor three times, calls digital assets “the most transformative new asset class since the invention of the internet.” 

His new book — his 11th — “The Truth About Crypto: A Practical, Easy-to-Understand Guide to Blockchain, Bitcoin, NFTs, and other Digital Assets” (Simon and Schuster-May 10), is a user-friendly explainer covering a wide range of digital asset aspects, together with numerous lists of resources. 

It also is complete with a chapter on “The 10 Common Concerns About Crypto,” like “It’s a fad.” “It’s a fraud. “It’s too risky.”

In the interview, Edelman discusses Bitcoin as a hedge against inflation, some approaches to investing in crypto, inherent tax issues and crypto in a retirement account.

Plus, he opines on what he calls “embarrassingly foolish statements about Bitcoin” that, he says, Warren Buffett and Jamie Dimon have made.

Once Edelman decided to leave EFE, he launched seven new companies before exiting. By fall of last year, he’d even hired employees for them in a dozen states.

Perhaps the first enterprise was the Digital Assets Council of Financial Professionals (DACFP), which he founded five years ago.

It offers financial advisors a certificate in Blockchain and Digital Assets with continuing education credit. DACFP recently formed a strategic partnership with the Financial Planning Association. 

Two thousand advisors from eight countries have enrolled in the certification program to date.

Edelman’s other new efforts include a media firm, companies researching Alzheimer’s disease and a fossil park where visitors will be able to “literally dig for dinosaurs,” he enthuses.

ThinkAdvisor interviewed Edelman, based in Northern Virginia, by phone on May 9 and in a follow-up email exchange on May 12.

He notes that though the financial services industry is “behind” in embracing digital assets, it “now recognizes that clients are clamoring for advice in this area, that advisors are engaged and that “many [firms] are racing to develop a crypto strategy.”

Here are highlights of our interview.

THINKADVISOR: What are your thoughts regarding crypto prices’ huge decline over the last few days?

RIC EDELMAN: There’s nothing new about this market decline; we’ve seen this happen seven times in Bitcoin’s history. Crypto prices have dropped by more than 50% in the past eight months.

This [recent rout] will not change anyone’s views: People who hate crypto will use the current decline to prove they are right, while those who understand the technological revolution that crypto is bringing to global commerce will view this decline as a tremendous buying opportunity.

The high risk of digital assets “actually serves as the most important reason you should invest in them,” you write. Why?

Volatility creates opportunity for improving portfolio diversification, lowering the risk of the overall portfolio and improving returns.

Bitcoin is the most volatile of all assets and therefore an excellent contribution to Modern Portfolio Theory, widely accepted as the best investment strategy in the world, and requiring the use of volatile assets.  

What percentage of an investment portfolio should be dedicated to digital assets?

You don’t need to have an outsized exposure. The goal is to improve returns while reducing risk. You can achieve that with a low single-digit allocation.

I recommend a 1% asset allocation. Up to 5% is sufficient to have a material impact on your portfolio.

Are digital assets a good hedge against inflation?

One of the reasons Bitcoin was invented was to provide inflation protection. It has a very strong record of doing that to date. They key reason is that there’s a limited quantity of Bitcoin, unlike dollars, which are constantly being printed.

There’s a fixed supply of Bitcoin; so as demand rises, the price has to rise as well. For that reason, many people believe that Bitcoin is a very effective hedge against inflation.

What should advisors and clients be aware of when investing in digital assets in a retirement account?

If you’re going to place crypto into an IRA, make sure you’re using a qualified IRA custodian. 

This assures you that they’re conforming to all federal and state regulations and complying with the highest level of cybersecurity protection.

What’s the scoop about using digital assets in a 401(k) plan?

The easiest way to invest in crypto in a retirement plan is through Fidelity’s 401(k). They’ve announced that they’re going to allow workers to invest directly in Bitcoin as easily as they invest in other choices within the plan.

That’s great news for investors.

What’s the significance?

Fidelity is the largest 401(k) provider in America, with 23,000 companies using their 401(k) program.

A company decides whether or not to put Bitcoin on their platform. If they do, it’s up to the employee to decide whether they want to buy it.

What income tax issues should advisors and clients be aware of in connection with crypto?

Investing in digital assets has the same tax obligations that investing in other assets have.

When you earn income or generate profit, you have tax-reporting obligations and owe liability to the IRS.

In some cases, the rules are very clear. In others, the IRS has not yet issued rules because elements of crypto are brand-new and unique to the asset class, like staking, mining, airdrops and forks.

Because they’re so new, the IRS hasn’t yet released regulation governing them.

When you use Bitcoin to buy goods or services, are you required to pay income tax on it?

Any time you use Bitcoin to purchase something, you’re generating a capital transaction.

The IRS says that if you’re converting your Bitcoin to dollars and using the dollars to purchase the goods [or services], you must report the realized gain or loss on your tax return.

Isn’t that a drawback to using Bitcoin?

Yes, it’s a drawback to using Bitcoin as a payment mechanism; but it’s not a drawback to using it as a transmittal if, say, you need to send money to another country.

[Usually] it takes five days at an average cost of 6.5% to move money from one country to another. With Bitcoin, you can do it in 10 minutes virtually for free.

I interviewed a financially savvy sex worker who was quite interested in investing in crypto in the future. Apart from that, I wonder: Can crypto be used for her accounts receivable?

Digital money leaves a digital footprint. So if you’re trying to use them in order to be anonymous, you’re not likely to be as successful as you had hoped.

This is why [Russian President Vladimir] Putin hasn’t been able to use Bitcoin to evade the sanctions [against Russia for invading Ukraine].

What are your expectations for the regulation of digital assets?