Introduction
Bitcoin is one of the most powerful technologies of our time, having delivered financial freedom to millions and disrupted established financial players. Yet many of my fellow financial professionals remain deeply skeptical of its value.
This skepticism is beginning to shift, as evidenced by recent headlines. The rise of Bitcoin Exchange Traded Funds (ETFs) and marketing pressure from giants like BlackRock are softening the stance. BlackRock’s IBIT has received $100 billion in fundingmaking it one of the most successful ETFs in history, so it’s clear that many investors are taking notice. JPMorgan said this last week it would allow institutional clients to use Bitcoin as collateral for loans. The Trump administration explores adding crypto added to the list of approved 401-k investments. To be sure, challenges and resistance to stay.
And for many, daily conversations with financial advisors still feel like hitting a wall. Young financial professionals tell me all the time, “When I mention Bitcoin in the office, people’s eyes glaze over…”
So why the resistance?
Technical friction
With any shift from old to new there will always be resistance. There is a learning curve for the internet, for artificial intelligence or for any other breakthrough technology. These changes can be particularly challenging for older generations, but age alone is not the obstacle.
Crypto’s user interface has presented additional challenges to the masses. Dealing directly with crypto assets on-chain via hardware wallets and seed phrases is not particularly difficult, but there are large segments of the population that have neither the technical knowledge nor the desire to educate themselves enough to feel safe enough to store a significant portion of their net worth in these assets.
The launch of ETFs in the US in January 2024 changes this dynamic, allowing anyone with an investment account to invest. I expect there will be other solutions that will make self-management (security without a third-party intermediary) easier for non-technical users, allowing users to use the technology on a daily basis, but it takes time to build all these layers of functionality.
We must also realize that there is a difference between using the Internet to search for a product online or using AI to plan a business project, versus storing significant portions of one’s wealth in a new financial technology. The stakes are higher in crypto, and this could hinder the approval of financial professionals. The higher stakes appeal to some investors but offend others, who prefer to wait until the risks have diminished and the technology has become second nature.
But financial professionals are smart, tech-savvy people. Technical friction doesn’t explain the visceral reaction when you speak to your local economist.
Economic ideology
Bitcoin is a non-state monetary asset. Monetary policy is determined without a central bank. “Chancellor on the Brink of Second Bailout” was embedded into the first block of the blockchain by its creator, Satoshi Nakamoto, highlighting concerns about overuse of monetary and fiscal policy. The mindset required to understand its value and unique proposition goes directly against economic orthodoxy.
Source: The Times of London
Traditional economists, on the other hand, assume that central banks are needed to set interest rates and control inflation. In fact, most economists work at central banks, finance ministries or private banks. They have a personal interest in maintaining the status quo. These same institutions dominate not only the profession, but also economic academia. As a result, this mindset is taught to 95% of economics students around the world, becoming the foundation for most finance professionals.
Economic ideology is similar to political ideology and religion: it is deeply rooted and difficult to change. Once we are taught that this is the way the world works, and we have embraced the virtues of that mindset, we are deeply entrenched in its continuity. Financial professionals probably have a much stronger ideological bias than we would like to admit.
Financial valuation
Investing is based on quantitative methods – and for good reason. We want substance behind these particularly important decisions. As the field of finance has developed, a range of widely accepted valuation methods have emerged. That makes perfect sense.
For example, dividend discount models, discounted cash flow models, credit spreads and option-adjusted spreads are all well-established approaches for valuing various asset classes. But Bitcoin has no income, dividends, yields or interest rates. The many ways to think about valuing Bitcoin do not fit neatly into traditional methodologies. It requires more abstract thinking.
We may need to question the long-term sustainability of the dollar monetary system, or the inherent value of our current forms of money. This kind of conceptual thinking, and its clash with conventional valuation methods, fuels both ideological and technological friction.
How do you explain to Warren Buffet that the valuation methods he relies on do not apply to this asset? It sounds suspicious. From his perspective, skepticism makes sense.
Regulatory restrictions
The financial sector is a highly regulated sector. Professionals have significant reporting requirements and are often required to maintain specific approved assets. Regulators are almost always behind the ball when it comes to innovative technology, so it has taken them a long time to respond to Bitcoin. Bitcoin has been around for over 15 years and still regulated Bitcoin instruments are not available to many investors across jurisdictions.
Financial professionals are incentivized to promote the products they manage and are licensed to sell. If Bitcoin is not on this list, there is a major misalignment of incentives. Even if a financial professional were to have a constructive view of Bitcoin in a personal capacity, their views may be related when speaking to clients or in the media.
With the advent of the Bitcoin ETFs in the US and the GENIUS Actthat regulates stablecoins, regulatory restrictions are shifting. But regulation takes time and remains a new barrier to support from financial institutions.
Career risk
Financial professionals have spent years studying – earning honors and master’s degrees from college, Chartered Financial Analyst certifications, MBAs, CFPs, CPAs and more. We have created a major barrier to entry for the powerful industry that they control. And not without reason: a lot of knowledge is needed, and we have invested a lot of time and energy in gathering it.
Serious and highly educated financial professionals are now confronted in their basements with twenty-year-olds who have made $1 million in just a few months. Not only that, but they shout it from the rooftops, post it all over Twitter and drive Lamborghinis around town.
That sounds too good to be true! And often that is the case! There are many scams in crypto. Sam Bankman-Fried’s infamous outburst at FTX set the industry back a few years.
Then there are the many news stories of people making bad investment decisions and losing their savings. They just don’t shout about it as loudly as the “crypto bros” shout about their profits! It only takes one of these stories for a financial professional to label crypto as a “scam.”
As stewards of clients’ money, reputation is everything to us. We cannot be associated with scams!
Performance pressure
The reality is that there are numerous reasons why it has historically been challenging for many financial professionals to embrace Bitcoin. But there is another reality that we must face at the same time.
Bitcoin has returned 50% annually for the past five years. Simply buying and holding Bitcoin would have outperformed most time horizons. Bitcoin outperformed the S&P500 by 40% over the past year (through the end of October) and almost 300% over the past five years.
Source: Sound Money
Of course, buying and holding Bitcoin is harder than it sounds. It requires patience and a reasonable assessment of central bank risks. But it doesn’t necessarily require 10, 15 or 20 years of study. And yet the outcome is: a simple strategy dramatically outperforms the work of highly qualified professionals.
From a financial professional’s perspective, that’s a tough pill to swallow – and it naturally leads to reluctance to greenlight the asset class.
Overcome our prejudices
There are structural factors that make adoption and support from the financial sector more challenging. It’s not just the technological leap. It is the economic ideology that conflicts with Bitcoin. They are the financial models built in a fiat era, centered on assumptions of monetary continuity. It is the way this technology bypasses traditional centers of power that is raising questions among bankers, asset managers and regulators.
Bitcoin, with all its flaws, challenges our assumptions. History shows that when our assumptions are challenged and we remain open to change, we usually come out stronger on the other side.
As mounting evidence and adoption weigh in Bitcoin’s favor, the question is not whether financial professionals will embrace Bitcoin, but how long we can afford not to.
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