This former financial advisor is now teaching other advisors about cryptocurrency. "A lot of people think it's a fad or a scam," he says.

 KEY POINTS

• Many financial experts have avoided bitcoin and other cryptocurrencies.

• Ric Edelman, a former independent financial advisor and wealth executive, says that even though these assets are going down right now, they are still a huge opportunity.

• Edelman has written a new book called "The Truth About Crypto." In an interview with CNBC.com, he talks about what he thinks will happen with what he calls "a chance to make money we haven't seen in 35 years."

Some people who didn't believe in cryptocurrencies were able to say, "I told you so" when Bitcoin's price dropped below $20,000.

"How do you get a million dollars? "Invest a billion in bitcoin," one panellist joked earlier this month at a conference for financial advisors. The crowd laughed.

Ric Edelman, who used to be an independent financial advisor and started Edelman Financial Services, gave a different talk at a different session of the Wealth Management EDGE conference.

Edelman said, "A lot of people think it's a fad or a scam, like tulip bulbs or Beanie Babies." "I'm not here to tell you that bitcoin is the love of your life."

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"My point is that you need to know about this because clients ask you about it," he said about crypto.

Edelman started a new company called the Digital Assets Council of Financial Professionals to help the financial industry learn about what he calls "the first major new asset class in 150 years."

He stepped down as chairman of Edelman Financial Engines, which at the time was said to be worth $270 billion, but he is still the company's biggest individual shareholder. He has also given up all of his licences to sell securities.

Edelman was interviewed by CNBC.com about his new book, "The Truth About Crypto," and what he thinks the future holds for bitcoin and other cryptocurrencies.

"Bitcoin and many other parts of the digital asset community will probably be worth a lot more than they are now," he told CNBC. "It's an opportunity to make money that we haven't seen in 35 years."

This interview has been shortened and edited to make it easier to understand.

"Major drops" aren't unusual for new technology.

Lorie Konish: What is the "crypto winter," and what does it mean for digital asset investments?

Ric Edelman: A "crypto winter" is a big drop in the prices of digital assets like bitcoin, Ethereum, and others. Seven times in bitcoin's history, its price has dropped by 70% or more. When this happens, it is called a "crypto winter."

It is not unusual for new technologies that are just starting out to go down by this much or this often. If you look at how the stocks of Amazon, Apple, and Google did in their first 12 years, you'll see that they all did about the same. When developing a new technology, gaining market share, and reaching maturity, it's common to see huge price swings on the way to making profits that have never been seen before.

Even though bitcoin has had these big drops many times, it has made a total return of 40 million percent since it started. Even though bitcoin has dropped 70% since November, it is still up 7x since 2018. That's not 7%, but 7x. This is what innovation is all about, and along the way, you have to keep a long-term view and be willing to deal with a lot of crazy changes.

LK: Before this, there were a lot of doubters among financial advisors, and they may see this as proof of what they already thought. What do you think you should tell them?

RE: That they wouldn't let clients feel that way about stocks if they did. In the first six weeks of the pandemic, the stock market dropped by 35%. If you look at such a short time period and use it to say that stocks are risky and you shouldn't invest in them, advisors would say that you're using an artificial time period. To come to a more valid conclusion, you need to look at a longer time frame.

Cryptography is the same way. You can easily say that the 70 percent drop in bitcoin's price over the past nine months shows that it's too risky to invest in. But if you look at the last four years, which have given you a 7x return, you would see things very differently. People who are using this latest drop as an argument against bitcoin are just using confirmation bias and recency bias. These are advisors who already have an opinion and are using a single data point to prove an argument that isn't valid to begin with.

"I suggest a very small number in the single digits."

LK: What are the risks of not putting money into cryptocurrency?

RE: In my new book, "The Truth About Crypto," I say that digital assets should make up 1% of a portfolio. This is a brand-new type of asset. It's getting better and more grown up, but it faces a lot of risks. You might run into trouble with the law. You could be a victim of fraud or abuse. There is a risk with technology. There is always a chance that market demand will go down. Because of this, I think this asset class should only make up a small part of a diversified portfolio, no more than 1%.

With that in mind, if you do nothing instead of 1 percent, you risk being 100 percent wrong. The history of Bitcoin's price shows that even a small amount of assets, like 1%, 2%, or 3%, can make a big difference in the overall return of a portfolio. Even if bitcoin fails and is no longer worth anything, a 1 percent loss won't hurt you very much financially. If you don't invest, you run the risk of being wrong in every way.

LK: In your book, you say that investing in digital assets doesn't have to mean investing directly in cryptocurrencies. So you can still see this somewhere else?

RE: Yes, you're right. Even if you like cars, you don't have to buy stock in General Motors just because you like them. Instead, you could buy stock in a company that makes asphalt, since those cars will need roads to get around on. You could also put your money into companies that make white paint, since those roads will need to be painted. You could also put your money into companies that make traffic lights and stop signs. Without making a direct investment, there are a lot of ways to put money into a business. It's called the "picks and shovels" method, which was made famous by Levi Strauss, who never mined for gold during the California Gold Rush but sold blue jeans to the gold miners.

The same method can be used in cryptography. Instead of buying bitcoin, you should put your money into the companies that are helping to build and support the technology. You can invest in bitcoin miners that are traded on the public market or in crypto exchanges that let people buy and sell crypto. You can put your money into Nvidia, a company that makes computer chips that bitcoin miners use to mine bitcoin. You can invest in companies that build blockchains, like IBM, or in Silvergate Bank, which is a government-chartered digital bank. There are a lot of different ways to invest in this type of asset without actually buying bitcoin.

Bitcoin is not a thing; it is a network.

LK: What are the most common false ideas you hear about crypto?

RE: The most common one is that you can't put a price on bitcoin and that it doesn't have any value on its own. This is a very common mistake that even well-known people in the financial world, like Jamie Dimon and Warren Buffett, sometimes make. Jamie Dimon is well-known for saying that bitcoin has no value in and of itself.

When economists and market analysts say this, they're making a mistake because they're using the same economic models they use for stocks to look at crypto. They don't realise that digital assets are a brand-new class of assets that have nothing to do with the stock market. And if you try to use traditional stock valuation methods to figure out how much a digital asset is worth, you'll come to the wrong conclusion.

As a market analyst, you would look at a company's products, how they compare to their competitors, how they run their business, and how they make their products. You would look at how much it makes and how much it keeps. But if you try to do that with bitcoin, you find that there is no company, no employees, no product, no money coming in, and no money going out. All of those numbers are 0, which would make you think that bitcoin has no real value, which is the wrong conclusion to come to.

Instead of comparing bitcoin the way you would compare shares of IBM, you should realise that bitcoin is not a product but a network. And the value of a network is based on how many people use it and how fast that number is growing. When you look at it this way, you can compare it to networks like AT&T, Netflix, or Facebook, all of which are networks. You start to realise that the bitcoin network is growing so quickly that the value of the network itself is increasing at a rate that is exponentially faster than the number of people using it. This is the basic way to understand that even though bitcoin may not have a value, it does have a price, which is set by the market.

LK: In 10 years, where do you see crypto?

It will be a normal part of business all over the world. McKinsey says that by 2030, digital will make up 70% of the world's GDP. Every central bank in the world will offer digital currency, and it will be normal for us to manage our own money with digital assets.

We have a hard time keeping in mind that the iPhone is only 14 years old. And yet, we couldn't leave the house without it now. Most of us are never more than 3 feet away from our phones. Blockchain technology will be as common and commonplace as the Internet itself. The sooner people realise this, the sooner they can take advantage of the business and investment opportunities it brings.

Source: https://www.cnbc.com/