Crypto and Cybersecurity: Wealth Planning in a Time of Rapid Disruption

In partnership with Bloomberg Media Studios

Whether you’re weighing an investment in crypto or trying to protect your wealth from the growing scourge of cyber scams, fundamental principles of wealth management should still help guide your decisions.

It's an understatement to say 2020 was a disruptive year, and, so far, 2021 has brought more of the same. We’ve endured a global pandemic, political unrest, an abrupt shift to work from home, a massive uptick in cyber scams and the rapid rise of cryptocurrencies amid volatile equity markets.

Any one of these events is enough to make investors jittery. But it may be comforting to know that, despite dramatic changes in the world, basic investment fundamentals still apply. That means optimizing your portfolio growth by staying in the market with a sound strategy, and managing risks. So, whether you’re weighing an investment in crypto or trying to protect your wealth from the growing scourge of cyber scams, fundamental principles of wealth management should still help guide your decisions.


Forward-looking volatility of equity indexes


Forward-looking volatility of emerging markets


3-year rolling realized volatility of Bitcoin over the past 10 years

"We are watching developments with interest, but it's hard to see anything near-term that would alter our time-tested approach to wealth management,” says Sinead Colton Grant, Deputy Chief Investment Officer and Head of Equities at BNY Mellon Wealth Management. 

Is Crypto Ready for Primetime?

Last year, cryptocurrency crept closer to widespread acceptance. Bitcoin quadrupled in price in late 2020, while the value of all cryptocurrencies passed $2 trillion in April 2021.

Large companies are increasingly accepting cryptocurrency and driving the higher valuations. In October, PayPal said that it would start accepting Bitcoin for payments, while Tesla’s $1.5 billion Bitcoin purchase in February sent cryptocurrency values soaring to new heights. Several financial institutions recently introduced cryptocurrency funds, further signaling a shift in perception, and BNY Mellon has formed a new digital assets unit to develop a multi-asset digital custody and administration platform for both digital and traditional assets.

Amid growing acceptance, markets are assessing how to view Bitcoin and other cryptocurrencies; for now, most banks and wealth managers are urging caution.

Cryptocurrency may be getting more popular, but it’s quite different from traditional assets. To start, it’s not legal tender. It’s also far more volatile: While the forward-looking expected volatility for equity indexes is around 15%, and about 20%–22% for emerging-market equities, Bitcoin’s average 3-year rolling realized volatility over the past 10 years was more than 100%.

Bitcoin volatility is declining, hovering around 80% over the last three years, and is expected to decline further as the cryptocurrency trades more broadly, Colton Grant says. New regulations that bring digital currencies closer to the traditional financial ecosystem could further dampen Bitcoin’s swings, but volatility “would need to decline a lot further to be comparable to other assets,” she says.

Bitcoin is being compared to gold as an alternative hedge for inflation, as Bitcoin and gold share some similar qualities, Colton Grant says; both have a finite supply and are somewhat isolated from inflation. Equities typically work well in portfolios as a medium to long term hedge against inflation, but not as well against short term, surprise inflation. Bitcoin could end up being an effective hedge against surprise inflation, but for now, there is limited data to support this, given its short lifespan and small investor base relative to other assets.

Protecting What You Have

Bitcoin’s future is uncertain, but what is clear is that disruptive events such as economic downturns often bring an increase in fraud.

Cryptocurrency crime chart

That was no different this past year. The number of internet crime complaints rose 69.4% from 2019 to 2020, according to the FBI, with reported losses from phishing, non-payment, extortion and other scams exceeding $4.2 billion, up from $3.5 billion in 2019. In addition, the global cost of cybercrime is on track to double, from $3 trillion in 2015 to $6 trillion by early 2021, according to a recent Cybersecurity Ventures cybercrime report.

“Everybody’s a target, but high-net-worth individuals, just by the sheer fact that they have more at risk, tend to be more of a target,” says Avi Shua, Managing Director and Chief Information Officer at BNY Mellon Wealth Management. That’s especially the case if they are also public figures, he says.

Creating complex passwords, changing passwords regularly, using multi-factor authentication and not using the same password for multiple accounts are good practices to follow, but that’s not enough in this climate, Shua says.

High-net-worth individuals, in particular, need to know how their information is stored and shared at all times, including keeping tabs on how others are handling their data. Such individuals frequently have a team of finance professionals, including an advisor, accountant and attorney, all with their own cybersecurity practices, so it’s useful to do some due diligence by asking questions about how they handle sensitive information and keep their records safe. Advisors, for instance, should not send sensitive information in the body of an email or encourage clients to do so. 

These professionals should be eager to share their best cybersecurity practices with clients, says Shua. “More and more companies are dependent on their technology operation—digitizing their operations and ensuring that they’re up and running in the event of a cyberattack, or even a disaster-recovery situation,” he says.

Beyond that, high-net-worth clients may also want to look into identity protection services, says Shua; these providers monitor the dark web to check if usernames and passwords are compromised. Some ultra-high net worth families or family offices also contract cyber concierge firms that do an assessment of their digital environment and draw up a custom plan.

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