Crypto's gained popularity in the mainstream, but advisors are increasingly divided on its future

Cryptocurrency has gained mainstream favor with younger investors, but financial advisors are increasingly divided when it comes to recommending the notoriously volatile asset.

Advisors increased their use or recommendation of cryptocurrency by 767% from 2019 to 2023, according to a newly released Trends in Investing survey conducted by the Journal of Financial Planning and the Financial Planning Association. Still, the asset class is in small favor, with only 2.6% of advisors surveyed recommending it to clients, up from 0.3% in 2019.

Jackson Wood, a financial advisor at Freedom Day Solutions in Houston, said his team is excited about the future of crypto but remains selective about which clients receive the "crypto conversation."

"We will not recommend it to someone that we don't believe is ready to retire or is on track to retire within the traditional financial framework," Wood said. "[If] the client is on track or at their retirement and they have extra money, that's where we introduce speculative investments. That can be crypto, private equity or more speculative growth-focused stocks."

Crypto markets have been shaken by a string of recent scandals. Multiple exchanges reported hundreds of millions of dollars in compromised accounts over the last year and cryptocurrency exchange FTX collapsed in November of 2022, sending the price of bitcoin to a two-year low.

Read: Gen Z investors seek advice from friends and family more than from planners

Bitcoin has rallied 68% since its November low, but the drama is not over yet. On Tuesday, the Securities and Exchange Commission accused Coinbase of running an illegal exchange. The day before, it accused Binance, the world's largest cryptocurrency exchange, of doing the same.

Wood said the regulatory crackdown is welcome. "We've been publicly just screaming at the SEC for some sort of guidance, some sort of framework to put in place," he said. 

Advisors surveyed cited market volatility as the top concern with clients during the last six months. More regulation will not only protect investors, but also help them have more confidence in the industry's stability, Wood said.

When Bitcoin hit an all-time high in 2021, 15% of advisors surveyed said that they use or recommend cryptocurrency as an investment vehicle to their clients. Since then, the flagship coin has lost over half of its value, making more advisors wary.

"I strongly discourage investing in cryptocurrencies due to their track record during market downturns," said Sean Lovison, a financial advisor at WJL Financial Advisors in Chatham, New Jersey. "While cryptocurrencies have gained significant attention and popularity, they have yet to prove their resilience in times of economic turbulence."

Multiple advisors pointed to the lack of historical data on cryptocurrency performance as a major roadblock to future adoption. Across the 191 advisors surveyed this spring, 5% said they expect their use/recommendation of cryptocurrency to decrease over the coming year. Another 3% expect their use and recommendations to increase.

Read: Family offices sour on crypto, ready to deploy cash: Goldman Sachs study

Investors who get their financial tips from social media and other informal sources are another hurdle for advisors wading into an asset class that younger generations favor.  A survey conducted earlier this year by the Financial Industry Regulatory Authority and NORC, a University of Chicago research institution, found that only 9% of people who invested in crypto for the first time last year cited financial planners as their primary source of information.

Wood, who posts personal finance content to his 116,000 Instagram followers, said that millennials and Gen Z favor cryptocurrencies. "They were born into the world of crypto," he said. "They're in tune with how the technology works."

Brandon Gibson, a financial advisor at Gibson Wealth Management in Dallas, said that until there is more data on how cryptocurrencies perform over time, he is "inclined to let someone else's clients be the test case."