Lately, it is difficult to go a day in the news without hearing someone talk about cryptocurrency. Whether it is Bitcoin, Etherium, or Dogecoin (for all the meme lovers), crypto is more prevalent than ever before. Just the other day, Tesla made waves in the news after announcing a $1.5 billion investment in Bitcoin¹. This could be a sign that Bitcoin will go mainstream and be used for some everyday purchases.
So what does this all mean for our clients? Candidly, I don’t know. We have so much to learn about crypto as an investment and its real-world utility. For some, it might prove to be a speculative investment opportunity. For others, it is best left alone.
What I do know is that as of today, it’s not an essential component to a portfolio that is designed to meet your goals and objectives.
What are cryptocurrencies?
Generally, cryptocurrencies are decentralized (not backed by government or banks) currencies. Undeniably the most popular, Bitcoin seems to have more notoriety since it has a finite supply and its value fluctuates more than most. As such, Bitcoin has seen more common use in everyday life and has evolved in recent years. As an example, the owner of the Dallas Mavericks, Mark Cuban, added Bitcoin as an acceptable form of payment for tickets and gear in August 2019². And just this year, Tesla announced that it plans to take Bitcoin as payment as well.
That is enough of the basics to get me through a (Zoom) cocktail hour with family and friends, but beyond that, I don’t have much to say when it comes to what Bitcoin does. I can understand that its value fluctuates based on supply and demand like gold or other commodities, but gold and other commodities are tangible making it easier for me to wrap my head around the value. So I go back to the question: what does Bitcoin do? They say if you can’t teach something to a 5-year old, then you don’t understand it yourself³. I’d put myself in this camp, which is one of the reasons why I’m still skeptical of its role in client portfolios.
Why don’t we currently recommend it for clients?
Simply put, we currently feel that owning Bitcoin is not needed to meet our clients’ goals and objectives within the context of their overall financial plans. As our clients know, when we make investment recommendations, everything ties back to their unique situations. As we construct portfolios and evaluate new investments, we’ll ask ourselves whether a given investment, on its own and in combination with other investments, helps our clients achieve their goals.
We fully acknowledge that investors are finding that they might have to take on some additional risk to meet their expected returns given the current interest rate environment. However, we believe that there is a difference between taking a thoughtful risk in a well-diversified portfolio and taking a speculative risk with a volatile asset in the hopes of getting richer quicker.
My colleagues, Neal Price and Michael Karmin talked about this same concept in their post about Gamestop being the latest “trendy” investment with the promise of easy money. These days Bitcoin is certainly back in the “trendy” camp. But it was also incredibly trendy in 2017. Bitcoin has been around since 2009 when the price of a coin was close to zero. The price of a coin exploded in December 2017 to almost $20,000, then dropped to as low as $3,300 in December of 2018. Thanks to its recent rally, the price of a coin currently sits around $50,000 as of this writing. Given its prominence in the media over multiple years, of course, we have asked ourselves if it is an exaggerated trend or if it is here to stay. In our opinion, the jury is still out.
Bitcoin is still a speculative play with so much being unknown. Will it find practical everyday use for goods and services? Will it become so heavily regulated that its value becomes affected? Will it serve as a hedge against the dollar? So many questions! With all of this uncertainty, we’re just not yet comfortable allocating a portion of our client’s portfolios to Bitcoin, or any cryptocurrency for that matter.
But we’re still open-minded.
As with all financial news, we are seeing the headlines, reading the articles, and paying attention. The increase in popularity not just with retail investors but also institutional ones makes investments like Bitcoin impossible to dismiss. Our investment committee meets every two weeks to discuss a wide range of topics. We pride ourselves on open-minded conversations about an ever-evolving investment universe. We have only scratched the surface of the crypto world, and I wouldn’t be surprised if Bitcoin and cryptocurrency, in general, become a recurring subject of future meetings.
If you’re reading this and you own any kind of cryptocurrency, please note that this is not a call to action for you to sell. Not even in the slightest. Recognize cryptocurrencies for what they are: speculative investments that are probably not necessary to help you achieve your long-term goals in today’s world.