Polarizing. The zealots who swear by it. The traditionalists who make a cross with their fingers at the mention of it. The friends who think they are experts after watching a few videos on YouTube. The guy who got burned and wants nothing to do with it.
I have seen the worst of it. Like the young man I met who was scammed out of his life savings when he was sold a pack of lies online from someone who would “help him” buy the right cryptocurrencies if he just wired the money over.
I have also seen the best of it. Like the other young man who implored me to buy bitcoin with him back in 2011. He bought one of the first pizzas in the US using roughly a thousand bitcoins. I didn’t have two dimes to rub together in college, (these were pre-NIL days, after all), so I couldn’t follow his guidance. He and his family are independently wealthy now, despite blowing what is today worth well over one hundred million dollars on a pizza.
I have asked over fifty fellow advisors now what they think about cryptocurrency. Of course, they do not share the same beliefs. There were highly differentiated trains of thought.
Like the advisors who hate crypto because they hate bitcoin and think they are all online Monopoly money. Some advisors believe this is just the beginning of the digital currency age that will steadily change the world’s way of doing business.
The interesting thing about the advisors I asked is that they often like or dislike crypto for different reasons.
Some hate that it distracts from other wealth-creating assets clients could own, like equities. Some think it is a terrible store of value because its price is anything but stable and currency-like, so they believe it is an example of people sold a false bill of goods. Some advisors hate it because it’s the quintessential example of everyone jumping on the bandwagon…except the bandwagoners have actually made a lot of money if they bought and held bitcoin or ethereum for the last few years. Some advisors are holding their breath, convinced the house of cards is going to fall down any moment. Never mind that the ‘pyramid scheme’ has been going on for a lot of years now. Most people holding their breath are running out of air.
To contrast, some love crypto because they grew up understanding it as tech-savvy digital natives with lots of exposure. Some advisors I spoke with love the premise of decentralized currencies, and they think volatility will diminish as these still young markets mature. Some love that they are “ahead” of the curve in investing in them because they reason that regulations and old-fashioned traditional finance have slowed larger institutions who are only now dipping their toe in the crypto water.
I think advisors and investors need to be clear why they feel the way they do. Some dislike crypto because they feel like they missed out. FOMO not acted upon can mature into MOMO, Mad on Missing Out.
Some are showcasing behavioral biases. Conservatism and status quo biases, for example. Some aren’t willing to admit they are wrong and stubbornly cling to old beliefs, even in the face of new information and a growing body of evidence suggesting something counter to their original thesis. Others on the other end of the spectrum are guilty of blindly following the herd and gross overconfidence. You see web articles titled “When is Bitcoin going to $1 million?” and people fall for the false framing that Bitcoin is inevitably going to rise in perpetuity to the moon and the stars and eventually blast out of this galaxy.
To be absolutely clear, you can believe crypto is a poor investment (or a great one) and not be exhibiting any biases. It is perfectly logical to decide against investing in something if you don’t understand it. Or if the perceived risks are too high to stomach. Or if the investment doesn’t align with your values. Or if you disagree with the thesis for an investment’s value (or valuation).
Jamie Dimon, the CEO of JP Morgan, cracked me up when he compared bitcoin to having a pet rock.
He’s not entirely wrong, in more than one way. Never mind that JP Morgan bank clients can now buy bitcoin; even Jamie has to admit that times change, and we have to change with it or risk becoming obsolete.
In several respects, bitcoin bears a resemblance to gold. Both are innately finite—there is a scarcity component to each of them. Both can be volatile, despite their respective camps arguing they can be a flight to safety when the dollar or the stock market is struggling. Proponents also argue they both have elements of protection against inflation. Neither become more by themselves—unless a new use is discovered for gold or bitcoin, they mostly have value because people decide they have value. They don’t innovate or create new products and revenue by themselves, so they don’t kick off interest or dividends (although you can “stake” some kinds of crypto, essentially loaning it out in exchange for interest).
Crypto is also reminiscent of hedge funds in that people commonly make sweeping statements about them, when it really isn’t accurate to paint them in such broad strokes. Bitcoin behaves completely differently—indeed, is built fundamentally differently with different intentions and uses—than Ethereum, XRP, so-called “stablecoins” like USDC, and the hyper speculative meme coins like Dogecoin.
Going back to Jamie Dimon, he also pointed out that crypto is the safe haven for terrorists and law-breakers to exchange money. While I agree that digital currencies are a tool in law breakers’ toolkits, I don’t think that makes it unique or enough reason to not use it. Drug lords have long used dollar bills, gold, and traditional banking for transactions and money laundering too. That doesn’t stop JP Morgan from holding everyone’s dollar bills in bank accounts.
Sometimes we need to place blame on the bad actors rather than their props.
What do I think? I think we shouldn’t throw the baby out with the bathwater. The underlying technology behind crypto, known as blockchain technology, really is revolutionary, helpful, and worth paying attention to. It is disruptive and at its core has the capability to facilitate more efficient, recordable transactions than many traditional exchanges can. What’s more, even traditional equities are embracing this technology. Blockchain is likely a core foundational technology of the future with more efficient transactions and recordkeeping.
Notably, bitcoin was more of the first mover rather than the best mover—there are more efficient cryptocurrencies today by many standards that can process transactions much more quickly. I am not convinced bitcoin is the final landing place for cryptocurrency fans. Its energy inefficiency alone is a problem–bitcoin mining (the process for creating bitcoins and finalizing transactions) uses massive amounts of electricity and hardware systems, creating significant pollution and waste. There are other cryptocurrencies that are significantly easier on the environment with less hardware waste.
One thing is for sure—crypto is no longer something you can ignore. There is a 3 trillion dollar market globally of crypto. Institutions and governments are increasingly open to this technology and acknowledge there is a real need to own it themselves.
But the cryptocurrency world is also the Wild West in many respects. Small cryptocurrencies can easily be exposed to price manipulation from pump-and-dump investors. Many exist to suck in investor dollars only to collapse on no notice. Some regulations that help create orderly markets with public equities and bonds are still absent in crypto marketplaces. What’s more, untold bitcoins have been hacked and stolen, lost, or rendered inaccessible from lost IDs and passwords. There are many risks.
On a related note, many who embrace cryptocurrency do so because they like how decentralized it is—there is no government that presides over bitcoin, for example. It is a free market in that its supply and demand is uninhibited by government control. However, as I discussed with Lubos Pastor, a professor at the University of Chicago Booth School of Business (who also serves on the board of directors and trustees for Vanguard), this has not proven true—bitcoin and other cryptocurrencies are absolutely subject to the powers of government. Companies like Coinbase who hold crypto for investors are subject to the regulations of the US government, and US policies regularly cause massive swing responses in crypto markets.
The cryptocurrencies themselves fall under the jurisdiction of the SEC and the CFTC. The taxation falls under the jurisdiction of the IRS for US investors. And Congress has notably been working through new bills like the Genius Act to establish a federal framework for dollar-pegged stablecoins.
Interestingly, bitcoin and other cryptocurrencies with no interest are very tax efficient vehicles. You don’t have to worry about wash sale rules, either. And admittedly, anyone who finds themselves with a fantastic gain in crypto can avoid significant taxes (and even get a substantial charitable deduction) by gifting their coins to any number of qualified charities. Many charities are fully prepared to accept cryptocurrency today.
One thing about the crypto universe that makes me cringe, however, are the countless articles, YouTube videos, and social media posts that talk confidently about the technical analysis for why ___ coin is going to “break through” __ blank price because of some technical analysis. Frankly, I liken their “technical analysis” to gazing up at the clouds and swearing the cloud looks like a dragon, which means it is going to be hot next week. Humans are great pattern-spotters, habitually assigning meaning to pure coincidence. The problem, however, is that these “experts” lure unsuspecting newbies into investing in volatile assets under the false pretense that they can successfully time the market with any kind of consistency.
Keep in mind: you can invest in underlying blockchain technology beyond owning cryptocurrency. There are wonderful, publicly traded companies who are embracing blockchain technology to improve and streamline their businesses. This technology allows for everything from better banking to improved recordkeeping for agriculture and livestock. Blockchain technology even helps companies better use AI by improving its security, transparency, and data integrity. Many of our clients already own these companies.
Clear as mud? Advisors think so too as a whole. You won’t see me drawing firm lines in the sand on recommendations for or against bitcoin today, I am sorry to report. One line I will draw, however: the question of whether crypto or any other investment belongs in your portfolio comes back to your goals. Will that investment help you achieve what you want? Is it worth the perceived risks? Are we making the decision with irrational exuberance, dismissive ignorance, or open thoughtfulness? Is the investment aligned with your timeline for the stated objective? Does it make sense in the context of everything else you already own? Does it help from a tax planning and estate planning perspective? Ask away. It is what we are here for.
This communication is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.
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