Over the last several months, our team has received an influx of questions pertaining to cryptocurrency and the feasibility of investing in digital currency. If you’re reading this, it’s safe to say this topic has been on your mind, too. The cryptocurrency trend has accelerated dramatically and its circulation in the media has increased exponentially. It seems more likely than not that crypto or “digital currency” is here to stay.
In this article, we’ll explore the principle of investing and the monetary value you and your family can receive from cryptocurrency to help answer this specific question:
Should I Own Cryptocurrency as a Part of My Broader Portfolio?
The basic principle of investing involves placing your capital into securities and/or businesses that have some productive capacity, i.e. intrinsic value can be derived. When you own businesses that produce goods or provide services that others tend to want (think iPhones, cars, software, clothing, and professional advice), their value tends to be maintained or increase over time.
Examples of Derived Intrinsic Value
- A common stock can be valued based on the company’s earnings, cash flow, and dividends
- A corporate bond can be valued on its coupon, the credit worthiness of the company, and the bond’s position with respect to its claim on the assets
- Income producing real estate lends itself to analysis of its rent roll and operating expenses, as well as the nature of its mortgage indebtedness
- Farmland can be analyzed as to its crop yields, estimated market prices for those crops, and the expenses of growing crops and bringing them to market, all leading to a projected cash flow before debt service
The Value of Cryptocurrency
It is difficult to predict the future of cryptocurrency, as it would require that we bet on the continuation (or, for that matter, the reversal) of a price trend in something that has no intrinsic value. Think gold, baseball cards, and betting on this weekend’s football games. Crypto or digital currency is the essence of this standard; we can see it as a potential medium of exchange, a currency, but not as a store of value, in that it doesn’t produce anything. Furthermore, its extreme price volatility paired with the absence of regulation place it outside any sphere of rational analysis we can yet understand.
What About Cryptocurrency’s Ability to Protect Against Inflation?
Prominent investors and firms have discussed the correlation between crypto and inflation. However, this digital asset class has only been in existence for about twelve years. Each subsequent year, until this past year, has seen largely insignificant inflation. About the only year we’ve seen the CPI (Consumer Price Index) above 3% since crypto was born showed a yawn by the currency, if not a reduction in its value, between April and December of 2021. In short, there’s simply not enough data or time to determine if crypto truly is an inflation hedge.
The Line Between Investment and Speculation
The presence or absence of intrinsic productive capacity that lends itself to rational valuation is the dividing line between investment and speculation. As financial advisors, we are always working towards the plan we have laid out for our clients and choosing the investment vehicles that have the greatest odds of helping our clients attain long-term financial success. As such, we seek to own assets that have demonstrated a consistent ability to maintain their value (purchasing power) over time in the face of inflation. Ownership of stocks that provide the goods and services we seek is one such asset class. While speculative assets like gold, commodities, and cryptocurrency certainly have the ability to increase in value over time, it’s our belief that they should be thought of not as a long-term store of value, but as a bet that you’ll be able to sell yours to someone else for more than you paid for them. We wouldn’t stake our client’s future financial security on such a bet.
If you have any questions about investing in cryptocurrency, please contact our Wealth Management team.
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