Bitcoin has again recently come to dominate the headlines. The digital “currency” has quintupled since its March low; it’s doubled in the past two months alone. Why? No one really knows but, regardless, the digital currency’s recent meteoric rise has come to attract a fair amount of attention—so much so that recently I participated in a Bloomberg-sponsored panel discussion with several promoters of cryptocurrencies, including Bitcoin.
I first wrote about Bitcoin in a November 2017 piece in Financial Planning where I dismantled arguments that Bitcoin was a viable currency.1 I argued, and still argue, that the digital “currency” is not really a “currency” since it’s not a medium of exchange, it doesn’t serve as a unit of account, and it’s far from a reliable store of value—all critical attributes that define what it is to be a currency. In the months that followed my article, the digital currency plummeted 85% in value. Why? Again, no one really knows. Imagine having something in your portfolio, no matter its allocation weight, that lost 85% and you’re not exactly sure why. Unlike declines in stocks—where you can point to new information, such as a recession, pandemic, or interest rates—no one has any real insight as to why Bitcoin collapsed so violently in early 2018. For this reason alone, I think investors should avoid adding Bitcoin to their portfolios. If you don’t know how to value something, you don’t know how much to pay for it. It’s that simple. And the price you pay is always the most important part of the return equation.
With respect to Bitcoin’s recent rise, no one seems to have a good reason why it’s now suddenly worth twice what it was merely two months ago or why it’s up nearly 40% in the past three weeks. When pressed, I often hear arguments that pivot between lectures on not understanding blockchain technology or that the digital currency has gone “mainstream” with institutional investors getting into the mix. Other arguments for investing in Bitcoin tend to center around the digital “currency” as a hedge against inflation or its diversification properties due to its non-correlation to other asset classes. These arguments all fail for the following reasons:
I think the best argument I’ve heard thus far for how to think about crypto currencies is that they’re a form of “digital gold”, which is presumably better than investing in the shiny metal that generates no profits and has only very limited industrial use. That doesn’t mean it’s a good argument, only that I think it’s the best I’ve heard thus far. Others argue Bitcoin is more of a collectible, that we should view Bitcoins as a form of digital art. Maybe that’s true, I don’t know, but I’m open to the possibility.
We’re very open to the idea that there will be new and exciting asset classes in the future. Some of those may be digital in nature and will go parabolic, like Bitcoin; others, probably most, will sadly destroy investor capital. On occasion, we may be early and benefit from some; we may also miss the train on others. Such is the nature of investing. But regardless of where we invest our clients’ capital, we always owe them a high standard of care—the very highest—when it comes to managing their family’s wealth. And for that reason, we have yet to seriously consider cryptocurrencies as part of any responsibly diversified portfolio.
1Calcagni, Donald. “Why Your Clients Shouldn’t Own Bitcoin”, Financial Planning. November 28, 2017
2Source: FactSet, Inc.
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