This article was contributed by Wealth Advisor John Zachary.
Cryptocurrency, or crypto, is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.¹ You may have seen news headlines covering the recent price increase in crypto; the recent hype has many people asking if cryptocurrency is something they should have in their portfolio. Generally, once something like a hot stock or investment trend hits the national news, you could be too late to the game.
Simply put, cryptocurrency, or any currency for that matter, is not designed to be a long-term investment. For decades, gold has been used as a hedge against currencies – such as the US dollar – or inflation. However, since price moves are based largely on speculation, it makes valuation, and the predictability of future price moves, very tricky. In addition, currencies and precious metals do not pay dividends and there is no underlying company to generate earnings. Using gold as an example, if you look back on the past 10 years, the S&P 500 stock index has averaged an annual return of 13.43% vs. GLD (the SPDR Gold Shares ETF that tracks the price of gold) has returned 1.63%.²
If you look at the past several years of Bitcoin, the most popular cryptocurrency, you can see the dramatic price moves both on the upside and downside. At the start of 2017, the price was around $900 a coin. By the end of the year, it had soared to as high as $19,650, over a 2,000% increase. For those who jumped on the bandwagon at those high prices, they could have experienced a drop of as much as 84%, as the price tumbled to under $3,200 a coin by the end of 2018. Of course, more recently, it has picked up traction once again and the price has skyrocketed to over $57,500 a coin! If I were looking at a stock with that type of volatility – or that type of price runup in such a short period of time – I would approach with caution, no matter how attractive the gains have been. The risk is just too high.
To be clear, I am in no way saying that cryptocurrency will not be a part of our global economy in the future, because I think they will. I am stating that in terms of an investment, it should not be considered a long-term growth instrument, or at the very least, should not be a large part of a balanced investment portfolio.
With a company’s stock, we can look at organizational fundamentals like revenue, earnings, historical data, and management to give us a general expectation of future volatility as well as price valuation. With Bitcoin, there is simply no telling which way it will go. The recent craze is a classic example of one of the most common behavioral finance phenomena’s, called recency bias, which is putting more emphasis on recent events than historic ones. In this case, it is the assumption that just because Bitcoin has increased in value recently, it will continue to do so. Or to coin a “millennial” term (quoted because I am one), we might call that FOMO or “fear of missing out.”
Anyone who has made real money investing in cryptocurrency would have had to buy in when the price was low (before it was a big part of the news), had the wherewithal to ride through the tremendous price swings, and sell at one of the peaks. Those folks are few and far between, similar to investors who have become rich quick by speculating with individual stocks.
As quickly as the investment world moves, including the complexity and number of choices available, there is one thing that has not changed. The best way to build long-term wealth is to have a diversified portfolio, live below your means, and save as much as you can. Sticking to a disciplined investment strategy, not trying to chase returns or the next hype investment, will ensure that you build wealth in a responsible way.
If you have more questions on cryptocurrency, I encourage you to check out our recent webinar on the topic (contact us if you would like a link to the recorded session). At Pathfinder, we have been helping clients navigate the ever-changing investment world since 2005. To learn more about what a fiduciary investment advisor can provide, give us a call at 910-793-0616.
² As of 02/28/2021
Content provided for information & education only. All investing involves risk including the possible loss of principal. Past performance is no guarantee of future results. Diversification does not assure a profit or protect against loss
Jason is a wealth advisor and founding partner of Pathfinder Wealth Consulting. He has been in the financial services industry since 1999. Jason was born in Dayton, Ohio, but grew up in Eastern North Carolina. He graduated magna cum laude from the University of North Carolina Wilmington in 1999 with a BS in finance and an MBA in 2003. Rob Penn, Jason’s business partner, hired him in 1999 and the two began a successful business relationship, highlighted by the formation of Pathfinder Wealth Consulting in 2005. Jason’s passion for the business begins with helping our clients, working with select families to accomplish their personal and business goals. Jason’s role also includes managing the overall firm, leading its growth initiatives, and enhancing operations. Jason resides in Wilmington with his wife, Ashley, and their daughter, Merritt. Ashley is a speech-language pathologist and owns Therapy Connections, Inc., a pediatric speech therapy company. Currently, Jason spends most of his free time with his family doing anything kid-related. He also plays average golf as often as possible, waits patiently for his invitation to Jedi training, and hopes that maybe this year he'll have more time for surfing, boating, fishing, and all the water activities that the family loves. Jason considers himself a lifelong learner and is always ready to try a new activity, travel to a new spot, or delve into a new subject.
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