posted by: Radnor Financial Advisors
There is a lot of buzz about Bitcoin these days as its price rose above $60,000 in mid-April and its total market value crossed $1 trillion. However, recently it has fallen back, dropping as low as $30,200 on May 19th.
Cryptocurrencies such as Bitcoin are a digital means of facilitating online transactions. Blockchain is the underlying technology and is essentially a database or ledger distributed across a peer-to-peer network. Cryptocurrency is stored on a computer and sent between users across a network without the need for an institution/government intermediary.
There has been a lot excitement around Bitcoin. Some investors compare Bitcoin to gold as a potential store of value while others argue it is a better form of currency, as unlike fiat currencies, it cannot be hyperinflated since its blockchain has a limit of 21 million bitcoins. Others point out that cryptocurrencies are useful for portfolio diversification, as they may be uncorrelated to traditional stocks and bonds and may act as a hedge against inflation and geopolitical uncertainty. Given the low interest rate environment and concerns with equity valuations, interest in cryptocurrencies has increased.
However, just because there’s excitement around investing in Bitcoin doesn’t mean individual investors should participate. Knowing the risks of any investment is as important as potential gains. Bitcoin has been a very volatile asset, experiencing significant drawdowns, including falling more than 80% from late 2017 to late 2018, more than 50% in February – March of last year, and over 40% from its April 2021 high through mid-May. Bitcoin’s extreme movements up and down are relatively common and are expected to continue.
There are a number of risks associated with Bitcoin that may not be fully understood, including the risk that governments will step in and regulate Bitcoin’s usage (recognizing that about 70% of global network processing power is currently in China). Bitcoin and other cryptocurrencies also face competitive risks, technological risks, fraud, and market manipulation risks. Another obstacle may be the rising energy consumption from cryptocurrency mining in a world that is increasingly focusing on environmental issues.
For investors who have a desire to own Bitcoin, a Bitcoin ETF doesn’t yet exist. In the meantime, cryptocurrencies can be owned directly or bought and sold on crypto exchanges, crypto brokerage platforms, and crypto apps. Unfortunately, each of these current methods for accessing cryptocurrencies is relatively costly to buy/sell.
At this stage, we view Bitcoin (and other cryptocurrencies) as speculation, as opposed to investing. There is no cash flow or traditional method to fundamentally gauge its value. Moreover, from our perspective, it does not seem necessary to own Bitcoin (or other cryptocurrencies) to achieve our client’s investment goals. However, we recognize blockchain as a potentially disruptive technology, and thus we will continue to review and monitor cryptocurrencies and the digital asset ecosystem.