Bitcoin, among other cryptocurrencies, has warranted significant media coverage lately. Overnight, we have seen Bitcoin investors become millionaires as a result of volatile fluctuations, while others’ fortunes were just as quickly fleeting. These erratic market changes have prompted some investors to wonder: Do these new types of electronic money have a place in investment portfolios? While cryptocurrencies present some interesting possibilities for society, their future is still largely uncertain. As a Charleston-based investment advisory firm, we have gathered a few key takeaways on Bitcoin and other cryptocurrencies for investors who are considering adding this digital cash to their portfolios.
What You Need to Know About Cryptocurrency Before Investing
What Is Bitcoin?
In briefest terms, Bitcoin is currency in the form of code made by computer and stored in a digital wallet. No paper or metal is involved in Bitcoin currency, no central bank issues the currency, and no government or regulators stand behind the currency. Bitcoin has a finite supply of 21 million, of which approximately 18.5 million are currently in circulation, and all transactions involving Bitcoin are recorded on a public ledger called a blockchain. To many enthusiasts, the limited supply and lack of government control are attractive features. Hailed by some as the “currency of the future”, Bitcoin seems to offer an innovative option to those disenchanted with the existing monetary system.
Why Has Bitcoin Become So Popular?
Over the years, Bitcoin has gained increased traction in the investment community and, more recently, has received significant media coverage. But what should we be making of all this recent attention? It’s no secret that Bitcoin has seen unprecedented price surges in the past. Notably, in late 2017, the returns sparked many investors’ attention. Sharp increases more recently can be attributed at least in part to supply/demand dynamics with Bitcoin’s finite supply and fears of future inflation. Generally, the hope is that Bitcoin would hold value better than traditional fiat currencies. Price increases, along with additional large firms beginning to explore Bitcoin as a form of payment, have in turn fueled a resurgent media interest. Current and future Bitcoin prospects have enticed many to further consider Bitcoin’s additional investment return potential.
Is Bitcoin a Legitimate Alternative to Traditional Currencies?
As is often the case, the “hype” surrounding the next shiny object fades under further investment scrutiny and research. Any long-term investment potential would first depend on the answer to this question being a resounding “yes”. Right now, the answer is, at best, “not really”. Although blockchain technology is innovative and exciting, there are numerous problems and obstacles that may prevent Bitcoin from becoming an efficient, independent, and widely accepted currency. First, the Bitcoin system is inherently loaded with technological issues. The storage capacity and computing power needed for mining, transacting, securing, and verifying are prohibitive and costly. Second, from a transaction standpoint, Bitcoin fails as a store of value or unit of account. Bitcoin has no inherent worth or government backing and has proven to be too volatile to be widely used as an efficient transaction mechanism. Finally, Bitcoin faces multiple regulatory issues including account insurance, taxation, and illegal usage. All in all, Bitcoin faces many hurdles on the path to becoming a viable currency for circulation.
Will Bitcoin’s Value Continue Rising?
In a hypothetical utopian market, Bitcoin’s value would likely continue to rise. The real question is, should we expect it to? Since Bitcoin has no inherent value and does not offer any positive expected return, betting or guessing on price movement is simply a form of speculation. Bitcoin may certainly continue to appreciate at times, but there is no reliable way to predict when and by how much.
Does Bitcoin Have a Role in a Diversified Investment Portfolio?
To answer that question, it might be helpful to revisit the role that more traditional stocks, bonds, and cash play in client investment portfolios. Stocks provide clients with a residual claim on future growth and profits of the underlying companies. Generally, bonds offer a promised future stream of cash flows along with repayment of principal at maturity. In other words, for both stocks and bonds, an investor is willing to give up some current cash (the purchase price) in exchange for an uncertain but usually greater amount of expected cash in the future. In our experience and omitting any extenuating market circumstances, both stocks and bonds provide positive expected returns. Cash does not provide an expected stream of future cash flow, but it does serve as a reliable store of value (used to manage known near-term expenditures).
At this time, it is not clear that Bitcoin offers any of these things. Bitcoin does not offer positive expected returns, nor does it provide clarity about future wealth. Due to extreme price volatility, Bitcoin cannot provide a means for planning for near-term expenditures. So again, Bitcoin as a potential investment opportunity falls squarely within the definition of speculation. Bitcoin does not help achieve investment or planning goals and, in our view, does not warrant a place in portfolios thoughtfully designed to meet such goals.
The Bottom Line on Bitcoin
As a Charleston-based investment advisory firm, the bottom line is that we remain focused on planning and investing, not on speculating. While the underlying blockchain technology has exciting potential and may have significant future implications for banking and other institutions, Bitcoin, as it exists today, is problematic as an investment plan. As fiduciary advisors, we do not believe it has a place in goal-driven, risk-aware client portfolios. We continue to invest in diversified portfolios of understandable investments that allow clients to participate in global economic growth and provide for near-term needs. Our investments are guided not by speculation, but by a well-considered plan framed by market history and academic research and driven, as always, by the individual needs and wants of our global client base.
While cryptocurrency investing may not be the best fit for your portfolio, there are plenty of other investment tools that can help you achieve your financial goals and life aspirations. If you are looking for investment firms in Charleston, SC, reach out to Morris Financial Concepts today!
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About the Author
Bart Valley is a Charleston investment advisor and Chartered Financial Analyst® at Morris Financial Concepts in Mt. Pleasant, SC, with over 16 years of experience in investment counseling and consulting experience. Bart primarily focuses on providing detailed investment counsel, education, and guidance that aligns with holistic financial goals and life aspirations. Bart works collaboratively to clarify individual wants and needs. He provides a risk assessment to establish and implement comprehensive, tailored investment plans for our Morris Financial clients.
The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. Nothing contained herein is intended to be investment advice. Nothing contained herein is an offer to buy or sell a particular security or investment strategy. Past performance should not be used as an indicator of future results. The Chartered Financial Analyst (CFA) is a qualification for finance and investment professionals, particularly in the fields of investment management and financial analysis of securities. The designation is an international professional certification offered by the CFA Institute to financial analysts who complete a series of examinations. The CFA designation is awarded to candidates who must pass each of three six-hour exams, possess a bachelor’s degree from an accredited institution, and have four years of qualified professional work experience. CFA charter holders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. Please refer to www.cfainstitute.org for further information. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. MFC-21-07.