Over the course of our recent quarterly reviews, we couldn’t help but notice a common question resurfacing: “What are your thoughts on Bitcoin?”. Who could blame anyone for asking? How often do we see investments balloon from 30k to 60k in a matter of months? Or the likes of Elon Musk discussing the topic on Saturday Night Live! In a world where teens on Tik Tok & Reddit are outperforming the smartest investors on Wall Street, it was definitely time to address the elephant in the room.
Let’s start with a high level introduction to Bitcoin & Cryptocurrency.
At the most basic level, Bitcoin is a decentralized digital currency and was started over a decade ago (2009). Interestingly, the person or group responsible has never made themselves public. Instead they’re known only by the pseudonym, Satoshi Nakamoto.*
Given the nature of a digital currency, you cannot physically hold a Bitcoin. The currency is “mined” through blockchain. Each digital currency is different, but with Bitcoin, there is a finite number of digital coins available to be mined (21 M Bitcoins) with roughly 2.3M left to be mined as of Feb 2021**
As with any “new” investment vehicle, we’re still seeing extremely high price volatility as investor confidences grows or wavers. As recently as January of this year, Bitcoin was trading below 30k and just last month it hit all-time highs of 60k. While that growth has undoubtedly been exciting to watch, you don’t have to look back too far to see lows around 5k (May 2019). If the stock market can teach us anything, we expect the Crypto market will have similar boom & bust cycles. Considering we’re nearing highs, we’d argue that now may not be the time to double down or chase returns.
At Bluestone, we’ve been keeping a close eye on digital currencies for years. We always want to be ahead of the curve in terms of adoption of new technologies (ex. Move to ETFs from MFs), however, we never want to do so at the safety or risk of client portfolios. It is really only been in the last few years that cryptocurrencies are garnering the attention of many major institutional investors – i.e. BlackRock, Tesla, etc. As more respected market participants get behind digital currencies it helps create legitimacy to the market. Adding to this legitimacy, is the ability to use your Bitcoin on online payment platforms such as PayPal & Square.
Even with respected Institutional players entering the crypto market, we’d still argue that Bitcoin needs to catch up from a regulatory standpoint. Let’s go back to the fact that we still don’t know who created Bitcoin. Since it is not controlled by any central bank, corporation or individual it’s impossible to say if the group or person that created this, could just shut the whole thing down. Until it is held to tighter regulatory standards, we’d argue any investment in Bitcoin should be treated as a speculative investment.
At the same time that we’re monitoring the regulatory environment, we’re also seeing many new entrants to the space: Ethereum, Litecoin & Dogecoin. Overall, we view new entrants as great news for the digital currency marketplace. While some may just be trying to get rich quick - Afterall, Dogecoin was started as joke - This type of disruption is healthy for any new technology. Competition forces businesses to evolve and improve. A new entrant may bring a more superior decentralized chain, for example. Right now, the new digital competition seems to be coming at the expense of Bitcoin; although it continues to be the most dominate player in the space.
While the security and regulatory areas give us pause, one other positive we see for the crypto marketplace diversification. Other than tech stocks, crypto moves have not been highly correlated to the broad stock market. If we experienced sell off in bonds or golf, for example, we wouldn’t necessarily expect crypto to do the same. In that respect, it can be considered a benefit to an overall investment strategy.
For now, Bitcoin is not something we’re recommending adding to a retirement portfolio, however, we’re not against owning it in a “fun money” or play account. When thinking about how much to invest, consider an amount you’d be comfortable losing entirely.
Please give us a call if you’d like to discuss further.
This material is for informational and educational purposes only. LPL Financial does not participate in the crypto marketplace.
Courtney Walls is a registered representative of LPL Financial. Securities and investment advisory services offered through LPL Financial., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through LPL Financial affiliates and other fine companies.
**Source: Investopedia. What Happens to Bitcoin after all 21M are mined? (Feb 28, 2021).