Should cryptocurrency be in your portfolio?

by | Aug 30, 2021 | Investing

Jim Kramer says Cryptocurrency should be 5% of your portfolio!  I have to admit I enjoy watching him sometimes, a guilty pleasure, although a little goes a long way.

The truth of the matter is that Jim is primarily a financial entertainer.  He says all sorts of things, some of them interesting and insightful, others LOL funny, and some just throw-away statements without much substance underneath.  The Henny Youngman of Wall Street: take my Bitcoin, please!

But seriously, folks, what about Cryptocurrency?

I will not try to race through all the complexities of this topic in a short blog, obviously.  But there are a few fundamentals we ought to keep in mind.

Vince Lombardy famously started a training season with his new team with the line: “Gentlemen, this is a football.”  Let me start by saying that Bitcoin, Ether, USDC, and tens of thousands of other cryptocurrencies have one thing in common – people, these are currencies.

The primary purpose of a currency is to function as a medium of exchange and to do that well it also has to be a reliable storehouse of value.  Without currency, we are back to bartering wheat for chicken.  And a currency that fluctuates in value a lot (e.g., in Venezuela) can’t be trusted and therefore ceases to function effectively.

A currency is not an asset.  It produces nothing of value.  But sometimes currencies fluctuate in price, and people speculate in them, trying to guess which one will go up and which will go down.

Bottom line: currencies are not assets, and our view is that they do not belong in a long-term portfolio, except to the extent that legitimate investments (e.g., foreign companies) are denominated in other currencies.

Then why all the talk about “investing” in Crypto?

Several quick things spring to mind:

  1. The cryptocurrency market has experienced extraordinary volatility, including huge gains for some people, along with big losses. That kind of thing always attracts some “get rich quick” kind of people.  Who wants to be a millionaire overnight?
  2. It is new and technology-based and generally not controlled by a government (although Initial Coin Offerings (ICOs) can be subject to SEC oversight). Doesn’t that sound exciting and free?

But remember, these are currencies, not productive assets like stocks and bonds.  This is speculation, not investing.

Do we need another type of currency?  What is wrong with what we have?

That is actually an interesting question.  US dollars are already digital in the sense that they are resident in the Fed’s computers; there is very little paper cash left.  What is not working?  Why change?  Several thoughts:

  1. Potential to avoid government regulation? Great for criminal activity, or maybe tax evasion?  Or what if the government becomes authoritarian, like China–you can have some of your assets potentially outside the reach of that government in case you have to get out quick.
  2. As we face huge government spending and loose monetary policy, maybe our official currency is going to wither in the face of inflation. A cryptocurrency could hold up a lot better; the government cannot print cryptocurrency by the bushel anytime it needs to.
  3. Could some cryptocurrencies function as an essential part of a broader digital platform? Could they be more secure and transparent than government-backed currencies?  Could they facilitate international trade and investment?

In Summary

Cryptocurrency and related platforms are in their infancy, but there must be some substantive advantages driving all this activity.  Current pricing can be the product of market frenzy and limited markets, and how this plays out remains to be seen.  The risks are enormous and oftentimes unknowable.  More will be revealed.

Meanwhile, a long-term investor should not speculate in currencies, per se, but stocks of companies like Coinbase can be part of an equity portfolio.  Coinbase is a cryptocurrency trading exchange that went public this year.  Businesses that come out of all of this activity would certainly be legitimate investments, although at this stage still quite small as a fraction of the portfolio.  Kramer’s 5% seems a little on the high side.

 

Team  Hewins,  LLC  (“Team  Hewins”)  is an SEC-registered investment adviser;  however,  such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.