I have been skeptical. I first heard of Bitcoin years ago and concluded that it was too speculative to allocate any real capital into it. After all, it was engineered from the internet as a cyberbank, touted as “digital gold,” and could have disappeared as quickly as it emerged. People still aren’t 100% sure who founded Bitcoin, but they have a good idea. The first recorded transaction was 11 years ago when 10,000 Bitcoins were exchanged for a pizza delivery. Unbelievable. As Bitcoin interest started to grow and people started embracing it, the price increased substantially. “Crypto to the moon!” was all the rage in social settings, social media platforms, and small talk by the company water cooler. There were enough red flags to keep me away, especially feeling confident that the stock market was providing enough opportunities for serious investment gains. As a CERTIFIED FINANCIAL PLANNER™ and a fiduciary, I’m always cautious and prudent when considering potential investments for clients and so I decided to take a “wait and see” approach.
Fast forward to today, over 100 million people worldwide utilize cryptocurrencies. The digital coins have grown into a $2.5 trillion asset class and are gaining popularity from the large institutions. I believe it has reached an important threshold. I have learned and seen enough to now view Bitcoin as an asset class and a serious consideration for part of a diversified portfolio. Should you bet the farm on Bitcoin? NO. Is it too late to get in? NO. Ever increasing demand, security and acceptance can justify the risk-reward opportunity for higher prices if you are willing to stomach the volatility that accompanies it. If you are a fan of owning gold for diversification purposes, then Bitcoin should be on your radar as it can accomplish all that gold can do and more. Bitcoin (BTC)is the largest cryptocurrency and Ethereum (ETH) is the second largest.
What are cryptocurrencies? Cryptocurrencies are decentralized, digital assets that are denominated in terms of digital “tokens” or “coins” and can be bought, sold, stored in an account and converted into almost any currency. Although you can’t touch it or hold in your hands, it does exist in the virtual world otherwise known as the "metaverse." Recently, Nvidia CEO Jensen Huang stated, "The virtual world will be larger in economics than the physical world." Facebook apparently agrees as evident by their recent name change to Meta, showing a clear signal that they are going “all in” on the metaverse. Cryptocurrencies rely on blockchain technology to maintain a ledger of transactions without having to rely on a third-party like a bank or financial institution. It is very difficult, if not impossible, to hack cryptocurrencies. “Crypto” means utilizing cryptography to protect the asset, like sending an email with an encrypted-protected file versus just sending an attachment. Digitally encrypted data is much more insulated from thieves compared to traditional bank and credit card accounts which have experienced billions in losses due to fraud.
What is blockchain technology?
Blockchain technology makes cryptocurrencies possible and is something entirely different than actual cryptocurrency. Blockchain technology is essentially an encrypted ledger, recorded as a series of codes and data, that are compartmentalized into separate and secure “blocks.” The codes are shared across multiple global networks to ensure authenticity. It is a decentralized ledger system that keeps track of “who owns what.” When enough transactions occur, a new block is added to an existing linear and chronological “chain” of blocks, essentially making an irreversible timeline. There is no going back to hack or change data in previous blocks, which is the main reason why blockchain technology is so desirable. Security in a very unsecure digital world, growing larger by the day, is quite valuable technology. Blockchain is also used for other purposes such as smart contracts that automate agreement terms between buyers and sellers, non-fungible tokens (NFT’s) that validate property rights, supply chain analysis, inventory levels and more.
So, why have I changed my mind?
Cryptocurrencies represent over $2.5 trillion in market cap adding it to the “too big to fail” category.
New filings for easier ways to purchase cryptocurrencies through financial instruments like Exchange Traded Funds (ETF’s) will only fuel further demand increases.
Increased regulation is on the way, which will allow governments to tax and profit from it, reducing the risk of banning it.
Nearly half of millennial millionaires have at least 25% of their wealth in cryptocurrencies. Own what the millennials want to buy.
Unlike fiat dollars, which have unlimited supply potential through money printing, there is a cap on how many coins are issued. Currently Bitcoin is capped at 21 million coins protecting it from saturation and inflation.
Increased demand with limited supply almost always leads to higher prices (Economics 101).
You can transport cryptocurrencies no matter where you live in the world and no one can seize your asset.
What are the potential outcomes?
The future for crypto is still very uncertain, but can be summed up by three potential outcomes:
The U.S. government bans cryptocurrencies.(Not Likely)
Cryptos Do become money and are regulated and taxed as such.(Possible)
Cryptos Do Not become money, remain legal to use as an asset, and serve as an insurance policy against fiat currency similar to gold. (Likely)
More aggressive investors should consider placing up to 5 percent of their assets in cryptocurrencies. As the drawdown risk of owning cryptocurrencies converges with that of owning gold (outcome #3), the cryptocurrency asset class can reasonably displace half of gold’s $12 trillion anti-fiat investment market.
If Bitcoin and Ether take even a third of this half – $2 trillion – each.
This means that Bitcoin would double to $120,000, while Ethereum would quadruple to $17,000.
This is not a guarantee, but a possible outcome to consider.
If outcome #2 becomes reality, then one can safely assume that those potential dollar figures would be much higher.
If we can help determine if cryptocurrencies have a place in your portfolio, please do not hesitate to reach out.
Gregg Pacitti CFP®