Should You Own Cryptocurrency in Your Portfolio?
We’ve been fielding several inquiries lately into Bitcoin and cryptocurrencies and whether they are a good “investment.” I don’t believe anyone knows what the future of cryptocurrency holds, but cryptos seem to be building momentum and it’s certainly worth understanding the risk and reward that may come with owning them.
What is Currency?
Let’s start with a quick refresher on what a currency is. Each country or region has its own local currency. Americans have the US Dollars ($), Europeans hold Euros, Japanese have the Yen, China has the Yuan, etc. Each of these currencies serves three main functions; a unit of exchange (medium to buy and sell goods), unit of account (1 gallon of milk = $3) and a store of value (deposits in a bank). The extent to which any single currency can fulfill these functions determines how stable that currency is viewed around the world. The historically stable value of the US $ has enabled it to become the world’s number one reserve currency, meaning foreign countries buy US $ and hold them in reserve. They buy US$ to hedge against a devaluation in their own currency and to conduct international transactions since most major commodities (oil, copper, corn, etc.) are priced in US $.
For cryptocurrencies to be widely accepted, they will have to serve the same three functions. Currently, few transactions are conducted in crypto (although it is growing) and very few items are priced in crypto so its use as a unit of exchange and unit of account are practically non-existent. It’s the store of value, or lack thereof that makes crypto so intriguing as its value can swing wildly on a daily basis, enabling traders to make quick profits (and losses).
Bitcoin is perhaps the most recognizable cryptocurrency. Despite the negatives discussed above, Bitcoin has a major advantage over traditional currencies; the number of Bitcoins is fixed. There are 18.5 million Bitcoins in existence today and the most that can ever be produced, or mined, is 21 million (mining refers to work of verifying the legitimacy of Bitcoin transactions). The last Bitcoin is expected to be mined sometime around 2047. Bitcoin investors believe that as the cryptocurrency gains acceptance in the world economy, demand will increase and the price of Bitcoin will go higher. The naysayers argue that the world’s powerful central banks (Federal Reserve, ECB, etc.) will stifle the growth of cryptocurrencies, therefore universal acceptance will never happen and cryptos will become worthless.
Does Crypto have a place in your portfolio?
As I began, no one knows the future of cryptocurrencies but they seem to be gaining a foothold in the world economy. Fortunes have been made and lost on them due to their volatility and that volatility continues today. Therefore, investments in cryptos remain highly speculative, somewhat similar to being in Las Vegas at the roulette table where there is a high probability of losing everything against a much smaller probability of winning big. So, if you choose to do so, invest in cryptos with your eyes wide open and make sure your portfolio can withstand the worst-case scenario.
Would you like to speak with one of our advisors further about cryptocurrency? Please call our office at (706) 364-4281 or email us at [email protected]
Financial Advisor, Partner