None of us can disagree that cryptocurrencies have grabbed investors’ attention. What is a point of discussion is whether they are suitable for most investors. Let’s start with a general overview of cryptocurrency. According to Investopedia, a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. The first blockchain based cryptocurrency was Bitcoin. It was launched in 2009 by an unknown individual under the pseudonym Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation. It is capped at 21 million coins. While Bitcoin is the most well-known cryptocurrency, there are many others such as Etherum, Litecoin, Cardano and Dogecoin.
The rapid rise in these currencies’ values – and the publicity surrounding them – have increased interest in them. But they remain a speculative investment. Cryptocurrency has a low correlation to other assets which is a motivation for adding to portfolios, however, it also does not have a store of stable value, so it can decrease for no apparent reason as well.
An advantage of cryptocurrency includes being easy transfer between parties. Transfers are secured by the use of public keys and private keys that have timestamps and other proof of work systems that eliminate the need for third-party financial institutions and their fees. The technology built to accommodate digital assets may provide an easier and more efficient way to handle transactions. Many experts see blockchain technology having potential uses such as online voting and crowdfunding, as well as lowering transaction costs by streamlining payment processing.
Disadvantages are many. Currently crypto has very limited use. Tesla was one of the few major companies that accepted Bitcoin for purchases – until this May, when Elon Musk announced they would stop accepting it for payment due to concerns over its energy usage. According to the Cambridge Center for Alternative Finance, Bitcoin currently consumes .55% of global electricity produced, or roughly equivalent to the annual energy draw of small countries like Malaysia, Sweden, or Chile. Some of this energy is renewable, but much of it is not, so this can be a concern for clients who favor low-carbon assets. Since cryptocurrencies are not issued by any central authority, they are theoretically resistant to government interference or manipulation. But the United States Securities and Exchange Commission is currently reviewing how to regulate them. This could result in over-regulation that will make the currencies difficult to trade or under-regulation that could make them more subject to fraud and illegal use.
As a financial professional, part of your job includes managing your emotions and those of your clients. Studies show that clients are more likely to buy risky assets after a sharp rise in their portfolio. Unless their risk tolerance and investment objectives have changed, it is not in their best interest to increase the risk in their portfolios. You need to make sure neither you nor your clients get swept up in the fever surrounding cryptocurrencies. We suggest you review some materials provided by product sponsors.
At this point, The Leaders Group views these as highly speculative instruments which make them an unsuitable choice for most clients. We will allow you to invest in cryptocurrencies for yourself, but not make any recommendations to clients. Be assured, we will continue to monitor digital assets and are open to adding them if we determine they are in the best interest of clients.
Chief Compliance Officer