Should Investors Consider Cryptocurrencies?

Should Investors Consider Cryptocurrencies

Christopher P. Casey

This article was originally published by Citywire RIA in March 2021

Absolutely! We have been writing about and advising clients on cryptocurrencies since 2014. Cryptocurrencies possess the breakthrough capabilities of blockchain peer- to-peer technology, namely: digitizing assets for better security, transparency, and transactional efficiency. No matter what the application, the underlying thesis behind all blockchain varieties is the same: a disruptive technology which cuts out the middleman to provide exponential benefits. Bitcoin, in acting as a monetary substitute while sporting a market capitalization approaching $1 trillion, is simply the first cryptocurrency to be validated by the marketplace. It should be considered by every financial advisor.

Why? As always, simply look to demand and supply. Bitcoin now has a strong institutional infrastructure with futures offered by the CME and Bakkt (in part owned by the NYSE’s owner, Intercontinental Exchange), newly viable custodian options, and better regulatory certainty. Accordingly, institutional demand has taken off, ranging from dynamic hedge funds, to entrepreneurial Tesla, to mainstream mutual funds, and even to insurance companies like MassMutual. Retail investors have followed suit given easier access and increased security due to custodial “cold wallets” and theft insurance. Largely driving bitcoin demand for all parties is the recognition of bitcoin as a legitimate inflation hedge.

And given the Federal Reserve’s newfound commitment to increased inflation, they should. One needs only to look to Federal Reserve balance sheet growth for an ominous warning: according the Federal Reserve, its assets (from printing money out of thin air) increased over 76% from $4.3 trillion in mid-March 2020 to $7.6 trillion today. How does that increase in the supply of dollars stand in relation to the supply of bitcoin?

The answer: in sharp contrast. The most bitcoins which can be “mined” (created) are limited to 21 million (and over 18 million exist today). Just as importantly, the rate of bitcoin creation is decreasing as rewards for mining bitcoin are periodically diminished by 50% (known as a “halving”). Constrained supply combined with rising demand should result in continued, albeit potentially volatile, long-term bitcoin price appreciation.

Detractors often characterize cryptocurrency investing as “speculative” given its dramatic volatility. Have individual stocks not experienced similar declines? It should be remembered that bitcoin has existed for over 12 years and, despite dramatic drawdowns along the way, has proven itself resilient.

Critics also dismiss bitcoin and other cryptocurrencies since they lack “tangible” value. But how much tangible value is there in most software companies? How about financial derivatives? How about the dollar?

Yes, there will be winners and losers in the cryptocurrency universe. It is very comparable to investing in the early days of the Internet. But bitcoin and cryptocurrencies are legitimate investments and deserve consideration in every investor’s portfolio. RIAs who refuse to consider them are doing their clients a disservice.

About WindRock

WindRock Wealth Management is an independent investment management firm founded on the belief that investment success in today’s increasingly uncertain world requires a focus on the macroeconomic “big picture” combined with an entrepreneurial mindset to seize on unique investment opportunities. We serve as the trusted voice to a select group of high-net-worth individuals, family offices, foundations and retirement plans.



Our Economic Views

We are economic thought leaders following the free-market oriented Austrian economics, whereas most advisors follow Keynsian Economics and tout the merits of money printing and government intervention. Global central banks have printed tens of trillions of dollars out of thin air as global debts exploded. Yet most advisory firms act like this is just another “normal” investment environment and allocate capital the way they’ve always done so. In our opinion, this is not a normal environment and requires an acute understanding that the pillars of the world are now built on a mirage of bubbles with serious consequences for growing and protecting wealth.

In an attempt to offset continued economic weakness, governments are reacting with spending, debt issuance, and intervention in the economy on a scale without precedent in modern history. Although these policies may buy time, they cannot solve the underlying issues. Ultimately, governments will repay debt with their last remaining option – printing more money. As money floods the system, this will drive inflation higher despite continued weakness in the economy.

Under these circumstances, the current conventional model of a static bond and stock mix will fail. It will fail investors in realizing reasonable returns. It will fail investors in preserving their purchasing power after inflation. And it will fail investors in protecting their capital and securing their retirement.

The conventional experts do not foresee such risks. But these same experts missed the prior 2000 tech bubble and 2008 housing and stock bubble.  Today they are missing the bubble in government debt and the ramifications of unbridled money creation. WindRock understands these issues and positions clients to not only minimize their risk associated with these dangers, but to profit from them.