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.
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.