Our thoughts on the Bitcoin trend.
Should advisors be investing in Bitcoin and other cryptocurrencies? Here’s our take.
We love interesting tech, and cryptocurrencies like Bitcoin are technically impressive. But here’s the thing: it’s been around for a decade, and as far as we know, no one has come up with a legitimate use for cryptocurrencies that can’t be accomplished as well or better by other solutions. Seriously, we really don’t know what problem it solves that can’t be solved better in some other way. Maybe we’re missing something here, but our impression is that cryptocurrencies are cool tech in search of a problem.
The gap between buzz and demonstrated usefulness goes beyond cryptocurrencies. Cryptocurrencies are just one application of a Blockchain-based distributed ledger, a clever way for records to be shared across multiple systems with no master copy. Nobody is in charge, and yet everyone can have confidence in the records. That this is possible is remarkable. But we haven’t seen a compelling use for any distributed ledger (other than, perhaps, drug trafficking, ransoms and the like).1
So let us turn to a different question: should advisors be investing client assets in Bitcoin and other cryptocurrencies? The nominal value of all cryptocurrencies is something like 1/1000 of the world’s wealth. Does that mean, as a first pass, that $1 out of $1,000 should be invested in cryptocurrencies? Should a $10 million dollar investor have $10,000 in this new-fangled investment?
We won’t make any specific forecasts of cryptocurrency prices. But we still think that advisors should leave this alone. Every advisor we speak with wants to get away from product-oriented value propositions. The last thing they want to do is build their practice around chasing hot stocks or sectors. Bitcoin and the like make “the nifty fifty” (an investing fad of the 60s), the dotcom boom and hedge funds look staid in comparison. The point isn’t that cryptocurrencies are necessarily a bad investment; it’s that the advisors we speak with simply don’t want to be chasing speculative returns. Even if it’s successful, it’s a distraction from the advisor’s core value: acting as a financial life coach focused on financial planning.
On top of this, there are, of course, good fundamental reasons to treat the entire cryptocurrency boom with (extreme) skepticism. Among the many buyer-beware stories, a few highlights are the success of “Ponzicoin.co,” which attracted more than $800K before being shut down, despite a Q&A that included:
Q: This seems like a great investment opportunity!
A: No, this is a joke. Don't put any significant amount of money.
Q: This seems to be too good to be true, how am I getting screwed?
A: It's a literal pyramid scheme. You are fairly likely to be one of the last people to buy PonziCoins…
Then there are the spate of cryptocurrency exchanges that “took the money and ran.” See, for example, Bitconnect, Confido and Coindesk. The case that the current cryptocurrency craze is a bubble strikes us as pretty compelling.
So, let us all admire Bitcoin as a technical achievement. History is full of examples of seemingly useless but intellectually compelling ideas that eventually led to practical applications utterly unseen by the original creators. The iPhone’s navigation system, for example, wouldn’t work without a GPS system that makes use of Einstein’s General Theory of Relativity. It’s possible that Blockchain will have amazing applications. But we don’t know what they might be. They could be decades off or never arrive at all. We’re happy to be wrong, but right now we won’t shy away from being direct: we don’t see it.
For more on this topic, check out Automated Rebalancing & Specialization.
1 Kai Stinchcombe has a nice article walking through this in a bit more detail here. Blockchains are built on underlying technologies, like public key encryption and Merkle Trees (the mechanism Blockchains use for verifying checking ledger integrity), that are both interesting and useful. Some of the proposed Blockchain applications we hear about aren’t really Blockchains. They’re fairly standard uses of Merkle Trees.