Good morning & happy Monday!
“Speculation is most dangerous when it looks easiest.”
– Warren Buffet
Cryptocurrency. It was all the rage for a while, then it subsided, now with crypto hovering around all-time highs it’s getting attention again.
This leads to a number of clients who will ask me something along the lines of “should I be investing in cryptocurrencies?”
My answer now is the same as it was a year ago and 5 years ago: “Cryptocurrency is not an investment.”
I recall specifically speaking with one individual … the conversation went something like this:
- Client: “I’ve been doing some research on cryptocurrency, and I think it may be a great thing to get into. What do you think?”
- Me: “I think it’s not a wise idea. Cryptocurrency is not an investment.”
- Client: “What do you mean? If I had invested in it a few months ago I would have nearly doubled my money. Seems like a great investment.”
- Me: “Cryptocurrency is not an investment.”
- Client: “What do you mean ‘it’s not an investment’?”
- Me: “What does cryptocurrency do?”
- Client: “I don’t understand. What do you mean ‘what does it do’?”
- Me” “I mean, how do you expect it to make money?”
- Client: “I don’t know, I just know I could have made a ton of money in it had I bought in a few months ago. I don’t anticipate being in it forever, just make some money and then get out.”
- Me: “What you are describing to me does not sound like an investment, it sounds like speculation at best, gambling at worst.”
- Client: “I never really thought about it like that.”
- Me: “If I invest in stocks, I have an ownership stake in a business. That business makes products and/or provides services than in turn make a profit, that profit is then sent to the owners of the company or reinvested into the business to generate future profits. If I buy a Bitcoin or an Ethereum or an XRP how do you expect that to turn a profit?”
- Client: “I’m not really sure.”
- Me: “Again, crypto is not an investment, it just sits there, and you hope that someone will pay you more than you paid for it, but there’s no basis for that belief … that’s not investing.”
- Client: “Maybe I can just buy a little bit, just to see how it goes.”
- Me: “I cannot help you with that, for multiple reasons. First of all, the compliance department of most investment firms do not allow for cryptocurrency holdings. Even if they did, I still would not do it for you because #1 it’s not an investment and #2 I have a fundamental investment principal that’s fairly simple: I do not invest in things I do not understand. I do not understand cryptocurrency, so I cannot in good conscience take your money and put it into something I do not understand. And #3, we’ve already determined that crypto is somewhere between speculation and gambling, but it’s most certainly not an investment … why would your investment advisor purchase a non-investment?”
It is said that investing is driven by 2 emotions: greed and fear. I’m still not willing to put cryptocurrencies in an investment conversation, but the same greed / fear dynamics are most certainly in play.
Cryptocurrency can have a compelling story to tell, but so do all fads.
Is cryptocurrency a fad? I don’t know. We’ve seen plenty of fads come and go through the years: GameStop in 2020, gold in 2010-2012, and real estate in 2007-2008 are just a few recent examples of speculation gone wild. In every one of those cases there were lots of people who got burned.
I have no idea what cryptocurrency will do going forward or what the next fad will be, but I can tell you that we won’t be chasing it. The stakes are too high. We are managing your lifetime savings; we refuse to get caught up in the winds of “I’ve got a gut feeling” or “This opportunity is too good to be true.”
Ladies & gentlemen, this cryptocurrency conversation is just another example of why I stand by my belief on investing in fundamentals, not fads. I believe there is no substitute for a well-diversified investment portfolio … we don’t chase fads, we don’t stress about headlines, we stick to the plan.
Please never hesitate to reach out with any questions, thoughts, concerns. We are always just a phone call away.
Thank you for the privilege to serving you. Make it a great week ahead!