Rewind the clock to December of 2019 and there were several words we were not likely to find in everyday language: pandemic, Covid-19, and cryptocurrency. Today, we are seeing headlines of Bitcoin blasted all over the financial news and social media. Just last week, I heard the conversation among colleagues out to lunch. I even overheard people discussing the latest surge in Dogecoin on the driving range. It has everyone’s interest, and why shouldn’t it? After all, cryptocurrencies can experience massive swings in one day!
When I hear people talk about Bitcoin, people admit it is useless. Some people describe it as fake, a scam, gambling, or use some other language to express to peers ‘I am not a sucker.’ At the same time, there is a curiosity if friends and colleagues are participating in this wild ride. People think, “I know Bill, he is a smart guy. If he is invested, should I?”
The lines become easily blurred because people quickly forget what game they are playing. As investment professionals, we do just that, we INVEST. Viable businesses provide goods and services that create value and usefulness in people’s lives. The securities traded represent the market’s estimated value of future cash flows today. The challenge is separating the noise. We have modern tools, online brokerages, and trading platforms that allow speculators to blur the lines. Energy ETFs can be found right alongside cryptocurrency ETFs. One invests in businesses that allow us to turn on lights, while the next is simply speculating whether the next person is willing to pay more for an idea.
There is further evidence cryptocurrencies are out of control. The headline on the Wall Street Journal recently read, “The price of Dogecoin jumped to its highest level in about two weeks, giving the cryptocurrency, which was designed to serve no real purpose, a market value of about $53 billion.”1 That is a similar size market capitalization to Ford Motor Company and is larger than most Fortune 500 companies. Ford was founded more than 1oo years ago, with innovative manufacturing and business practices that brought cars to the middle class and allowed people to live in ways never imagined. Dogecoin was literally a joke on Saturday Night Live fabricated by one of the richest people on the planet. He even said it was a joke. In a matter of weeks, there was more money behind it than a century old auto company.
In the late ‘90s, people knew the internet was the new train of modern day. Speculation drove the price of anything.com through the roof, even with no plan or business model. Most of these sites simply did not survive. The ones that did eventually created value for businesses and consumers and are now the largest companies in the world. Digital currencies and blockchain technology could evolve in a similar pattern. There may be a use for digital currencies at a future date, but what if Bitcoin is not the vehicle? At what point does the government and Federal Reserve become involved? We know China is experimenting with a digital Yuan. If the United States does the same, does Bitcoin and the 100s of others still have a place?
When people ask for my advice on “investing” in cryptocurrencies, here is what I tell them. I cannot predict the future, and it is possible that cryptocurrencies will create some form of utility to benefit people. If that is the case, businesses and consumers will adopt the technology. If large swaths of companies can increase efficiency with cryptocurrencies, and you have the right portfolio strategy, you, too, may benefit in the form of greater returns. With a direct investment in any one cryptocurrency, you are simply speculating on whether the next person is willing to pay a higher price for what is today; pretend money. My advice is to understand what game you are playing. For some, spending time in the casino is great entertainment. For others, trading Bitcoin can be great entertainment, however, going to $0 should be considered a probable outcome. How much can you afford to go to $0?
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1Ostroff, Caitlin. “Dogecoin Price Jumps on Coinbase Debut Prospect.” The Wall Street Journal, Dow Jones & Company, 2 June 2021,