In 1999, author Michael Lewis published The New New Thing: A Silicon Valley Story, about Jim Clark, a technology entrepreneur who helped launch the age of the internet. Also in that year, technology stocks (as measured by the Nasdaq index) rose by 86%. The following year, as the internet bubble burst, the Nasdaq plummeted by 77%
Since its launch in 2009, the cumulative price increase of Bitcoin has been astounding: a mere $100 purchase of Bitcoin in 2010 would be worth millions today.
But the year-to-year return from holding Bitcoin during the past half decade has been noteworthy due to wild price swings, more akin to the tech stock experience of the late 1990s – early 2000s. In the crypto crash of 2022, the Bitcoin price declined by 65%. More recently, the price has climbed by a similar amount.
Until this year, owning Bitcoin has been more challenging than buying stocks or bonds. Typically, Bitcoin aficionados needed to do things like create a digital wallet or open an account on a specialty crypto exchange to hold their coin.
The “New, New Thing” in 2024 is that Bitcoin can now be bought and held in a standard brokerage account or IRA, just like a run of the mill stock, bond, or mutual fund.
On January 10, the US Securities and Exchange Commission (SEC) authorized eleven applications to offer exchange-traded funds (ETFs) tied to Bitcoin.
Since the question of “can I buy it?” has been answered with the advent of Bitcoin ETFs, more investors may now be asking “should I buy it?”
We encourage our clients to think long-term and prioritize well-diversified portfolios that support their financial plans. It’s not a crazy notion to think that an allocation to Bitcoin would add to the diversity of a portfolio and might contribute to wealth creation over time.
Some market practitioners equate Bitcoin to “digital gold”. Actual gold has been recognized as a store of value for centuries due to its durability, fungibility, and scarcity. While fourteen years probably falls short of a true durability test, Bitcoin does check the boxes of fungibility and scarcity, so the digital gold claim is not without merit.
Other folks are turned off by the idea of Bitcoin because of its association with illicit transactions. Since it is possible to hold actual Bitcoin in a wallet that is delinked from an exchange and not hooked up to the internet, cryptocurrency is a favored medium of exchange for malefactors.
The question of “Should I buy it?” is best considered through a lens of personal values and preference. A more appropriate question for an advisor to answer is “Must I buy it?”
For most individual investors, some mix of stocks or stock funds; bonds or bond funds; and short-term investments are appropriate and required to meet long-term financial goals. Stocks, bonds, and short-term investments are the must-haves in a typical investment portfolio.
Stocks provide an important growth element. A stock’s price is influenced by the profitability and sustainability of the enterprise that issues it. Over the long-term, there is a high likelihood that a diversified stock allocation will exceed the rate of inflation and enable the holder to maintain or improve their purchasing power.
Bonds and bond funds deliver regular income and often act as an offset when stock prices stumble. Bonds are contractual arrangements that promise their holders income and return of principal. Short-term investment funds also include contractual arrangements and typically provide stability with modest returns.
Commodities, on the other hand, are not tied to profitability of an entity, nor are they contractual arrangements that promise a return. Commodities are economic goods with fungibility whose prices are influenced primarily by supply and demand and are often the subject of speculative activity.
As such, we typically don’t include commodities directly as elements of investment portfolios for our clients: no gold ETFs, no oil ETFs, no funds whose sole purpose is to have direct exposure commodities. Since I view it as a commodity, Bitcoin is not a portfolio “must have”.
Another twist on the cryptocurrency narrative is its treatment under the law. The Commodity Futures Trading Commission treats cryptocurrencies as a commodity; the SEC argues that certain cryptocurrencies should be considered securities; and the Internal Revenue Service treats crypto as property.
While the latest Bitcoin ETFs won’t be popping up as a constituent in our model portfolios any time soon, you should know that digital assets are being viewed very seriously as investment vehicles by many large institutional investors.
Also, cryptocurrencies offer interesting technological applications that are being explored by financial institutions and even by central banks.
At a minimum, it’s worthwhile for informed investors to have some perspective on developments in the digital asset space. If you have questions, please send them our way.
RK