Cryptocurrency – An Emerging Industry
Posted on July 28, 2021
It seems nearly every year a specific topic garners significant investor attention. This year, cryptocurrencies have dominated news headlines given the sizeable price movements across this emerging new asset class. While price volatility tends to drive interest in and of itself, much of this news flow is warranted given how the broader cryptocurrency industry is indeed developing and expanding every day.
Today, more than 10,000 different cryptocurrencies exist across more than 350 exchanges, exceeding $1 trillion in value. More and more companies are focused on some aspect of the crypto landscape, including (but not limited to) research and analytics, trading, custody, and asset management. Governments and banking institutions are realizing the opportunities afforded through blockchain technology. Smart contracts, non-fungible tokens (NFTs), and the concept of digital property rights are gaining much attention. We have even witnessed U.S. corporations using bitcoin as an alternative to cash on their own balance sheets. In short, regardless of our personal opinions on the subject (and they are varied), the cryptocurrency industry is certainly here to stay.
The word currency elicits comparisons to other forms of traditional fiat currency, such as the U.S. dollar. However, cryptocurrencies do not function like other forms of currency – at least not yet. Due to the significant volatility around many of these crypto assets, the likelihood we will see cryptocurrencies displace fiat currencies in the near term remains rather low. For any currency to be accepted broadly as a means of exchange, price stability and broad-based consumer confidence is vitally important. For example, we all expect a cup of coffee to cost us approximately the same number of dollars every day, ignoring some modest amount of inflation over time. While we certainly expect more innovation and adoption, cryptocurrencies do not yet afford consumers sufficient confidence as a reliable and consistent means of exchange.
Cryptocurrencies are much more akin to a commodity investment at this point. For example, bitcoin is often referred to as digital gold given its scarcity and global appeal. Similar to commodities, some investors are trading cryptocurrencies hoping to earn short-term profits, while others are treating them as a long-term investment no different than other more-traditional asset classes such as publicly traded stocks or bonds. Importantly, cryptocurrencies are treated as assets for tax purposes, subject to the same short-term and long-term capital gains tax rules ascribed to other conventional assets – even when using a cryptocurrency as a means of exchange for other goods.
Cryptocurrencies offer investors some compelling attributes such as the potential for very high returns, which are often uncorrelated with other asset classes, thereby providing a diversification benefit within a portfolio. Other investors view cryptocurrencies as a potential hedge against inflation and the debasement of fiat currencies by global governments. Conversely, cryptocurrencies tend to be highly volatile and unpredictable. As with any new emerging technology, we should expect competition and innovation to disrupt the thesis for investing in many existing cryptocurrencies. Moreover, cryptocurrencies are difficult (if not impossible) to value using common methods of valuation ascribed to other traditional investments such as stocks or bonds. As investors and stewards of capital, we encourage others to consider the risks as well as the opportunities when evaluating any investment decision. Keeping your position size modest relative to your broader portfolio is prudent given the rather speculative nature of this emerging asset class.
For those interested in learning more about the history surrounding bitcoin, blockchain technology, and the broader cryptocurrency industry, we invite you to watch our webinar at Cryptocurrency Webinar Replay
Ian Breusch, CFA
Chief Investment Officer
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