I can admit when I’m wrong…
When it comes to digital assets and cryptocurrency, I’ll admit that a few years ago, I was pretty critical and skeptical. However, I have since changed my tune and have become an investor and perhaps even an enthusiast. I could give you many reasons for my previous skepticism, but it amounts to not knowing the asset class well enough.
Over the last several years, I have worked on rectifying that knowledge gap. My colleague Kyle Cooper and I recently completed the Certified Digital Asset Advisor designation. Kyle and I have learned a great deal about this exciting asset class, and we are likely among some of the most knowledgeable financial advisors on this topic. However, we are acutely aware that this evolving asset class is very nuanced, and even the foremost experts can have trouble keeping up with the rate of change.
With that being said, I am of the opinion that this is a valid investable asset class, and we will likely be rolling out a digital asset (crypto) investment management service later this year. However, I don’t necessarily believe that this asset class is suitable for everyone. Still, I think that for many investors (particularly younger or more aggressive investors), it can make sense to have a small allocation to cryptocurrency/digital assets (perhaps 1-5% of their portfolio).
This news may come as a surprise or a curiosity to many of you as we have written and talked about crypto so little. Notably, our last article or blog post about this topic was written way back in 2017 by my colleague Ronnie Thompson. https://fsgmichigan.com/blog/the-buzz-of-bitcoin
I think Ronnie did a beautiful job writing that article. Ronnie was neither supportive nor critical of crypto (specifically Bitcoin). In his article, he merely presented the facts with some opinions of prominent investors. Interestingly, we now have the benefit of hindsight and seeing how the asset class has performed since then and how it has evolved.
The article was posted on 12/11/2017, and below, you can see the performance of Bitcoin, ETH (the #2 cryptocurrency and the native currency of the Ethereum network), and the S&P 500
The ride in digital currency has been bumpy with several years of dramatic underperformance; however, it has trounced the equity markets in recent years. Most of the investing experts Ronnie quoted attributed zero value to crypto. So far, those experts are wrong, and I believe now more than ever that crypto has great potential, and the zero value attribution comes from a lack of homework on the subject. Additionally, the use cases have been proven over time.
For example, Ronnie correctly pointed out at the time, “You certainly cannot buy anything meaningful like a home or pay for a college education with Cryptocurrency.” Since that time, the adoption of Crypto has been so great that you can certainly buy a vast number of products and services with Crypto. Ironically these products and services include tuition at major universities such as Princeton and The Wharton School of the University of Pennsylvania. Additionally, it is becoming increasingly common for high-dollar homes to be purchased with cryptocurrency. https://www.travelandleisure.com/the-grid/cryptocurrency-real-estate-miami
What I find even more interesting is the impact a decentralized currency can have on helping refugees, protecting against overreaching governments, and protecting against central bank mismanagement. Ok, I get I just said A LOT in that sentence; let me unpack one at a time.
1. Refugee crisis.
a. Imagine you are a Ukrainian citizen fleeing as the Russian army surrounds your city. As you head to the Polish border, you realize that all of your money is in a Ukrainian bank apart from the small amount of cash on hand. Once you reach safety, how will you get your cash out of your bank? Will your bank exist in a month? Will the Ukrainian government fall and its currency become worthless? In this scenario that we are watching unfold in real-time, I firmly believe that I would find comfort in owning some Bitcoin (despite its volatility) safely stored in the digital world and can be moved anywhere.
b. On the other side, Russian citizens may not realize the full weight of these events yet, but their currency will likely be impacted for a generation. Moreover, international sanctions will hurt the Russian economy and, by extension, the value of its currency. If I were a Russian citizen who was somehow aware of these factors, I would want to trade some Rubles (Russian currency) for some Bitcoin or ETH.
2. Government Overreach
a. As far as the news cycle is concerned, it was a lifetime ago, but it was merely a few months ago that Ottawa, Quebec hosted a convoy of truck drivers protesting a vaccine mandate in Canada. This protest which was by nearly all accounts peaceful, eventually disbursed. One of the tactics used by the federal government in Canada to hurt the protesters was the extraordinary step of freezing all financial assets of some organizers and protestors. Now whether you agree or disagree with the motives and tactics of the movement, it should scare everyone that a first world democracy froze the bank accounts and other financial assets of its citizens WITHOUT due process. This is where Bitcoin and other digital currencies offer an interesting use case. The wallets in which Bitcoin and other currencies are held are decentralized, and therefore they cannot be frozen by governments or corporations. This same argument could be made for citizens of any tyrannical government (China, North Korea), which might use the power of financial access to curtail protests or to limit the freedoms of certain groups (think access to banking for women in Afghanistan).
3. Central Bank Mismanagement
a. In the world of fiat currencies, central banks are responsible for managing that fiat currency. The central bank can increase or decrease the supply to curb inflation or prompt economic growth. It's no secret that sometimes central banks get it wrong. For example, Venezuela has experienced inflation exceeding 100% in recent years. The Venezuelan Bolivar is worth essentially nothing, and although this is the most dramatic example, it is not the only example of centralized financial power structures breaking and leaving citizens in desperate positions. It goes without saying having a little Bitcoin would have left a Venezuelan far more financially secure.
Even as I made all these points for crypto, I must point out that it certainly has downsides. Most notably, this asset class is enormously volatile. Crypto, in general, moves so violently that it makes the stock market look like a savings bond. The regulatory environment is another potential risk. We have even witnessed some large cryptocurrencies fail completely in part due to a lack of oversight. The crypto market is very new, and although I’m not a huge fan of regulation, I think some is needed. There is the chance that regulation stifles innovation and therefore hampers the investment thesis. However, that risk is worth the cost of bringing legitimacy to the space. Although these are all valid risks, I believe for the right investor, the risks are worth the opportunity.
As we work on a crypto solution for FSG clients, we will continue to write articles to help you become more knowledgeable on this topic. I’m also interested in getting your feedback on this topic and seeing how you feel about an FSG Crypto Managed Offering.
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Written by Brice Carter