Over the last few months, I have talked to several clients about cryptocurrencies and particularly Bitcoin and similar offerings. Either Bitcoin is a massive bubble or the digital currency of the future. The reality is likely somewhere in the middle. Regardless of how we feel about this space, it is becoming mainstream and will likely be difficult to dislodge or restrain going forward. The risks are great but so are the potential rewards. We have opted not to invest client monies into the crypto space simply because the ability to do so is not mainstream enough yet and does not align with our current management style. Rest assured that we are monitoring this space and may be using it in our models in the future much like we have used gold as a trade. Here are the main concerns we have regarding this space:
- There are no regulations. A likely outcome is that the governments around the world will eventually regulate these types of assets which will have unknown consequences regarding the valuations of such assets. Nations typically do not allow a competing currency to devalue or debase what it has used for hundreds of years. We should be expecting the US government to digitize its own currency.
- Only a small fraction of the Bitcoin supply trades on exchanges or platforms. Most of it is kept off the market by a few players who control the supply and therefore make it thinly traded and exceedingly volatile. It is also worth noting that China is the largest player in this market and recently a very influential tech investor warned that the Chinese would use crypto currencies to undermine the US dollar and it would be used as a weapon of mass financial destruction. That’s a scary scenario.
- There are unknown tax consequences. This is tricky because the IRS has not clearly outlined how it will tax the asset and the trading of it. Many users of crypto currencies are trying to evade detection from authorities which makes the space a black-market haven for illegal activities from the drug trade to human trafficking.
These three items alone should be enough to give you pause as it does us before investing money in this space. However, the internet was once thought of as a nonsensical idea and look how technology has changed our lives. It will continue to do so. It makes sense that technology will impact how we pay for goods and services much like PayPal and Venmo have personal transactions and like credit cards did decades ago. Be patient with us as we look for the best ways to protect your capital and grow it smartly.