179- Crypto Cravings – Learning About Digital Currencies
Have you seen all the news about digital currencies, led by Bitcoin? It seems like the world is going seriously crazy about the potential for crypto. In this post, I will highlight some of the recent press and provide you with some thoughts if you are getting interested in this new currency. This post is not a primer on crypto currencies but has been written to make you aware of what has been happening in the news.
Before we look at the news, let’s revisit exactly what crypto currency is all about. A cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same methods as cryptography (the science of hiding information). Cryptocurrencies only exist digitally and have no central issuing or regulating authority such as the US Treasury or European Central Bank but instead use a decentralized system to record transactions and manage the issuance of new units. These currencies rely on cryptography to prevent counterfeiting and fraudulent transactions. Examples include Bitcoin, Ethereum, Litecoin, Ripple and Dogecoin. The lack of a regulatory authority overseeing the various currencies is a key weakness for many financial professionals as it creates increased perceived risk.
As crypto is decentralized, buyers need a digital currency exchange to buy and sell their digital assets. Recent research published by Statista says there are over 60 million blockchain wallets in existence which gives you some idea of how crypto use is growing.
Here are the headlines that are driving interest in crypto:
Tesla recently announced in an SEC filing that it has bought $1.5 billion worth of bitcoin and said it would start accepting bitcoin as a payment method for its products. This announcement along with recent social media posts by Tesla’s CEO Elon Musk have been credited for raising the prices of crypto, including bitcoin.
BNY Mellon announced plans to begin holding, transferring and issuing crypto, including bitcoin, for its institutional clients this year.
BlackRock Inc, the world’s largest asset manager, added bitcoin as an eligible investment to two funds.
Mastercard Inc announced it was planning to offer support for some cryptocurrencies on its network this year.
Last week, JP Morgan became the latest Wall Street bank to underline how seriously it is taking the biggest cryptocurrency by saying that it would start trading bitcoin “at some point."
Treasury Secretary Janet Yellen has recently stated that she is concerned about the “misuse” of cryptocurrencies like bitcoin and that this is a growing problem. Regulators are increasing their scrutiny after the recent surge in investor interest. Lastly, she has said the use of cryptocurrencies like bitcoin should be “curtailed."
Yellen has acknowledged the promise of these new technologies but has also pointed out that crypto has been used to launder the profits of online drug traffickers and have been a tool to finance terrorism.
Besides Yellen’s recent public statements, crypto has come under criticism by regulators worldwide for its ability to be involved in illegal transactions and scams. That’s just one of the reasons that investing in crypto carries significant risk.
From my reading of the financial press and listening to various media sources, here is what experts are saying about crypto:
Crypto has been around about a decade, not long when considering any investment.
The key phrase I see time after time is to proceed to invest in crypto with caution.
The tide has changed and crypto is now getting more serious consideration by institutions and individuals.
Any institution or individual owning crypto must be able to withstand the volatility these currencies have. What goes up does not necessarily stay up all the time.
Regulators have significant concerns about how each currency is offered and managed.
In a low interest rate world, crypto currencies are emerging as a new asset class that is being used by some individuals and corporations as a place to put part of their liquid assets. It is felt the likelihood of a return on crypto is higher than the near zero returns they are earning on their cash holdings.
Some professionals view crypto as a gamble and not a store of value.
Some investment professionals are adding the asset to portfolios as a high risk investment. Many are limiting the amount invested to 1% of a portfolio.
Crypto is emerging as a new asset class that should be considered in constructing investment portfolios. Some are using it in a manner similar to gold or other precious commodities.
Overall, in my view crypto currencies have emerged from the darkness and are getting serious consideration by knowledgeable parties. I think the key to owning this new asset class has to be making sure it matches the investor’s risk tolerance, it is part of a diversified portfolio and that the amount purchased should be commensurate with the buyer’s risk tolerance. This means proceed with caution and do your research before parting with your money. I will provide more commentary in future posts.
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