When it comes to cryptocurrencies, we often get asked:
- What do we think of it specifically and the crypto world in general?
- Is this a legitimate asset class?
- Is it investable?
While we are not experts, we contend that it is still too early to have a meaningful portfolio allocation for most investors.
Certainly, on a visceral basis, cryptocurrencies are a romantic notion – the democratization and anonymization of money. Currencies are insulated from the political decisions of ivory tower elites, from the sovereign risk created by bloated governments, and from the grips of totalitarian regimes.
Sign me up!
However, we have learned that this is not all that it seems.
- It is not and never was a currency. Sure, there was a brief moment in time when you could buy a house, a Tesla, or a pizza with Bitcoin – but that functionality quickly faded.
- Most sellers that accepted Bitcoin during this period quickly converted it back into sovereign currency, not willing to bear the volatility for more than an hour or two.
- The hallmark of a currency is its stability and lack of volatility.
- The very characteristic that makes crypto attractive – potential upside return – essentially disqualifies crypto as a functioning currency.
Over the last 18 months or so, Bitcoin is down over 60% and has traded with the volatility of a leveraged speculative asset – in effect, fully at the mercy of fiscal and monetary policy. This has become obvious to most – today, very few supporters even bother to defend crypto as a currency.
For us, and for most old-school investors, the biggest problem is that there is no fundamental underpinning to cryptocurrencies. Nothing independent to evaluate and no underliers to inform price outside of anticipated supply constraints. As a result, price is merely a function of confidence, momentum, and the collective wisdom of the crowd – the same basis on which meme stocks and pyramid schemes are built. For all its noted shortcomings, at least sovereign currencies are “backed” by the earnings power of the issuer’s economy, which can be studied and evaluated.
Many try to justify the legitimacy of cryptocurrencies by suggesting that the technology on top of which it was created – blockchain – is a game changer. It certainly seems like it could be – although we would submit that the pace of adoption is decidedly slower than most had previously touted (many industries predicted to be disintermediated that still exist). From this perspective, crypto is merely an interesting use case for blockchain technology, not a revolutionary medium for purchasing goods and services. Crypto needs to stand on its own merits.
The speculative, momentum-driven bubble followed by a substantial downturn has exposed weaknesses in the crypto world that require regulation, oversight, and caution from investors. In short, it is still the Wild West. Regulation will happen — governments are eager to step in and protect investors once they figure out how. In the meantime, a shake-out amongst industry players has started and will continue until further clarity is provided (very similar to what is occurring in the cannabis space).
This all means lots of uncertainty – too much for most investors. So, for now, we’re content to sit on the sidelines and watch things play out.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
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