Amazon stock was a risky proposition in the 2000s. Cryptocurrency is arguably at a similar point.
Itโs fair toย emphasize sentiment toward cryptocurrency amongย the generalย public has plummeted in the past year. This may have a secondary effect of pushing financial advisors to shy away from the category, and digital assets moreย generally, at least until thereย is more certainty in the markets and the forces driving them.
Looking at the longstanding โ as advisors are supposed to do โย lends itself to a different perspective. Cryptocurrency isย still a relatively new technology, and with all new technologies, thereย is an adoption curve, and a good way to evaluate this is Metcalfeโs Law. Metcalfeโs Law states thatย a networkโs impact is the square of the number of nodes in the network. Forย instance, if a network has 10 nodes, its inherent value is 100 (10 x 10).
If you believe cryptocurrency isย still early in its evolution (and it almost certainly is), it has unmatched potential to grow in an exponential manner. The analogy isnโt perfect, but one of the toughest times to buy Amazon stock was in the 2000s, when it was virtually stagnant; ofย course, that likewise turned out to be a great time to buy.
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Alongย with its untapped potential, cryptocurrency and blockchainย tech have come to be defined by such features as decentralization, security, transparency, efficiency, innovation and financial inclusion. Aย lotย of these facets are appealingย to financial advisors as they scan the macroeconomic landscape for financing opportunities for their clients. With a difficult 2022 behind us โ during which almost every investment class went down โ and the traditional 60/40 portfolio had its worst year in over a century, it is important for advisors to be open to possibilities in the future landscape to rebuild, protect and grow their client portfolios.
Managing feelings
Emotion can be a difficult thing to manage, and in one sense, that is part of an advisorโs job description. The situation in the Unitedย States has big challenges: The country has one of the highest debt-to-GDP ratios we have encountered, a devaluation of fiat currencies is ongoing, and demographics are aging with no end insight. A natural question arises: How can we find opportunities to outpace these challenges? It isย crucialย to realize that the economy isย frequently slow to reflect economic conditions. We should expect to see challenged earnings, a credit crunch and uncertainty around the Fed. 1 answer is blockchainย tech and crypto.
There are plentyย of reasons why investing in cryptocurrency makes sense: diversification, high growth potential, being on the bleeding edge of new technologies, a hedge against inflation and self-custody, to name severalย . The question is, how should advisors allocate a portion of client portfolios to digital assets?
Without taking a single cryptoย token or thirdย party danger, the SECโs intransigence in disallowing a spot Bitcoin ETF, and attemptingย to keep up in this 24/7 cycle market, what is a regulated option? As famed value investor Warren Buffet once stated, โBe fearful when others are greedy, and greedy when others are fearful.โ
Now it is one of those periods. In preparing for the longstanding, weย need get out of the day-to-day noise. Will this investment class be higher in 5, 10, 15 years and beyond? I believe so and believe it is responsible to research this investment class and have a portion of client portfolios allocated to it, just as it was for Amazon in the early 2000s. Cryptocurrency and blockchainย tech are important because they offer a new way to manage and secure financial transactions, increase transparency and accountability, and enable innovation in a variety of industries.
A hedge against uncertainty
Debt has been the backbone of the worldwide economy. As debt grows and credit tightens, it challenges all facets of the markets. This inย theย end devalues fiat currencies. Althoughย while the Unitedย States dollar remains the world reserve currency (for now), thereย is no guarantee of that in the future. The ultimate story isย theย factย that all fiat currencies depreciate asย aย resultย of our system.
As advisors, our job is toย sustain purchasing power for our clients. Moving forward, 60/40 portfolios and traditional wealth management strategies may not be enough toย achieveย this. Thisย isย why, we see an allocation to cryptocurrency as a responsible decision moving forward so as to not miss an exponential opportunity. Cryptocurrency as an investment class is directly tied to worldwide liquidity; this faucet cannot be shut off. As money supply rises over time, weย need be prepared to capitalize on that environment.
In the new world of โwork from home,โ where does commercial real estate fall in? We just hit a first-quarter record in office vacancies approaching 13%, which is larger than after the financial crisis of 2008. Commercial real estate loans account for nearly 40 percent of whatโs on bank lending books. This issue, along with the now very apparent potential for a bank run via a cellphone, adds pressure on the system, compounding the challenges to advisors. Cryptocurrency and digital assets enhanceย the set of tools toย assist deal with them.
With a system built on debt and big challenges ahead for Fed Chairman Jerome Powell, now is the time to look at additional alternatives. Advisors owe it to their clients to put in the work to navigate the digital investment space so theyโre better positioned to endure the looming headwinds. No single solution is a perfect fit, but aย mix of these strategies puts the people we work for in a better position to be successful for themselves and their families.
Pete Pachal.
