Cryptocurrency: Boon or Boondoggle?

MACRO Consulting Group
Bitcoin sitting on a pile of other bitcoins

Lately it seems that you can’t go to the grocery store, the gym, or your kid’s basketball game without overhearing someone talking about Bitcoin.

Established in 2009, Bitcoin is the best-known example of cryptocurrency. These digital currencies usually operate independently of a central bank or regulating authority and use cryptography to record, track, and verify transactions via decentralized, peer-to-peer networks.

As financial advisors dedicated to our clients’ long-term fiscal fitness, we offer some words of caution on cryptocurrencies:

It is a highly speculative investment
Cryptocurrency has no intrinsic value, it exists only digitally in the network. It also has no history of being a store of value similar to precious metals, which have over 5 millennia to their credit. If you look at the wild swings of Bitcoin so far in 2018, it has more in common with a penny stock or casino than a gold coin or a greenback.

The market has no oversight
With no central issuing or regulating authority, accountability is severely lacking. In addition to very legitimate concerns over facilitating illicit activity, there are no market rules governing participants’ trading behavior. Since the Securities & Exchange Commission has no jurisdiction over offshore entities or activities, U.S. regulators often question whether market prices are real or manipulated.

The market infrastructure is questionable
Even if everything cryptocurrency believers say about Bitcoin and other cryptocurrencies is true, there are still the issues of how and where to invest. There have been a number of cases where exchanges have gone insolvent, and some of the biggest ones have had serious concerns raised about their integrity and solvency.

Anxiety over the exchanges’ financial stability is valid given the difficulties some investors have faced cashing out during periods of large price declines. At best, this may be indicative of weak systems and possibly financial issues; at worst, it may indicate some kind of fraud such as a Ponzi scheme.

The lure of fast money is attracting charlatans and quick-buck artists
While there are legitimate cryptocurrency companies and traders, there are equally as many whose integrity is questionable, and several large entities have been accused of various forms of fraud or malfeasance.

There is minimal recourse should an adverse event occur to you personally
In the regulated financial world, there are protections in place for account holders; financial institutions have insurance for accounts, segregate client funds from bank capital, and bear the lion’s share of cybersecurity risk. In the crypto world, there have been numerous cases of wallet “hacks” draining accounts, exchanges losing coins or going insolvent with client funds lost. Since there is no regulation or oversight, there is little-to-no recourse.

What does MACRO think?
Cryptocurrency is a speculative investment opportunity that has generated great paper wealth for early entrants and it is easy to see why this is appealing. We are more circumspect on the matter and would caution investors to only speculate with money they can afford to lose.

Mark Twain famously said, “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.” Our focus is generating long-term portfolio growth for your well-deserved retirement; so we’re happy letting others speculate.