$20,000 for a Crypto-what?

December 14, 2020

This year has seen a lot of change. Zoom meetings and virtual learning have become commonplace, as have massive economic and market stimulus by central governments. Against this backdrop, Bitcoin, a dominant cryptocurrency, has made a resurgence; it was up 174% this year (as of November 30), setting a record high of $19,850 per Bitcoin.

Ironically, Bitcoin has no intrinsic value, and contrary to its moniker, it’s rarely used as currency. So why does a bit of code created by an unknown individual(s) in 2009 now have a market cap of around $350 billion?

Many proponents of the cryptocurrency believe that Bitcoin serves as an excellent store of value, analogous to a digital version of gold, due to its fixed supply and decentralized nature. Some bullish investors are predicting that Bitcoin’s market cap will eventually reach $9 trillion (gold’s market cap)—about 25 times Bitcoin’s current value. Others view Bitcoin as a purely speculative bubble. So, who’s right?

That’s the $9 trillion question and, unfortunately, it’s unanswerable. The last time that Bitcoin approached $20,000, back in December 2017, it crashed to $3,200 a year later. That decline could happen again, but this rally does feel a little different. While Bitcoin’s popularity has surged recently, sentiment doesn’t seem as frenzied as 2017, and the Bitcoin ecosystem has matured over the last three years. It’s still a nascent digital asset with a highly uncertain future, but over the last few years, institutional interest in Bitcoin, and cryptocurrency in general, has grown significantly. For example, recent announcements include the launch of Fidelity’s first Bitcoin fund, sizeable Bitcoin purchases by several public companies (like Square) and institutional investors (like MassMutual), the launch of cryptocurrency indexes by S&P, a letter from the OCC allowing banks to custody cryptocurrencies, and endorsements by famous investors like Stanley Druckenmiller.

However, it remains to be seen whether Bitcoin is merely a fad that will eventually fade or if it will continue to grow in adoption and ultimately stand the test of time. There are still many risks to Bitcoin, including regulatory risks, security risks, and the possibility of another cryptocurrency supplanting it. Perhaps, the biggest headwind to Bitcoin could come in the form of opportunity cost. Today, cash and bonds offer very low interest rates, and stock valuations aren’t much more attractive. But in the future, traditional investments could offer higher yields or alternative assets could become more accessible, which could weigh on Bitcoin’s popularity.

At this point, if an investor wanted to allocate to Bitcoin, it would seem best suited for a high-risk/high-potential, speculative role in a portfolio. However, due to Bitcoin’s extraordinary volatility (e.g., bitcoin most recently fell -15% from November 25-26) and lack of intrinsic value, we do not recommend investing in it. But for those who are interested — and able to accept its extreme risk — we would recommend that investors keep Bitcoin to a very small portion of their portfolios.

If you have any questions about your investment portfolio or financial plan, please contact your Blue Trust advisor, or email blog@bluetrust.com.


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