What to know about cryptocurrency

fortpitt in Wealth Management 23 February, 2018

In recent months, it seems like one of the most talked about topics in the investment world is cryptocurrency. Investors constantly want to know what this hot trend is all about, whether they should invest, and what the future holds for blockchain, Bitcoin, Litecoin, Ethereum, and more. But, before we dive into our outlook on the space, let’s rewind and take a look back at cryptocurrency’s history.

The (seemingly never-ending) rise and fall of cryptocurrency

Going back to the start is important for investors to understand where cryptocurrency originated from, and how it operates today. Cryptocurrency started as a mechanism to exchange money between a buyer and seller of online goods without using a third party intermediary (ex. a credit card company). Initially, this was developed for use of a website called Silk Road, which sold illegal products and services. While the website shut down, the technology and mechanism of these money transfers without a third party remained appealing, and so launched the cryptocurrency that we know today.

To be clear, I’m not against the technology that enabled cryptocurrency, but I am against cryptocurrency as a mechanism of investing. When an investor buys a share of stock, they are purchasing a slice of a company in the hopes that it will increase via a dividend, natural appreciation, or through a company buy back. When an investor buys $10,000 worth of Bitcoin, that money goes directly into the person’s wallet that sold that Bitcoin.

What’s next for cryptocurrency?

A concern of many analysts, advisors, and investors is whether this “hot trend” is inevitably a bubble that will pop. It likely will, and in fact, it already has popped a little. When it comes to investing in this space, know that you could be getting sucked into something that has no value, and you cannot trust when to get out at the right time.

While there is not necessarily a safe way to ride this trend, there are a few companies with loose ties to this technology. For example, IBM has a great handle on blockchain technology. But, know that it is a small part of their total portfolio, so you wouldn’t be investing in IBM because you are a believer in blockchain, but rather their bigger business goals and long-term market direction.

All in all, I compare the trend in cryptocurrency to one that occurred in the late 90s with Beanie Babies. Remember those adorable stuffed animals that children (and parents, to be honest) went wild over, and who thought “but they’ll be worth something in 10 years.” Guess what, Beanie Babies hold no value today and are a prime example of a bubble gone very wrong.

With these kind of trends, investors have to be very mindful. Not to be a buzzkill, but in my opinion, there is no inherent value. Fundamentally, cryptocurrency is a phenomenon, not an asset class.

Join Our Newsletter

Receive updates from our blog, retirement plan industry events & news, media appearances, and the latest on Fort Pitt events.