The crypto conundrum: Insights and cautions for investors

Although a lot of the buzz around cryptocurrency has died down since the pandemic, it still remains one of the most debated and misunderstood areas of investing. Unlike the relatively straightforward use cases of AI technology, the role of so-called digital currencies in an investment portfolio remains much more unclear and fraught with risk.

The allure of cryptocurrency

Cryptocurrencies, particularly Bitcoin, have been hyped as revolutionary, offering a way to democratize property rights worldwide. Anyone with a digital device can now own property digitally, without the need for traditional banking systems. This is a powerful idea, especially in regions where access to banking is limited.

Despite this positive development, the reality is cryptocurrencies are not stable stores of value. Their prices can swing wildly from day to day, which defeats the primary function of a currency. So, while it’s tempting to categorize Bitcoin as a modern-day gold or currency, it’s really more accurately described as a speculative asset.

Investing versus speculating

This brings us to a crucial distinction. As with any investment, understanding what you’re buying is essential. The intrinsic value of cryptocurrencies is notoriously difficult to establish, making it nearly impossible to determine if the asset is under or overvalued at any given time. This uncertainty means that crypto is a gamble, not an investment.

In our previous discussion on AI investments, we stressed the importance of understanding the price paid versus the value provided. With crypto, this basic investment principle becomes challenging to apply. Which means that, for most investors, especially if you’re looking for stable returns, crypto likely won’t fit comfortably within a traditional investment strategy.

Risks and regulations

The regulatory environment for cryptocurrency is also still in its infancy and changing all the time at home and in different countries. This creates an added layer of risk so that future regulations could favourably or unfavourably affect the value of cryptocurrencies. Plus, the security of digital wallets and the potential for hacking add layers of risk that are less common with more traditional investments.

For these reasons, we don’t proactively recommend cryptocurrency investments, whether directly buying crypto or any of the ETFs now available. We still may support clients who express a specific interest in this area if they understand the risks. But when all is said and done, we believe exposure to crypto should be limited and adequately hedged with more stable investments.

Keeping things in perspective

If you’re still excited about the potential of cryptocurrency, recognize it for what it is: a gamble. Remember to keep a balanced perspective, recognizing both the potential for high returns as well as the risk of significant losses. Think about the early days of dot-com investments in the 1990s or more recently, marijuana stocks. Both offered great potential and both resulted in substantial losses for many.

It’s also worth being reminded that investing should never be driven by a fear of missing out (FOMO) or the temptation of quick gains. For most investors, especially those with a conservative or risk-averse profile, the safe approach is to watch from the sidelines or engage only minimally. The landscape could change, but for now, cryptocurrency remains a completely speculative asset — best to approach it with caution and skepticism.

Would you like to chat about your investments? Reach out to us anytime — we’re always here to help.