Cryptocurrencies were back in the headlines throughout 2020 and into 2021, with some high-flying returns that attracted investor attention. Tesla CEO Elon Musk tweeted support for Bitcoin, and a few of the largest university endowments have begun to endorse cryptocurrencies as potentially viable investments. In times like this, with growing concerns about potential U.S. dollar devaluation and increasing inflation, investors often turn their eye to alternative options for hedging these risks. Given that cryptocurrencies are gaining broader acceptance, it is not surprising to see some investors considering whether they deserve a role in portfolio construction. So where do cryptocurrencies fit in?
At this point, we struggle to see them as anything other than a speculation. For clients concerned about a falling U.S. dollar or inflation, we believe our current approach to protecting against those risks (diversification, scenario planning) is both more effective and reliable. For context, our investment framework revolves around a fundamental approach to building globally diversified portfolios across asset classes, each serving a distinct role in the portfolio (some targeting the aforementioned risks):
Furthermore, as fundamental investors, we invest in assets that we can reasonably value, that offer transparency and defined liquidity, and finally, that we can be confident are subject to a reasonable amount of regulatory oversight and legal protection, to minimize the risk of price manipulation. We have a very difficult time applying any of these criteria to cryptocurrencies. Even as currencies, cryptocurrencies fail to meet the requirements to be a reliable “store of value” or “unit of account.”
For our Chief Investment Officer’s words of caution on Bitcoin’s investment merit, please read his analysis here >
As the capital markets continue to rally and valuations get increasingly stretched across nearly all asset classes, thus muting future returns, investors have inevitably cast a wider net. More speculative investments have lured investors after delivering spectacular short-term returns, including cryptocurrencies, special purpose acquisition companies (SPACs for short), and “meme” stocks. At times these have been driven higher by an army of retail investors, fueled by information that is quickly shared via social media and zero-cost trading.
These spectacular returns have reintroduced the age-old, dangerous behavioral risk: FOMO, or Fear of Missing Out. FOMO can tempt investors to take risks beyond what they would normally consider acceptable in search of incremental return. This behavior is often reinforced by reports that “smart money” endowments are making these same investments (likely in small size, limiting downside). Our guidance to clients and investors broadly is to regularly revisit your risk tolerance and return objectives and ensure that your portfolio remains well aligned with these objectives. If you find yourself lured into taking increasingly risky positions, we ask that you take a hard look in the mirror and ask yourself whether you are falling victim to FOMO.
We encourage you to reach out to our advisory team if you have questions about your portfolio or want to discuss this topic further.
Insight Newsletter—Spring 2023
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Effective May 30th, we will relocate into a beautifully renovated suite designed with more space for hosting visitors and collaboration among team members. We look forward to hosting our clients and friends of the firm in this new office.
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