What is Crypto and Should I Own It?

What is Cryptocurrency?

At its most basic level, cryptocurrency is a digital asset designed to work as a medium of exchange. Unlike the U.S. Dollar, it is not backed by any government authority or tangible asset.

• Who controls it? Most cryptocurrencies are decentralized, meaning no single bank or entity manages them.
• Is it “real”? Its value is not based on cash flow or profits, but on “belief” and the mechanics of supply and demand.
• Is it a currency? While the name implies it, cryptos do not currently function as actual currencies and are not universally fungible.

The Financial Landscape: A “Wild West”

The crypto market has often been described as the “Wild West” of finance due to a lack of regulation and oversight.

• The FTX Collapse: In November 2022, FTX—once a $38 billion conglomerate—filed for bankruptcy after it was revealed they were using customer assets to fund a sister trading firm.
• The “Arcade Token” Risk: Many platforms create their own tokens, like FTX’s “FTT”. These are essentially no different than tokens used at an arcade; they are not dollars, but are used to access features within a specific exchange.
• The number of digital tokens has reached about 50 million, but less than 20,000 actually trade on any recognized market and only about 100 of those have generated actual net gains for investors. Outside of Bitcoin and Ethereum it’s very much a minefield.
• Contagion: When one major player fails, it often triggers a domino effect, leading to bankruptcies at other lenders and forced markdowns for hedge funds and pension funds.

Complexity, Fees, and Liquidity

Beyond the headlines, the structural reality of trading crypto often involves higher hurdles than traditional investing.

• Hard to Understand: Many market activities in crypto resemble gambling rather than disciplined investing. Instruments like tokens only provide a “veneer of quality” to balance sheets and are often used in ways that would be illegal for U.S.-based brokers.
• Illiquidity: Until recently, high fees and low liquidity hampered the crypto market. While some ETFs have improved this, many individual assets still struggle with wide buy/sell spreads and low trade volumes.
• Higher Costs: Fees remain a significant concern; for instance, the oldest Bitcoin fund carries a high fee of 1.5%. This is substantially higher than the fees associated with traditional diversified investments.

Is Crypto a Hedge? (The Gold Comparison)

Many advocates call Bitcoin “digital gold,” suggesting it is a hedge against stock market crashes. However, the data tells a different story.

• Positive Correlation: While crypto is sometimes sought for non-correlation, it failed to provide this in 2022, falling alongside traditional markets.
• Stability Gap: Bitcoin is noted for its extreme volatility and unpredictability. One major fund shows a standard deviation—a measure of risk—of over 60%, which is vastly higher than traditional safe-haven assets.
• Broken Narrative: Financial experts note that Bitcoin’s narrative and its relationship with gold are “broken,” as it cannot be valued, only priced based on mood and momentum.

Why It Isn’t Appropriate for Most Investors

While we have seen increased institutional adoption and the approval of Bitcoin ETFs in 2024, our firm maintains a cautious stance.

• Speculation vs. Investing: We view crypto as a “lottery ticket” rather than a professional investment.
• Extreme Volatility: The crypto complex fell roughly 60% in the first ten months of 2022 alone.
• Security Risks: The ecosystem is vulnerable to hacking, fraud, and money laundering. If an exchange fails, investors may have little to no recourse as client accounts are often frozen.

Our Bottom Line: We view Bitcoin as a “lottery ticket” rather than a core investment. For the high-net-worth individual focused on long-term results, the cons of extreme volatility and lack of transparency outweigh the potential for short-term gains.