Tim Courtney, Chief Investment Officer
In today's fast-moving investment landscape, cryptocurrency and artificial intelligence are stirring debates among investors and market watchers alike. Both sectors have been around for some time, yet recent developments have put them back in the spotlight, sparking excitement and speculation about their future value and impact.
At the start of this year, the Securities and Exchange Commission (SEC) approved the long-awaited spot bitcoin ETF from a slew of filers.1 This nod to cryptocurrencies marked a pivotal moment for the industry, enhancing liquidity and accessibility for investors. This regulatory shift has already seen Bitcoin's value soar, surpassing its all-time high of $68,000 in the early days of March.2 However, the fundamental question remains: what intrinsic value does cryptocurrency hold if its utility as a currency is minimal? Its rare use in transactions (outside of trading them) underscores a disconnect between its name and its actual application.
While Bitcoin supporters have been celebrating, we still classify cryptocurrencies as speculative assets—assets that neither generate cash flows nor serve a practical utility. While Bitcoin and others certainly could fulfill a utility, they are not currently and so we value Bitcoin using the old rule about speculative assets: it’s worth what someone is willing to pay for it.3
Shifting gears to AI, the buzz is equally loud if not louder. AI stands on the brink of potentially revolutionizing our economy, productivity and labor markets. Its promise to automate mundane tasks and inspire creative work has certainly captured the market's attention.4 Yet, as with crypto, AI's current real-world application and value creation are still in early innings. Despite the massive allocation of capital and human resources to AI development, its tangible outputs, particularly those generating significant cash flows, are relatively small. While we acknowledge AI's potential to reshape industries, the valuations associated with AI technologies and related companies reflect a market that views this potential as a certainty. Our investment strategy remains selective, preferring companies well-positioned to gain from AI adoption while tilting away high valuations that suggest, misleadingly, that there is no uncertainty with the technology.
The market's infatuation with cryptocurrency and AI has been compared to past manias. While each represents a distinct asset class, the clarity regarding their long-term trajectories and value propositions is murky. The market usually values certainty very highly, and offers lower prices for assets with less certainty. Yet, in the current environment, we’re seeing sectors with very uncertain futures handed premium valuations. This is a bet investors are making, and it is a big one.
As we navigate markets, we remain focused on identifying and capitalizing on opportunities grounded in cash flow generation and utility. Maintaining a balanced perspective and weighing the allure of emerging technologies against the fundamental principles of sound investing is critical. Should you have any questions or wish to discuss your investment strategy further, please don't hesitate to contact your Exencial advisor.
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