By Tim Courtney, Chief Investment Officer
Cryptocurrencies made headlines recently with the Luna crash, which completely devalued the coin, and months of record volatility that left investors with valuations lower than expected.1 In response, we’ve received many questions from clients about our methodology and recommendations, which we will aim to address as part of this commentary.
As discussed in last week’s commentary, we consider cryptocurrencies as speculative assets because they produce no cash flow and their price is solely determined by supply and demand. However, although cryptocurrencies have no intrinsic value on the surface, there is a valid use case for them as they are easily transferable assets with constrained supply. Using blockchain technology, digital funds can be securely moved outside the traditional financial system and provide parts of the world with limited banking services access to currencies.2
While there are positive uses for cryptocurrencies, they are also highly vulnerable to scams, skewed trading patterns and market saturation. MonkeyPoxInu is the latest scam that caused investors to lose over $400 million in a matter of days before bottoming out.3 Although Bitcoin has a limited supply, there are tens of thousands of other cryptocurrencies, with a large portion being no longer active. 4
As with any endeavor, it helps to be first to market with the latest product, service or solution. However, as history has shown us time and time again, the first doesn’t always become the consumer’s favorite. In terms of cryptocurrencies, it’s very likely there will be viable solutions to the current problems impacting users and investors, but we are not there yet.
Instead, this period surrounding the speculation in cryptocurrencies is reminiscent of the early days of the internet. When many dotcom companies came into existence, a good portion ended up being scams or carrying no value. In a parallel, cryptos are at this stage with more than 19,000 currencies in existence, and many with little to no valuation. 4
As such, it’s beneficial to have this landscape of cryptocurrency investors collectively working to try to bring value to the economy, and even our lives. The latest events in the cryptocurrency world are showing the market at work. We have to be aware that as the market is churning, the earliest doesn’t always mean the best. Not all companies first to market make for wise investments.
Because of existing problems with the current generation of cryptocurrencies, we are not ready to recommend adding these to portfolios. As investors consider providing capital to cryptocurrencies, it’s essential to understand the risks and ensure your portfolio is well-diversified. If you have any questions, please contact your Exencial advisor.
- CNBC (5/17/22) — Investors withdraw over $7 billion from tether, raising fresh fears about stablecoin’s backing
- Investopedia (3/5/22) — What is a blockchain?
- Financial Times (4/24/22) — Further reading
- CNBC (6/3/22) – Crypto firms say thousands of digital currencies will collapse, compare market to early dotcom days
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