By: Jon Burckett-St. Laurent, Senior Portfolio Manager
Cryptocurrencies like Bitcoin have captured the imaginations of many investors, promising high returns and rapid gains. However, at Exencial Wealth Advisors, we have a different perspective. Despite the excitement surrounding crypto investments, we don’t recommend including Bitcoin and other cryptocurrencies in our clients’ portfolios. Here’s why.
The Lack of Fundamental Value
We contend Bitcoin and other cryptocurrencies possess no intrinsic value. Unlike stocks, which represent ownership in real companies and generate cash flows, or bonds, which pay interest, cryptocurrencies do not produce any income or represent ownership in a viable enterprise. Attempts to value Bitcoin based on metrics such as network nodes have failed to provide a clear rationale for assigning value. Our analysis indicates the way to profit from cryptocurrencies is by hoping to sell them at a higher price to a new investor. This makes the market highly speculative and akin to a game of musical chairs.
High Risk of Fraud and Regulation Issues
There are concerns that the crypto market is rife with fraud and lacks robust regulatory oversight. The lack of clear regulatory and tax frameworks can leave investors vulnerable to sudden government policy changes. Additionally, the number of crypto-related fraud schemes is alarming. With regulation lagging behind the pace of innovation, investors face significant risks from potential scams and legal actions.
Limited Practical Use
Despite popular belief, our assessment suggests cryptocurrencies offer limited practical use due to their extreme price volatility and high transaction costs. They are rarely used as a medium of exchange, and the supposed anonymity they offer is often overstated. Governments, commercial entities, and even criminals actively track cryptocurrency wallets, exposing owners to legal, tax, and security risks. The supposed "cold storage" solutions only partially mitigate these issues, further limiting the usability of cryptocurrencies.
Security Concerns
Cryptocurrencies may not be as secure as many believe. Blockchain networks can be vulnerable to attacks if an entity gains control over sufficient mining capacity. This could compromise the entire blockchain, leading to unauthorized modifications and potential theft. The high price volatility also makes cryptocurrencies unsuitable as a store of value or portfolio diversifier. Instead of providing a hedge against market downturns, crypto investments tend to amplify market risk.
Market Concentration and Manipulation
One of the most significant risks in the cryptocurrency market is the high degree of market concentration. A large portion of all Bitcoins is held by a relatively small number of entities, making the market susceptible to manipulation. New investors are particularly vulnerable to sudden market movements if a large holder decides to liquidate their assets.
Conclusion
While cryptocurrencies like Bitcoin have generated substantial excitement and media coverage, they do not fit our criteria for sound investment advice. At Exencial Wealth Advisors, we prioritize our fiduciary duty to provide the best objective advice based on current facts, not future promises. The lack of intrinsic value, high fraud risk, limited practical use, security vulnerabilities, and market concentration issues make cryptocurrencies speculative assets. We recommend minimal exposure to these speculative assets and focus on what we deem more reliable investment opportunities.
If you have any questions or would like to discuss alternative investment strategies, please feel free to reach out to your Exencial Advisor. We're here to help you make informed and prudent investment decisions.
Disclaimer: The information provided herein is for educational purposes only and should not be considered as financial, tax, or legal advice. The perspectives shared in this article are based on the author’s opinions and should be interpreted as such. They are not intended to be definitive financial guidance, and investors are encouraged to consult with a financial advisor who can provide tailored advice based on the individual’s circumstances and investment goals.
The content herein is being provided for illustrative purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of the information provided.
There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance
Exencial Wealth Advisors, LLC (“Exencial”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Exencial may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements.
Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 405-478-1971. Exencial is headquartered in Oklahoma City, Oklahoma at 9108 N Kelley Ave.