What We're Thinking: Cryptocurrency and Blockchain Update

 

In October of 2021, we posted comments on “Cryptocurrencies and Blockchain.” It began with a 1994 quote from Peter Lynch, the legendary manager of Fidelity Magellan Fund. He said, “If you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it.”

This is an update to that post.

First, if you’re suffering from periodic bouts of FOMO (fear of missing out), relax. When the 2021 post was written, Bitcoin was trading at about $61,000. About a month later it peaked at about $64,000. From there, it fell to about $17,000 by the end of 2022. That was a 73% loss. If that was the Dow-Jones Average, we'd be talking about a 29,000-point loss!

The good news is that the price has recovered to about $62,000. So, net net, holders are about even in nearly three years. In the meantime, your money market fund has served you well. Like I said, if FOMO tugs at you, relax.

But there's more to this story. An important change has occurred since 2021. Government regulators have approved the creation of cryptocurrency ETFs (exchange traded funds). This made it easier and safer for anyone with a brokerage account to own a crypto security. This is what the big asset management companies like Blackrock, Fidelity, and Schwab have been arguing for. And they have quickly followed up by offering a wide range of crypto products.

Vanguard is not playing. Their view is that "Crypto is more of a speculation than an investment. This is at the root of our decision to not offer crypto products. With stocks, you own a share of a company that produces goods or services, and may also pay dividends. With bonds, you get a stream of interest payments. Crypto is an immature asset class with no inherent economic value, no cash flow, and extreme price volatility.”

Let’s be clear. We’re not morally opposed to betting, speculation, or lotteries. They’re fun. Entertaining. There’s a remote chance of a big payoff. Want to speculate? Fine. It’s your money. Just don’t kid yourself about it being an investment.

Blockchain
Blockchain is the database technology that enables decentralized management, anonymity, authentication, forgery resistance, record-keeping, and verified exchange of assets among mutually suspicious individuals. Now we’re talking. There are a lot of mutually suspicious people walking around.

Blockchain is the underlying technology that supports the creation of cryptocurrencies like Bitcoin. But it has many other applications. It's already being used in contracts, medicine, finance, real estate, travel, insurance, entertainment, supply chain management, and AI (artificial intelligence) applications.

No one owns blockchain. It’s like no one owns the 'https' in a browser address. But anyone can use it. Again, from Vanguard, “We have a lot of interest in blockchain. We believe its application will make capital markets more efficient, and we’ve been actively involved in research to use it."

Summary
Cryptocurrencies are a high-risk, speculative game. That has not changed in three years. But we’ll continue to monitor it.

Blockchain is about building more complex and efficient databases, some of which support the creation of cryptocurrencies. In the meantime, Apple processes 285 million transactions every day on its blockchain. JP Morgan has launched its own blockchain called Onyx. Nvidia is a supplier of chips that help build blockchains. And there's an obvious link to AI tools.

So, if you hold a total stock market index fund, the S&P 500, or an international stock index fund, you already have an ownership stake in the creation and use of blockchain technology. Banish FOMO.

This is great news for people of any age who just want to save and invest for future goals. You don’t need to do anything except save aggressively, invest in low cost, broadly-diversified global index funds, and stay the course. 

That can be explained to a 10-year-old in less than two minutes. You’re not 10. We have more than two minutes. We’re here. All-in. Let’s talk.

 

 James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262

 Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.