2022 has been the year of the “Black Swan” throughout the world of cryptocurrency. From the fall of LUNA to the insolvency of 3AC, Celsius, FTX and now BlockFi, the market has taken major hits in value and credibility. Each one of these events seemingly was viewed as a once in a lifetime event. The fact that the industry has seen so many of these events has led to an erosion of confidence by many retail and recreational investors.
Bitcoin has historically been billed as a store of value. Since peaking in November of 2021 at $69,045/Bitcoin, the cryptocurrency has seen its price per coin drop down to roughly ~$15,700 per token. Even for the hardiest of investors, dollar cost averaging through these tumultuous market conditions has been difficult.
Despite these seemingly major headwinds, institutional adoption has continued to increase for many Web3 projects throughout the space. Polygon (MATIC) has established major partnerships for NFT marketplaces with Draftkings, Adidas, The Walt Disney Company, The National Football League, and more. More and more adoption and investments are being made by the likes of Meta (Facebook), Starbucks, Adobe, and other major companies.
But where does this leave Bitcoin? As a store of value, is Bitcoin still the answer the average investor should be seeking? I reached out to two well established investment advisors to see how this past year has changed their outlook on Bitcoin for investors.
Allen Harris is the CEO and Chief Investment Officer at Berkshire Money Management (BMM), which manages hundreds of millions of dollars for their clients. Allen and BMM do not currently invest their clients’ funds into any cryptocurrency assets. I was able to pick Allen’s brain about some of his views on cryptocurrencies and the market in general.
Justin: Allen, What are your views on cryptocurrency, in general, as a part of your clients’ portfolios? Are they too risky for most investors?
Allen: In general, I do not invest my clients' portfolios in crypto. I am not an expert in the asset class. And it's a small one to focus on. The capitalization of the U.S. stock market is something like $46 trillion, and the total market capitalization of cryptocurrencies is about $900 billion (or 1/3 of all Apple stock).
I've invested in stock and bonds for 31 years. I can do so comfortably because I've adapted to change over those decades. But if crypto wins, I'd suspect that would be a tailwind for my more traditional investments. So, in a way, we're all indirectly invested in the future of crypto.
I'd argue that for most financially healthy investors (those who earn more than they spend, pay their bills on time, have sufficient savings), few investments are "too risky" if done in moderation and with an appropriate allocation. I've heard some say that crypto should comprise 1-3% of an investment portfolio. That seems like a safe zone for an already financially healthy investor.
Justin: Do you think of Bitcoin as a store of value?
Allen: I would argue that the value (not price) of Bitcoin has not changed in 2022. However, its perception has changed: Investors see value better today than they did. For those who are skeptical of crypto, they've further lost trust. For crypto investors, I believe the view is that coins with better use cases are going to become more attractive than the alternatives.
I'd say that Bitcoin is NOT a store of value. However, neither is any publicly regulated/traded stock. It's an investment. Apple, the world's largest company, lost over 20% of its value from peak-to-trough in the last year. That's not a store of value. And if that's not a store of value, then neither is Bitcoin. It's an investment.
I’m inclined to agree with Allen. Risk is unique to each investor, and everyone has their own situation. Advisors such as Allen and BMM must consider everyone’s circumstances but prefer to focus on what they are very good at: traditional markets.
I also had the pleasure of speaking with Paul Farella, Managing Director at Willow and Willow Crypto, to see his thoughts on the market and how it has changed over the past year. Paul and the Willow team provide both traditional and cryptocurrency related investment services.
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Justin: Paul, what are your views on cryptocurrency as part of your clients’ portfolios?
Paul: I stand by vast majority of crypto does not actually have value, but the remaining minority is truly society changing technology. In client portfolios, I view crypto in three ways: 1) as a speculative play with potential to boost client returns over longer time frames, 2) as a diversifier/alternative to lower overall portfolio correlations with traditional markets, and 3) for providing exposure to frontier technology, the implications of which are massive but have only just started.
For those clients who can stomach the volatility, risk, uncertainty, and have longer time horizons, I believe a small and managed allocation can be appropriate in the right circumstances.
Justin: Has your approach as an advisor changed throughout all of 2022’s Black Swan events?
Paul: We stand by the mantra don’t invest what you can’t afford to lose and to approach this space with an understanding that as nascent technology there is incredible risk. This hasn’t changed. While crypto is currently riddled with scams, we can simply look to some other game changing technology like the telephone (how many spam calls do you get a day?) or email (how much junk mail is in your junk box?) to understand that this is part (unfortunately) of the maturing process.
Justin: Is Bitcoin still really a store of value?
Paul: I believe so. The SoV narrative is closely tied with demographic changes and generational attitudes. While gold is often viewed as the traditional store of value, advances in technology and changing demographics make a strong case for the growing need of digital stores of value. Digitally native generations will naturally seek digital versions of value stores especially when those value stores allow for seamless global connectivity, exchange, and utility. The relevance of traditions stores of value comes into question with the advent and prevalence of global network connectivity in the digital age, though there is certainly room for both.
Asked another way, how many millennial or Gen Z gold bugs do you know?
Paul’s last comment is an interesting one. Millennial and Gen Z investors are quickly becoming larger and larger percentages of the investing bodies in the market. Their focus and emphasis on digital technologies is clear and relentless.
When asked about how the various Black Swan events of 2022 have impacted the market, Paul replied:
Most of the “black swan events” in 2022 are all connected and can be attributed to the rise of DeFi (decentralized finance) and its cooption by hedge funds and venture capitalists. Paired with a lack of regulatory clarity and a failure by regulators to put sensible rules in place. Centralized, non-transparent entities (3AC, BlockFi, Celsius, FTX, Genesis, etc…) took massive risks with customer deposits and funds. The circular nature of these firms lending to each other, using illiquid assets as collateral, pumped prices. Ultimately, their schemes collapsed, due the unsustainable nature of their transgressions.
From an optics standpoint it looks bad. These bad actors have done some serious reputational damage and probably knocked mainstream adoption back. The unfortunate part is that one of crypto’s main tenets is around trust minimization, but everyone trusting these third parties with their funds learned a very painful, hard, and unfortunate lesson. It really does highlight the importance of the “not your keys, not your coins”
No investment is without risk. So instead of asking, “Is Bitcoin really a store of value?” I think maybe the real question is — does it need to be, even in regards to black swan events? The biggest maturation in the world of cryptocurrency is seemingly the value in decentralized operations. Black swan or not, Bitcoin has and continues to be the leader in this area. As an individual investor or investment advisor, you must ask yourself: Is digital technology here to stay? Or is it just a flash in the pan?
I don’t think Bitcoin is a store of value – nor should it be. There are fewer and fewer Bitcoin being added to the supply and in circulation. There will only ever be a maximum of 21 million Bitcoin in existence. If the demand for Bitcoin stays at the same level or increases, then the price could appreciate considerably. However, regulations and other unknowns could completely hamper the value of Bitcoin just the same.
My bet? I think Bitcoin is here to stay. Its visibility and exposure at the institutional level increases on a seemingly daily basis. Nothing is immune to macroeconomic events, but smart money looks to identify winners during bear cycles, and I plan to keep it part – albeit small! – of my portfolio.
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