Cryptocurrencies are all the rage with the kids these days. With its newfound popularity, many are asking if it should be part of their portfolio. Truthfully it is a case of "fear of missing out". A lot of people know someone or know someone who knows someone who "made a fortune" on Bitcoin. First, understand that the person who made money on a cryptocurrency is just lucky. They bought an expensive lottery ticket and scratched off a winner. It is the wild west right now in the cryptocurrency game. People are gambling like crazy and there is likely a good amount of fraud occurring as well. There are just too many of these currencies popping up and its actually quite scary to see how much people are pouring money into something they don't understand.
Created in 2009, bitcoin (ethereum and bitcoin are the most relevant currencies in this space) was the first decentralized cryptocurrency and it's important to remember that eight years is a microscopic period of time in the investment world. While it's performance lately has been nothing short of breathtaking, over the past five years its daily annualized volatility is ~86%. That alone would panic most investors to sell. The stats show that since August 2010, the S&P 500 has declined 5% or more 15 times while bitcoin has suffered negative returns in ten of those corrections with an average return of -2.8% and a median return of -5.7%. It's important to remember that volatility tends to be higher in the earlier years as there is a limitedtrack record but daily price movement of 10%+ are very common.
The opinions on cryptocurrencies range wildly. Just recently, JPMorgan CEO Jamie Dimon critized bitcoin comparing it to Tulip mania and went as far as calling it a fraud. These are pretty harsh comments from one of the top Wallstreet CEO's. Keep in mind many banks aren't fans of cryptocurrencies as they cut out the middle man in transactions (mainly banks). A few analysts are calling for bitcoin prices to hit as high as $5,000 in 2018 and as high as $20,000 by 2022. These wide predictions underline the extreme volatility in cryptocurrencies. We actually think Dimon's comments are accurate regarding some of the recent cryptocurrencies to pop up offering ICO (Initial Coin Offerings).
The fact is for cryptocurrencies to actually become usable currencies they cannot have the type of volatility they are having. One of the reasons your local grocery store will not offer Bitcoin any time soon is they don't want to sell you volatility they are having. One of the reasons your local grocery store will not offer Bitcoin any time soon is they don't want to sell you a carton of eggs in the morning and have the Bitcoin you bought them for drop in value by 50% by the afternoon. Currencies can't work that way. In order for Bitcoin to be taken seriously the whole reason why people are buying it right now (hopes of dramatic increases) has to end.
At present, investing in cryptocurrencies should be viewed as pure speculation and not part of your core portfolio. Does this mean cryptocurrencies won't succeed over time? Of course not, no one knows as it is still very early in its history, but given its limited history and wild volatility consider it gambling which is fine as long as you understand this isn't something you should be doing with your core retirement.
As an aside, this video is worth watching and we agree about the Blockchain being the sustainable story here.