Cryptocurrency often gets a bad reputation due to its potential environmental impact, its novelty, and its unusual origins. In 2020, only one percent of financial advisors recommended that their clients invest in any form of cryptocurrency. However, 2020 was a completely unprecedented year for the market in more ways than one.
The market’s crash in 2020 and the newfound interest in digital investments of the past 18 months have made crypto less of a question mark and more an investment opportunity, according to some experts. Others, however, warn that the new form of money is too volatile and new to be a sound investment, comparing it to the “Wild West.” Is Bitcoin the new gold rush? Or is the blockchain too risky for the average investor? Financial experts from Goldman Sachs, as well as Nobel-prize-winning economist Robert Shiller, weigh in this week.
What Is Crypto?
Cryptocurrency is a form of authorization that generates a unique digital token. Typically, this occurs in the form of “mining,” where a Bitcoin “miner” uses their computer’s graphics card to solve a complex math problem. By doing so, the miner uses a considerable amount of electricity. The idea is to make their power bill significantly higher to offset the gains they get when their system solves the problem and yields a digital coin.
These coins are then tracked by the blockchain, a series of networked exchanges that record the movement of every single coin in a given currency system. In theory, the blockchain is impossible to spoof, so the unique digital coins can’t be replicated and spent by someone who doesn’t actually have them.
The main concerns regarding crypto among regulators are its environmental impact and the anonymous nature of the currency exchange. Environmentally, cryptocurrency draws down considerable electricity while not actually creating anything of material value. Meanwhile, criminals can use cryptocurrency to engage in illegal sales or contraband without worrying about law enforcement tracking them.
What Do Financial Advisors Think of Crypto?
Some financial advisors have recently noticed their clients becoming more knowledgeable about crypto than they are. This is a bizarre moment for the market, as crypto investing is so new that many financial experts are still trying to learn about it.
“Anytime something becomes increasingly adopted that the price increases exponentially, and we’re starting to see that with bitcoin, and other cryptocurrencies, and I think that’s another bull case,” says financial advisor Ivory Johnson.
Today, financial advisors are trying to figure out ways to incorporate their clients’ crypto assets into their portfolios. For years, crypto has been under the radar. Amateur enthusiasts have driven the conversation around crypto, with little input from financial advisors. Now, many advisors are feeling the pressure to weigh in and bring some legitimacy to the conversations surrounding digital currency. But is there any legitimacy to be found in this strange new form of currency?
Expert Voices Concerns
Robert Shiller, an award-winning economist, spoke with CNBC’s Trading Nation on Friday to voice his concerns with the current state of the market. Shiller noted that crypto is ultimately very hard to pin down.
“That’s a very psychological market. It’s impressive technology,” Shiller told CNBC. “But the ultimate source of value is so ambiguous that it has a lot to do with our narratives rather than reality.”
One could argue that the same is true of paper money issued by a government, but cryptocurrency is another step removed from the type of fiat money that we’re all used to seeing. Federal Reserve notes, for instance, have the backing of a legitimately powerful institution: the US government.
Bitcoins have the backing of people who own Bitcoins, but no central bank guarantees their value. Shiller himself mentions that he’s thought about buying into crypto but has been hesitant. He may have even dodged a bullet. Friday, at the close of trading, Bitcoin was down thirty percent over the past two weeks.
Is Bitcoin a Good Investment?
The strength of Bitcoin, the most popular cryptocurrency, is a good bellwether for the state of crypto as a whole. And, generally speaking, investors are not confident about Bitcoin right now. The People’s Bank of China issued a warning against investing in Bitcoin, leading to the currency’s recent slide.
In the US, the opinion is similarly negative among established hedge fund managers. A recent survey from Goldman Sachs found that Bitcoin was the least favorite investment of the majority of CIOs they spoke to.
In spite of its unpopularity with Wall Street, Bitcoin remains extremely popular among amateur traders. Reports indicate that Bitcoin is currently one of the most traded assets on the market.
So, is Bitcoin a good investment? It’s new, it’s volatile, and it’s always on the edge of shooting up in value or crashing. Analysts are advising would-be investors to do their research. If you want to invest, be conservative about how much you’re willing to sink into such an unstable asset.