Should you be investing in crypto?
We’re leaning into the guidance of Goldman Sachs about what makes an asset investable. If something doesn’t meet any of these 4 criteria, it’s a no in our books.
Generates steady, reliable cash flows on a contractual basis - like bonds or a cash deposit that earn interest. While some crypto currency exchanges do have lending arrangements they are incentives and not legal obligations, so criteria 1 is a NO.
Generates earnings through exposure to economic growth - like stocks/equities. Unlike stocks that make economic profits that underpin their price trajectory, cryptocurrencies do not generate any underlying earnings. Criteria 2 is a NO.
Provides a store of value that is consistent and reliable hedge against inflation - like gold. Crypto is currently more like a financial engineering project with no value underpin and as such over the 15 year history of crypto there isn’t any evidence yet that it will become a store of value. Ask yourself: “What is the value of a Bitcoin?” Not the price, but the value. Criteria 3 is a NO.
Hedges against volatility in other types of assets. Investing in crypto is a much wilder ride than being invested in stocks - about 3 times more volatile without a history of earning 3 times the return. Bitcoin has also behaved more insync than opposite to equities, so when the stock market has gone down so has Bitcoin at the same time as can be evidenced in the chart below. Criteria 4 is a NO.
Bitcoin vs S&P 500 drawdowns, Source: Goldman Sachs
At this stage we don’t consider crypto currencies an investable asset class. If you’re still curious about it, it’s probably healthier to treat it like a gamble and play only what you can afford to lose.