(Forbes) Cryptocurrencies were born back in 2009 in the wake of the Great Recession, but it seems only in the last five years have investors actually started taking this asset class seriously. And with good reason. It’s not uncommon for currencies like Bitcoin and Ethereum to drop as much as 40% in value in a span of just 24 hours. With that kind of volatility, there’s no mystery as to why investors who value assets that can stand the test of time haven’t exactly been snapping up the Dogecoin.
But setting volatility aside for a second (just for a second), should we really be scared off by the “new” of crypto? In the 1980s, we saw the introduction of derivative securities. No one understood how we were supposed to divide these securities into either interest-only or principal-only parts, and then repackage them… Back then, we likened it to taking a car apart and separating the engine from the chassis and the transmission. But then a strange thing happened — miraculously, we found that the pieces would have more value on the market than the actual car itself, and if we bunched all these pieces together, we could create a brand new security. And for a while, it seemed great, but we also saw the downside to these chopped-up-and-then-repackaged derivatives in 2008, when mortgage backed securities contributed to the Great Recession in a way that history will never forget. But my point still stands: New isn’t always bad. But it is something to be wary of.
A Godsend For The Third World, A Gamble For The First
I’ve been thinking about this a lot lately in the context of crypto, because even though we might not understand how it works, and even though we might not fully understand how to value it right now, it’s here to stay. There will always be something new on Wall Street that we don’t fully trust or understand, but sometimes those little mysteries become very big parts of the financial fabric of our world. One big reason why I think crypto is here to stay is the unbanked. Approximately 56% of the world’s population — 1.7 billion adults — have no access to a bank, according to data released by the World Bank.
Based on these numbers alone, it’s clear that the world needs some form of digital, immediate, person-to-person payment option that knows no borders or language. Cryptocurrency offers that very opportunity. For the millions of people in developing countries like Africa, China, India, and Pakistan who can’t simply run to their local bank branch (how many times have you taken that simple errand for granted?), crypto presents a solution. And if the history of the stock market has taught us anything, it’s that investments that present solutions, particularly for such a large swath of the population, are investments that should be seriously considered.
Just how seriously? Some workers now have the option to invest in cryptocurrency as part of their 401(k) offering. 401(k) provider ForUsAll Inc. made headlines last month when it partnered with the institutional arm of Coinbase Global, allowing workers with ForUsAll-administered plans to invest up to 5% of their savings into cryptocurrencies. While ForUsAll is a relatively small player in the retirement assets landscape (they manage $1.7 billion in retirement plan assets, per the Wall Street Journal) their embracing of crypto as a part of someone’s long-term financial future helps to legitimize this asset class as something that’s truly here to stay. If crypto starts popping up in more Americans’ retirement plan offerings, then doesn't that speak to the fact that this often maligned, often volatile new kid on the block is now, well, mainstream?
All That Glitters…
Cryptocurrencies have value because the world thinks they have value. There’s no gold standard backing up any of it. There’s no tangible coin, no tangible asset. But you could say the exact same thing about countless other assets — their value is driven by what other investors think their value is. So, can I see the value of crypto? Absolutely. But it still carries risk and a level of unprecedented competition that should be seriously considered — especially before making a substantive investment with your retirement assets.
Although I feel this should go without saying, I’m going to say it anyway: your retirement savings should always be money that you can depend on for the long haul — not money you’re gambling with. And, yes, any money you have in the stock market is technically a gamble, but not all investments are created equal. With crypto’s historic volatility, there’s no way to tell what the value or risks with a particular currency will be. The future security and advancement of blockchain technology is still uncertain, and there are a lot of question marks around the stability of certain currencies — do you really want to put yourself in a situation where, when block miners lose access to power, you lose your money?
The Losses Aren’t Just “On Paper”
Let’s say you’re not investing in cryptocurrency as part of your retirement portfolio, but you are interested in getting in the game. That’s fair. But what happens if crypto becomes more mainstream, yet retains its current level of volatility? Here’s an example: You sell your house for a cool $1 million in an all-crypto transaction. The money is instantly deposited into your crypto wallet. It’s easy, it’s painless, and the transaction is virtually instant, without some of the traditional bank fees involved that we’ve all come to expect… But the next day you wake up and see that the balance in your account is suddenly $600,000, because, guess what? The Crypto market took one of its famous 24-hour dives, and now your wallet is worth 40% less than it was when you went to sleep the night before. Will it come back? Maybe. Is this the kind of gamble you want to be taking? Only you can decide.
A Place For Everything…
Of course on the flip side of that story are the incredible benefits that crypto can bring to other parts of the world. In some countries, people walk for days to access a bank in order to cash their paychecks, and they do so with zero guarantees that the bank will even have sufficient cash on hand when they arrive. The 1.7 billion of us without access to banks remain largely disconnected from the global economy, yet often these same people are the very heart and entrepreneurial soul of their local communities. Reliable digital currencies could increase productivity and change the lives of countless individuals, all of whom have much better access to a cell phone than they do to banks or ATMs.
Believing In The Future
If you think that cryptocurrency (or at least the blockchain technology that backs it) is here to stay, keep one thing in mind before you invest: Diversification is king. If you’re going to participate in this marketplace, look into a crypto-stacked mutual fund or ETF. And do some research into the best investing options for you, no matter your age or risk tolerance.
And when it comes to investing in the world of crypto, I’ll tell you what I tell my clients when they invest, in any asset class: “Past performance is no guarantee of future results, and investing involves risk.” In my opinion, any crypto-based 401(k) offering should come with that same disclaimer.
