Make sure you understand cryptocurrency before investing

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With the introduction of Bitcoin in 2009, much of the world became fascinated with cryptocurrency. In its first decade, Bitcoin reached the mainstream, becoming a household name. And more recently, on September 8, El Salvador launched Bitcoin as its national currency. Due to its popularity alone, many investors and financial advisers cannot escape the question: should we invest in cryptocurrency?

To get to the bottom of this, let’s start from the top first.

What is cryptocurrency?

Cryptocurrency is a digital currency created as a means of payment that bypasses the traditional banking structure. According to its creator (who used the alleged pseudonym ‘Satoshi Nakamoto’), Bitcoin was created to be a “peer-to-peer version of electronic (payments)”. . . without going through a financial institution. (bitcoin.org.)

Hunter Yarbrough

Bitcoin “mining” is the process of finding new bitcoin using sophisticated hardware to solve difficult mathematical problems. Miners are rewarded for their work with new bitcoins. However, most Bitcoin holders simply buy Bitcoin as an investment, assuming the price will rise.

There are thousands of digital currencies, with Bitcoin being the most widely used, accounting for almost half of the market share (coinmarketcap.com/charts.)

How much has he grown?

In 2011, a Bitcoin was worth around one US dollar. In April 2021, Bitcoin hit its highest price (so far) of over $ 64,000.

When running the numbers, Bitcoin has generated an average return of over 200% per year over the past decade. Compare that to the annualized return of the S&P 500 Stock Index – which has seen a stellar decade – of around 16% per year (finance.yahoo.com, Morningstar.com.)

It’s for you ?

While these returns are certainly incredible, we encourage you to keep several things in mind if you are considering investing in Bitcoin.

Evaluation. Entirely traded on sentiment, the cryptocurrency lacks economic fundamentals to support any valuation. Stocks, on the other hand, have an underlying value based on the company’s earnings, which provides a logical basis for investing. While some may state that buying cryptocurrency is a way to invest in blockchain (the technology behind crypto), owning Bitcoin does not give ownership of the underlying blockchain technology.

Performance. While the cryptocurrency may continue on its upward trajectory for some time, it is important to remember that past performance does not indicate future results.

Risk. Cryptocurrency is a very volatile investment. The prices can fluctuate considerably even in a matter of seconds and hence the risk is very high. Investors need to be comfortable with the risk of loss.

Story. What if tulip bulbs each cost more than the average annual salary? ‘Tulipmania’ really happened in Western Europe in the 1630s when Dutch investors started buying tulips and drove prices up dramatically only to see prices plummet. Or what about the dot-com bubble of the late 90s? The Nasdaq index quadrupled in five years and then fell 78% in two years.

Whether or not you decide to invest in Bitcoin, our goal as a financial advisor is to help you carefully guide your decision-making regarding a speculative investment. Please feel free to contact a financial advisor to discuss further or for general investment and planning advice.

Hunter Yarbrough is Executive Vice President and Financial Advisor at CapWealth. For more information on Hunter and CapWealth, visit capwealthgroup.com.

Drew O’Connor, CFA, CIPM, is Portfolio Manager at CapWealth Group, responsible for client portfolio analysis, investment research and performance reporting. Drew is an Investment Adviser Representative (IAR) with experience in client portfolio management, investment company research, due diligence, financial and performance reporting, investment advice, and financial data / software. For more information on CapWealth, please visit capwealthgroup.com.

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