Here’s Why The “Crypto-Luddites” Are Wrong

Let’s step back from the daily white noise of the financial markets to reflect on an unstoppable trend that’s transforming the investment landscape: cryptocurrency.

Crypto has been racking up astonishing gains, but the segment also generates negative news about fraud and scandal. Below, I debunk a few myths about crypto, by examining the pros and cons. The upshot: Investors are foolish to ignore crypto.

First, let’s examine the lurid headlines about crypto that grab the lay person’s attention.

Binance chief executive Changpeng Zhao last year admitted to violating U.S. laws as part of a $4 billion settlement resolving a years-long probe into illicit financial activities at the world’s largest cryptocurrency exchange. The charges included money laundering.

Changpeng Zhao’s stunning fall from grace got me to thinking about the lay public’s perception of cryptocurrency. It also reminded me of Sam Bankman-Fried’s legal woes.

In one of the biggest financial frauds on record, FTX founder Sam Bankman-Fried was found guilty by a jury in November 2023 of stealing at least $10 billion from customers of his now-bankrupt cryptocurrency exchange. Sentencing is scheduled for March 2024.

The tousled-haired millennial was founder and CEO of FTX, which at its zenith was the world’s second-largest cryptocurrency exchange. FTX filed for Chapter 11 bankruptcy protection last year after the company imploded and panicked customers withdrew billions. Bankman-Fried had been praised in the financial media as a game-changing wunderkind. But now, he stands accused of seven counts of fraud and faces 115 years behind bars.

As Warren Buffett famously said: “Only when the tide goes out do you discover who’s been swimming naked.”

I’ve always harbored a healthy skepticism over crypto, but I don’t side with those who glibly dismiss crypto as a fad (or an outright scam) that will one day disappear.

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Love it or hate it, crypto represents a lasting revolution in finance, investing and consumer behavior. Consider this: Bitcoin (BTC) rose 156% in price in 2023 and its upward trajectory continues so far this year.

This whopping increase last year in BTC’s value largely reflected surging demand as crypto investors anticipated the approval and listing of Bitcoin exchange-traded funds (ETFs). This bullishness has extended throughout the crypto segment and gained steam in recent weeks when the SEC finally gave the nod to spot Bitcoin ETFs in January 2024.

I believe that every portfolio should have some sort of exposure to crypto, depending on risk appetite. But first, a quick re-cap of comments from crypto’s harshest detractors.

Billionaire super-investor Warren Buffett has compared cryptocurrencies to 17th-century Dutch tulip mania. Buffett’s late colleague at Berkshire Hathaway (NYSE: BRK.A, BRK.B), Charlie Munger, has publicly attacked Bitcoin, calling it “disgusting” and “contrary to the interests of civilization.” He said cryptocurrencies in general are “useful to kidnappers and extortionists.”

Bank of England Governor Andrew Bailey also warned about crypto coins: “Buy them only if you’re prepared to lose all your money.” Economist Nouriel Roubini called Bitcoin “the mother or father of all scams.”

I suspect many of these detractors will one day eat crow.

It’s undeniable that crypto is changing global finance and human society in a permanent way. The critics notwithstanding, proactive investors can leverage crypto (or its underlying technology) for profit.

And smart people are known to adapt. Warren Buffett has changed his mind about gold as an investment. He might do the same with crypto.

One “Master of The Universe” who recently pulled a 180-degree turn on crypto is Larry Fink, CEO of BlackRock (NYSE: BLK).

Larry Fink used to deride and laugh at cryptocurrency. He’s not laughing now. Fink has been making the rounds in the media, calling crypto “digital gold. BlackRock is home to some of the brightest minds in finance, and it’s now home to the iShares Bitcoin Trust (IBIT), which boasts new assets of $2.7 billion.

Overall, a record $2.5 billion flowed into crypto ETFs last week, with Bitcoin funds responsible for 99% of all the inflows, according to data reported on February 19 by CoinDesk. IBIT led the pack, with inflows of $1.6 billion.

According to research firm Statista, revenue in the cryptocurrencies market reached an estimated US $37.9 billion in 2023. This revenue is expected to show an annual growth rate (CAGR 2023-2027) of 14.40%, resulting in a projected total amount of US $64.9 billion by 2027 (see chart).

The inevitable demise of paper money…

One trend is certain: paper money is on its way out. Crypto is hastening the demise of old-fashioned cash and expediting the prevalence of digital payments.

Competition from cryptocurrency is prompting central banks around the world to forge digital versions of their national currencies. Ecuador has rolled out its own official digital money, with China, Japan, Sweden, and the Bahamas following suit to varying degrees. The folding paper money in your wallet is destined to become a relic.

Which is not to say that cryptocurrencies will replace the U.S. dollar as the world’s dominant currency.

Cryptocurrencies are only backed by the faith of the people who own them, whereas the U.S. dollar is backed by the U.S. government. Investors still trust the greenback, even during economic hard times. It’s why domestic and foreign investors scoop up trillions of dollars in U.S. Treasury securities, even when interest rates are low.

But crypto is becoming more common in a wide variety of financial transactions. It’s not just small purchases at point-of-sale terminals at retail stores. Electric car maker Tesla (NSDQ: TSLA), for example, accepts cryptocurrency for vehicle purchases.

As I’ve explained in previous columns, crypto is made possible through computer algorithms operated on super-fast platforms called “blockchains.”

Blockchains are replacing intermediaries such as bankers, accountants, and lawyers. Indeed, we’re witnessing the emergence of a new type of cryptocurrency called “stablecoins” that strive for stable values. The idea is that an entity will issue its own cryptocurrency that’s backed by a fixed asset (e.g., U.S. dollars or gold), giving it a stable value.

But keep in mind, the value of a stablecoin backed by, say, the dollar is still reliant on a government-issued currency. Dollars may decrease in overall importance, but crypto isn’t about to dethrone the U.S. dollar anytime soon.

Social media ecosystems are emerging that use stablecoins, whereby members of the social network can safely exchange cryptocurrency and engage in other commercial activities.

This trend spells opportunity for makers of ultra-sophisticated chips, especially graphical processing units (GPUs), that are used by blockchains. These GPU chips allow a computer to present graphics.

Blockchains have other uses. They let businesses store encrypted data in a ledger. Blockchains are used in finance, supply chains, and data storage. This gives the makers of GPUs for video games additional prospects in commerce.

Cryptocurrency users leverage GPUs to speed up the network. Major chipmakers have recently released several GPUs dedicated to cryptocurrency mining.

Direct investments in crypto coins or crypto-linked ETFs can be extremely volatile and unsuitable for risk-averse investors. But make no mistake: crypto is here to stay, in one form or another. Don’t be a “Crypto-Luddite.”

Our investment team will continue to keep an eye on this transformative technology, as its investment opportunities unfold.

Stock market action…

The main U.S. stock market indices closed mixed Wednesday as follows:

  • DJIA: +0.13%
  • S&P 500: +0.13%
  • NASDAQ: -0.32%
  • Russell 2000: -0.47%

Weighing on stocks were the minutes, released Wednesday, from the last Federal Reserve meeting. The minutes indicated that Fed officials are concerned about cutting interest rates prematurely, which throws more cold water on any notion that monetary loosening is imminent.

Accordingly, the benchmark 10-year U.S. Treasury yield (TNX) rose 1.17% to close at 4.32%. The recent rise in bond yields is bearish for equities.

Editor’s Note: As explained above, every portfolio should have some sort of exposure to crypto. But you need to be informed, to make the right choices. Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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