Steve M Wyett- CFA, Chief Investment Strategist, BOK Financial.
With speculation about a new crypto winter now heating up faster than a bitcoin in February, many retail investors are left scratching their heads. Bitcoin, or crypto assets more broadly, is a topic on which I am getting more and more questions as a chief investment strategist. In an environment where liquidity is more than plentiful, and short-term rates are near zero percent, there can be an irresistible desire to seek returns by taking risks. And, as witnessed by the steep price drop in May, cryptocurrencies are one of the riskiest assets out there today. If you are thinking this is the ultimate buying opportunity, there are a few things you might consider adding to your investment equation.
Overall, the subject seems to be divided between the believers and the non-believers. One must admit, despite the volatility in the first half of 2021, you don’t need to zoom out more than 12 months until you see some cryptos up multiples of themselves. And while the price of cryptos has increased immensely, the risks within crypto assets abound. Between legal, regulatory, cybersecurity and myriad options (over 5,500 different cryptocurrencies listed at present), there is a lot to keep an investor, and investment company compliance departments, up at night.
Today, the exchanges on which crypto assets trade are generally unregulated and have been subject to hacks and outright fraud. This is not the type of marketplace one can be comfortable making general recommendations to clients. In addition, the IRS is just now beginning to formalize guidance and potential reporting around the ownership and trading of crypto assets. One can be assured the IRS is looking at the increase in the value of crypto assets and considering how to make sure this increase is properly reported and taxed.
Another specter, one that knows quite a bit about currency and value creation out of thin air, might be waiting in the wings. The Federal Reserve doesn’t appear to take too kindly to being “out-currencied” and seems well on its way to developing its own central bank digital currency.
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That said, not all governmental and governmental-adjacent bodies are a hindrance. The Securities and Exchange Commission (SEC) and other regulatory agencies are working to provide more oversight to the crypto asset markets, which should allow these markets to become larger and more efficient. As this occurs, security around safekeeping as well as reduced transaction times and costs will broaden the ability of firms to invest. This will begin to set the basis for firms to provide recommendations within client accounts.
At the end of the day, there is a lot of work to do to get any cryptocurrency asset across the line from a fiduciary standpoint, meaning you probably won’t see it as an option in your 401(k) plan or discretionary investment account anytime soon. That said, many banks and wealth management providers, ourselves included, are exploring ways to provide access on their brokerage platforms.
In the meantime, bitcoin went from roughly $10,000 to $65,000 to $30,000 in 12 months, highlighting the extraordinary amount of volatility cryptos can exhibit. It’s certainly not for the faint of heart. Over the past decade-plus, the crypto asset market has seen a huge increase in value, but I would stress the importance of understanding crypto assets are still highly speculative, with some risks that seem very difficult to avoid and manage. As long as this remains the case — speculate responsibly. Invest only what you can afford to lose.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.