January 30, 2018 |
Founder & CEO, Scottsdale Wealth Planning Inc.
I have been watching the sharp rise in the market value of bitcoins over past months with cautious curiosity and the intense media coverage and public reaction with great interest. While cryptocurrencies have historically held niche appeal with digital enthusiasts and people who believe the age of fiat currencies is coming to an end, a growing number of investors are exploring whether electronic money deserves a place in their portfolios. Here is my assessment.
Portfolios are designed with combinations of stocks and bonds to ultimately reach an investor’s goals, long- and short-term. Stocks and bonds are evaluated for expected returns, including capital appreciation and potential cash flow in the forms of dividends and interest. While holding cash does not provide a positive expected return to a portfolio, it is used regularly to pay for goods and services. The sharp rise of bitcoin in 2017 and the price fluctuations that have followed since hitting its high of more than $19,000 in December, illustrate the volatility at this time. Thinly traded and absent of large institutional investors, there is an increased risk of price manipulation. Ultimately, the uncertainty of an expectation on return could markedly detract from performance and achieving an investor’s goals. Bitcoin also cannot be considered a practical substitute for cash since very few good and services are prices in bitcoin at this time, and users would be subject to volatility in the bitcoin to traditional currency exchange rate.
So, do we expect the value of bitcoins to appreciate? Maybe. But there is no reliable way to predict by how much and when that appreciation will occur, making it a less attractive investment option for a goal-oriented portfolio. And in the meantime, bitcoin faces increased competition from smaller, less expensive crytpocurrencies and scrutiny from regulators.
None of this is to deny the exciting potential of the underlying blockchain technology that enables the trading of bitcoins, although these effects may take some years to emerge. In the meantime, I’ll be watching bitcoin and similar cryptocurrencies.
Paul Ohanian is founder and CEO of Scottsdale Wealth Planning, Inc. an Old Town-based registered investment advisor and Certified Financial Planner® with more than 25 years of experience in providing financial services to the Valley. Visit him at scottsdalewealthplanning.com.
Information contained in this article is for informational purposes only and should not be considered investment advice. Advice may only be provided after entering into an advisory agreement with Scottsdale Wealth Planning. Information is at a period in time and subject to change. Scottsdale Wealth Planning’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.