Over the past few years, you’ve probably heard—and read—more and more about cryptocurrency, including Bitcoin, Dogecoin, Ethereum, and many others. The investment team at Telarray closely monitors developments in this emerging universe, and we have strong opinions on it, which we’ll share at the end.
What Is Cryptocurrency?
When we talk about currency, we’re usually talking about a system of money used by a particular country. We may think about the physical currency we can carry in our wallets, or even gold and silver coins. So what is crypto? At the most basic level, cryptocurrency is a digital asset that is made scarce not by central bank policy (like government currency) or physical mining constraints (like gold or silver) but rather by encryption, which we’ll describe below.
What Is Bitcoin?
Bitcoin is the cryptocurrency that most people are familiar with. It was created in 2009 and was one of the first digital currencies to gain popularity. Like with other cryptocurrencies, there are no physical bitcoins. Instead, your balance is kept on a public ledger that everyone can access. This public ledger exists free from any particular government, exchange, bank, or clearinghouse, and gives rise to the term “blockchain” as a way to document transactions and balances in a decentralized way.
How Does It Work?
There are many flavors of cryptocurrency, but we will look at how Bitcoin works, which is the original and most popular iteration. Bitcoin works by generating arbitrary math problems, which must be solved by “miners” in order to create more bitcoin and validate transactions onto the ledger. These math problems are difficult to solve but easy to validate once solved. A network of miners is incentivized to work on these problems and then validate blocks (or lists of transactions) every few minutes, which keeps the system operating and continuously publishes a list of transactions so that records are kept, and coins cannot be double-spent.
There are countless other cryptocurrencies that purport to solve problems differently or more effectively than Bitcoin, but Bitcoin has tremendous momentum as a first mover. With most crypto, there is no central authority with the power to control or regulate transactions. There’s no concept of reversing or disputing transfers- all movements are permanent. Most crypto is inherently deflationary, meaning that there are caps on the number of units that can be outstanding, and the supply cannot be manipulated by any force other than the agreed upon algorithm used at the beginning of the process. Depending on your perspective, these could all be advantages or drawbacks.
The distributed nature of crypto (i.e., the blockchain) is very interesting from a technical viewpoint. We believe it’s likely this technology will continue to crop up in day-to-day life via banking, transaction processing, inventory control, and perhaps even less obvious areas like voting.
The investment qualities of crypto are less interesting for a firm like Telarray with fiduciary obligations to our clients. We acknowledge that vast fortunes have been made in crypto, but vast amounts of money have also been lost- often lost by those who can ill afford it. Our opinion at this time is that any allocation to crypto would either be too small to be meaningful or too large to manage the risk. Undoubtedly a tremendous surge in crypto prices might come again in the future. If it does, remember that times like this, with Bitcoin down over 50% year to date, will likely come as well!
We are not fundamentally opposed to cryptocurrency, but at Telarray, we continue to believe that a diversified portfolio free from direct crypto investment is the clearest path to your secure financial future. As always, we’ll continue to monitor developments on your behalf and are happy to help with any questions you might have on this or other aspects of your portfolio.