In determining whether cryptocurrency is right for them, many people are starting to question if cryptocurrency is in fact a store of value.
In essence, what they’re asking is whether crypto can help them protect their wealth, even during the coming economic meltdown.
Many hear precious metals and cryptocurrency work nicely together in a crisis investment portfolio, and conclude that crypto and precious metals are basically the same asset class. And that can cause a lot of confusion.
So, let me clear up this confusion.
Cryptocurrency is Complementary to Precious Metals
Cryptocurrency is complementary to precious metals – it’s not one and the same.
People have long clung to precious metals whenever our financial future seems in doubt, and correctly so. Precious metals have already been shown to be a store of wealth in crisis scenarios.
So, what function does crypto serve in a crisis portfolio?
Personally, I have always thought of savings in three buckets – emergency fund, dream fund, and aggressive growth fund.
Your emergency fund should be a minimum of three to 12 months’ worth of expenses in case you lose your job, get sick, get into an accident, etc.
Your dream fund is your second bucket of savings. You’re not going to live forever, so use this cash reserve to fund to your dreams – travel, recreation, toys, and so on.
Finally, we have your aggressive growth fund. You would put this money towards aggressive, speculative investments that are high-risk, high reward.
From this, you can probably deduce that cryptocurrency makes for the perfect “aggressive growth” fund. Of course, I’m not suggesting anyone play with money they'd mind losing.
There’s an article on New Money Review that explains both the upsides and downsides of crypto investing, but as they explain, some of the main benefits of crypto investing include:
- Precious metals can be purchased using digital currencies.
- Gold is a solid portfolio diversifier.
- Cryptocurrency allows for an efficient transfer of value.
- Cryptocurrency has brought a lot of people who might not otherwise be interested in investing, into the investing world. Precious metals have stood to, and already have, benefited from crypto.
Cryptocurrency is Speculative
What do I mean by “speculative?” I mean that there’s an inherent risk involved in the investment. As I said earlier, “high risk, high reward.”
Sure, the value of crypto has basically skyrocketed this past year, but that doesn’t mean its value will always be going up.
Adam Levy sums it up nicely in the intro to his article on The Motley Fool:
It’s possible to get filthy rich by investing in cryptocurrency. But you could also lose all your money. How can both of those things be true? Well, like most investments, crypto assets come with a host of risks but also vast potential rewards.
But what exactly are the risks? I will summarize Levy’s points below (though I don’t agree with all of them):
- Cryptocurrency exchanges have been prone to hacks and other criminal activity. Would love to see the facts on this. I have not found any information to confirm this rather audacious statement.
- Frauds and scams are rampant in the crypto industry. Levy claims many investors are making lofty promises they simply can’t deliver on. Personally, I would not rely on financial services for crypto investing.
- Online storage seems risky. Which is why many are turning to cold storage options like thumb drives. Of course, you can still lose your private keys, even if your crypto is stored on an external device.
- Not every crypto project will succeed. On this point I agree. Not to mention, the government may be looking to crack down on crypto (the government doesn’t like it because it reduces their ability to finance their operations through inflation – to me, that’s a reason to invest!). I feel that time is coming, but it’s not going to be in the immediate future.
- Cryptocurrency is still new. This is kind of like saying “a certain car manufacturer has a new model, and because it hasn’t been shown to be reliable yet, I’m not going to buy it.” Ironically, those who play it safe aren’t going to reap the rewards of crypto investing, because by that point, it might be fully regulated and under government control.
Market Corrections & Elon Musk
Market corrections have always been a part of crypto’s short history, so the recent correction shouldn’t come as a surprise to anyone who has been actively learning about, and investing in, crypto.
Last week, Forbes staff writer Jonathan Ponciano broke the news that crypto losses eclipsed $1.3 trillion. Headlines like that could obviously put you off from investing altogether.
But anyone with a brain can see that, as crypto goes mainstream and adoption rises, its value is only going to skyrocket, and by the end of the year, even conservative estimates show that the value of Bitcoin will rise to $100,000 (it started the year at $30,000).
And let me point out the irony, that it was the same Forbes that reported on this.
For better or for worse, Elon Musk’s commentary on cryptocurrency has also played a part in the market’s confidence.
Here’s a thought. It is my opinion (which is also backed by experts) that Musk is making the same mistakes a beginner crypto investor would. Meaning, he doesn’t know a whole lot more than you do, especially if you’ve been at this a while.
Don’t give too much credence to what Musk says, unless he’s your literal business partner or advisor. There will continue to be market corrections throughout the year, no doubt, but the overall value of cryptocurrency should triple by the end of the year.
So, is cryptocurrency a store of value? No, it isn’t, and that’s the wrong way of looking at it, especially given that you stand to gain a lot more from it should its value continue to rise.
But the government seems determined to fund their operations through inflation, which may result in an economic crisis of unprecedented proportions. That’s where the crypto asset class shines and it’s my opinion that it will outperform the stock market by a huge margin.
Crypto is a risky investment. But it can have high yields. Use your aggressive growth fund if you’re going to invest. And don't forget to put some money into precious metals.
- CoinDesk, BitCoin Price, https://www.coindesk.com/price/bitcoin
- The Motley Fool, Is Cryptocurrency a Good Investment?, https://www.fool.com/investing/stock-market/market-sectors/financials/blockchain-stocks/is-cryptocurrency-good-investment/
- New Money Review, Bitcoin: competitor or complement to gold?, https://newmoneyreview.com/index.php/2018/05/16/bitcoin-competitor-or-complement-to-gold/
- Forbes, Crypto Crash Intensifies As Losses Eclipse $1.3 Trillion Just Two Weeks After Market’s All-Time High, https://www.forbes.com/sites/jonathanponciano/2021/05/23/crypto-crash-intensifies-as-losses-eclipse-12-trillion-just-two-weeks-after-markets-all-time-high/?sh=5da8398b7407
- Forbes, Bitcoin Price Prediction: Why Bitcoin Could Be About To Soar To $100,000, https://www.forbes.com/sites/billybambrough/2021/04/28/bitcoin-price-prediction-why-bitcoin-could-be-about-to-soar-to-100000/?sh=168b9fe458fb
- Forbes, The Week Crypto Crashed – Market Drops $700 Billion After Chinese Crackdown And Elon Musk’s Environmental Worries, https://www.forbes.com/sites/roberthart/2021/05/19/the-week-crypto-crashed---market-drops-700-billion-after-chinese-crackdown-and-elon-musks-environmental-worries/?sh=37ffc28229fe