For a few years now, Ted and I have been asked about crypto currencies, what our opinions are & whether we recommend investing in the space. Of course, much of this was while crypto “values'' raged and the media acted like Don King hyping a boxing match, creating the illusion of easy money blooming in a dreamland future of “decentralized finance”. Now, the crypto world is waking up, hungover, in a landscape of vanishing “wealth” among fields of landmines. All while the promoters, celebrity hype men and criminals do their best to distance themselves from blame while pointing at others who were smarter than themselves, and at least as complicit.
So now we’re sharing our thoughts due to another question we’ve heard from a few clients recently: “We don’t have any of that, do we?”
Let’s Be Clear
So, before we dig into our thoughts, and most importantly WHY we have these views, let us answer this question clearly:
We do not and have not had any cryptocurrency in any portfolios under our management, both client and personal.
In fact, we’ve consistently taken an opposite stance, educating clients who’ve inquired why we don’t recommend cryptocurrency investments and if they still wanted to take those gambles that they would have to do so elsewhere, outside of our management, and be willing to lose all capital invested in those endeavors.
So now that we are clear, let’s talk about WHY. WHY have we never invested in crypto, even when stories of massive fortunes being easily and rapidly minted flooded the media?
Greater Fool Theory
First, we know of no current crypto currency in which any serious investor has been able to establish intrinsic value. And that’s for good reason. It’s magic internet money, created out of thin air much like a currency in a video game. Hardly an investable asset. More realistically a wonderful global experiment in greater fool theory. I’m not saying people who’ve bet on crypto are fools. Quite contrary, many who have are highly intelligent individuals and institutions.
What I am saying is that our clients don’t hire us to take fliers with their wealth. Internet money with no intrinsic value is one heck of a Hail Mary and Hail Mary’s are for Sundays, not your portfolios.
Core Tenants – The Sniff Test
Next, even if one were to suspend disbelief, cryptocurrencies have consistently failed to pass other key tenants to our investment processes. These include - Transparency, liquidity, prudence, volatility, regulatory compliance, and participant integrity (the industry is rife with grifters and bad actors). Put simply, time and time again, they just don’t pass the sniff test.
Sex Sells
In a world where sex sells, sometimes it’s good to be basic. No, not in every situation, but sometimes! And I would argue often when it comes to finances, simple is better. With all the hype around crypto, there was an air of FOMO (Fear of Missing Out). Media and paid spokesmen telling you that the old way of finance and building wealth is gone and you’d better get on this new sexier way or be left behind. Remember when Matt Damon interrupted the Super Bowl to tell you that “fortune favours the brave”? Sure, sounded sexy but MAN that was poorly timed…
Call me old fashioned but the strategy of owning a properly managed portfolio of equity and bonds over a long time has an unmatched track record for millennia! The challenge with that fact is today’s society yearning for instant gratification being at odds with immense wealth building strategies deployed by the likes of Warren Buffett, one of the wealthiest and most successful investors in the world. He accurately described this in response to being asked why even though having a simple process, why most investors don’t do as he does: “Because no one wants to get rich slow”. It's important for investors to understand that there’s no such thing as easy money and patience is king in successful long-term investing. But that’s just not sexy, now, is it?
Investing in the Tech vs. the Crypto
Now, there is an important distinction to be made here. There are interesting technological developments occurring in the crypto space. The infrastructures and blockchain work being developed does have use cases and potential opportunities. I am stating this because there is a difference between cryptocurrencies and the technology being developed in that industry, technology that could have future use in many industries separate from crypto.
Think of this as differentiating between Beanie Babies and the machines used to make them. While your weird Uncle Kevin might think that Princess Diana Beanie Baby he bought in the ‘90’s is the key to his retirement, a great component to an investment portfolio it is not. On the other hand, owning companies who develop machines and technologies to make toys could be. For instance, did you know McDonald’s is one of the largest toy distributors in the world (and has sold Beanie Babies, ironically)?
The tech is very interesting to see and monitor as it progresses and potentially real businesses, with real profits and value, could spawn as attractive assets to own.
Safety & Security: History Rhymes
Banks and brokerage firms can, and do, use your assets for their own operations. Take a moment to let that sink in. Brokerage firms legally use client assets in a multitude of ways, often. This was one of the major driving forces of the Financial Crisis of ’08-’09.
We’re now seeing this to be especially true of unregulated overseas exchanges as is common in the crypto space. Again, not passing our sniff test.
At Spurstone, the safety and security of client assets is of paramount concern. I know, everyone says this. The question is, who walks this walk? For us, the entirety of our business, the majority of Ted and my wealth, relies on this. Clients have heard me say “we take enough risk by investing; we need to limit the risk of where we hold those investments”. We do this by avoiding banks and brokerages.
You see, history may not repeat but it definitely rhymes. Ted and I experienced the systemic risk in the banks and brokerages during the financial collapse of ‘08-‘09. Many major banks and brokerages failed or were on the edge of failure due to their use of massive leverage, firm investments, and use of client capital to accomplish both. This was at the expense and risk of client assets. Sound familiar? Suddenly, crypto investors are learning terms like “contagion” and “counter-party risk”, terms that were hot topics in ’08-’09 but unfortunately most investors have forgotten.
Most people don’t realize there are alternatives to banks and brokerages for investing. We greatly prefer the use of a Private Trust Company, specifically to avoid these risks and ensure a much safer environment for custody of our client assets. We have no current business case to recommend custody at traditional U.S. brokerages and that would be even more true for our lack of confidence in retail investors using international crypto brokerages. I’m happy to share much more detail on this topic but will save from writing the book on this today.
So, at the end of the day, it’s important to remember a core tenant and goal of our firm with your wealth. We actively seek to build unbreakable wealth. With cryptocurrencies diametrically opposed to our investment beliefs, and arguably damaging that core pursuit, we can’t recommend investing in cryptocurrencies and therefore we have no investments held in them. We currently view crypto not as an investment, but as a gamble. While some bets pay off, and some pay big, regularly gambling is a losing proposition that we have no interest in entering.
I hope you’ve found these thoughts and insights to our processes to be valuable. If you’d like to chat more about this, please feel free to head over to Connect with Us.
Thanks!
- Tim Golas
Partner, Spurstone