Common Cents & Cryptocurrencies

About two months ago, I added Bitcoin to the data points we discuss during our morning call with client advisors. While we haven’t purchased cryptocurrencies for our clients, yet, they have been the topic of much discussion over the last several quarters. Everyone wants to know about ‘Bitcoin,’ which sort of serves as a proxy for blockchain investments in general.

But what exactly is a blockchain? Instead of my trying to explain it myself, let me give you what PWC has on its website. The link will take you to a nice primer on the topic:

“A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.”

Is that clear enough for you? It is the technology which enables you to buy virtual currencies to put in your virtual wallet out in the Matrix. I am just kidding about the Matrix thing, or at least I think I am teasing. The concept can be difficult to grasp. After all, there is nothing tangible about Bitcoin or other cryptocurrencies, at least using the traditional definition: something that is perceptible by touch. However, with the way our contemporary society has been excoriating so many established norms, maybe there is no such thing as intangibility any longer. It wouldn’t surprise me.

Even so, my experience has been most people prefer some form of tangibility when it comes to their assets. To be sure, many investments are digitized, nothing more than computer keystrokes on accounting systems. However, you can often request some form of physical certificate or other proof of ownership from the issuer which proclaims: “See? This proves that it exists and that it is mine…all mine!” This proof of ownership provides some measure of protection in a society which respects individual property rights.

But what to make of digital assets where there is no real issuer? No real way of getting a physical form of your investment, at least not one that provides the necessary legal protection? Further, what if you purchase your intangible digital assets directly from nameless, faceless sellers out in, again, the Matrix? What is your legal recourse if there is fraud or theft out in the unregulated ether?

To be certain, cryptocurrency experts would point out ‘sign messaging’ is a way to prove possession without actually spending your currency or exposing your private keys. Frankly, this is probably beyond the comprehension of most retail investors, the average person on the street it you will. This is why trading platforms like Coinbase have become so popular. Even if you would have no idea how to create your own virtual wallet out on a blockchain, these various services attest they can and will even give you “proof” of ownership on their accounting system. For most people, these computer keystrokes are often all the assurance they need.

This is why and how ‘Bitcoin’ has become so popular this year. It is now far easier for people who have no idea what they are doing to buy the stuff. It sort of reminds me of the bubble from back in the day. Remember that? Do you remember those Ameritrade ads? The ones with that slacker Stewart who was an ‘expert’ on investing? Follow this link to the famous “Let’s Light This Candle” commercial on YouTube, posted by ‘Mindless Shelf Indulgence.’ Take special notice of the stock Mr. B purchases.

Right now, cryptocurrency enthusiasts are getting hot under the collar due to this comparison. ‘Bitcoin’ is not a fad! It is here to stay! It is going to supplant worthless, fiat currencies! Just you wait and see! It is the future and you are living in the past!

I would counter this with: that isn’t the issue. Back in the 1990s, everyone knew the Internet was going to fundamentally change our lives and how we conduct business. That doesn’t mean it didn’t lead to ridiculous valuations in the stock market or that people didn’t do stupid stuff with the new technology, a la Mr. B’s purchase of K-Mart stock.

The same could be said of the housing bubble in the last decade. We all understand houses, don’t we? What isn’t to understand, right? However, ‘we’ still forged ahead into lunacy with crazy mortgage structures, and people went up to their eyes in debt due to a FOMO (fear of missing out) on a sure thing. I mean who doesn’t want a condo on the Gulf Coast? People will always pay umpteen thousands of dollars per square foot to live on a golf course behind a gate, right? We know what happened next, even if the markets eventually absorbed much of the excess inventory from the so-called housing bubble.

That blockchain technology is here to stay, that it will fundamentally change our lives and how we conduct business, isn’t up for debate. Anyone that would suggest otherwise is, shall we say, misguided. However, that doesn’t mean cryptocurrencies are always going to be the best possible investment, or even a good one, at a random snapshot in time. There will be times when they get ‘ahead of themselves,’ and when the money is ‘all in.’ I would suggest perhaps this had been the case up until just recently.

It wasn’t going to take much to get the crypto market to ‘sell-off’ given the explosion in prices since September of last year, some 6x. That casual investor who plopped some money down during 4Q 2020, someone who isn’t a long-term cryptocurrency aficionado? It would appear a lot of those types were itching to lock in some of their gains. So, when Elon Musk waffles on Bitcoin or when the Chinese authorities reiterate their ‘tough’ position(s) on cryptocurrencies, it was/is time for the dispassionate to head for the doors, the non-believers.

Frankly, this is good for us, because, as I previously mentioned, we have yet to make investments in cryptocurrencies for our investors, and this correction gives us a little more time and space to get things right. To that end, we are actively analyzing acceptable alternatives in the cryptocurrency/blockchain space. We consider this a separate asset class more than another ‘currency,’ and will treat it is as such in the future. As with any asset class, there will be times when it is more attractive than others, times to get in and times to get out. While the technology is cool, even Bitcoin can’t escape the need for reasonable valuations.

In the end, cryptocurrencies are here to stay. The train has left the station, and Pandora has opened her box. Whether you will be using them to buy beer at the convenience store in the future is anyone’s best guess. However, they will be increasingly commonplace in investor portfolios as better collective fund options become available to the general public.

Finally, in the spirit of complete transparency and candor, I personally set up a Coinbase account with an extremely modest sum, less than dinner out, largely to appear cool to my 19-year-old son. Seriously. It is an even more modest sum as I type here today, and it didn’t do anything for my coolness.

Take care, have a great weekend, and be sure to listen to our podcast Trading Perspectives.

John Norris

Chief Economist


As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.