Warren Buffett famously said about speculative assets, “People start being interested in something because it is going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich, and they aren’t.”
Cryptocurrency has garnered significant attention due to its volatility and speculative appeal. However, in our opinion, it is not suitable as a core asset in a well-balanced portfolio. Here’s why it should be approached cautiously, with any exposure limited to a small, speculative allocation, if at all.
Extreme Volatility
Cryptocurrency prices experience dramatic swings, making them unsuitable for long-term wealth preservation or consistent portfolio growth. Unlike traditional assets such as stocks or bonds, cryptocurrencies lack intrinsic value, dividend income, or interest payments, which provide stability over time. Their value is often influenced by speculation, regulatory changes, and technological developments, rather than underlying fundamentals.
Lack of Regulation and Consumer Protections
Cryptocurrencies operate in a largely unregulated environment, exposing investors to fraud, theft, and cybersecurity risks. Transactions are irreversible, and the absence of robust consumer protection increases the potential for financial loss. While the introduction of cryptocurrency exchange-traded funds (ETFs) has brought some oversight, the underlying assets remain inherently risky and speculative.
Poor Performance in Purported Use Cases
Despite being touted as a medium of exchange and store of value, cryptocurrencies fall short in these roles due to their high transaction fees, price instability and lack of widespread acceptance as a payment method. Despite growing interest, the number of merchants accepting cryptocurrencies remains limited due to complexities in setting up payment systems and the volatility of digital currencies.
Furthermore, as a hedge against inflation, another alleged use, cryptocurrencies have demonstrated weak performance, further undermining their appeal as a reliable investment. While traditional inflation hedges like gold or Treasury Inflation-Protected Securities (TIPS) have decades of proven track records, cryptocurrencies lack such history. For instance, during the recent period of high inflation, Bitcoin and similar assets have shown high correlation with speculative equities rather than acting as an inflation hedge. This behavior weakens the argument for cryptocurrency as a reliable tool to preserve purchasing power over time.
Viewing Cryptocurrency as Speculation
Given these risks, cryptocurrency is best viewed as a speculative asset rather than a traditional investment. Limiting exposure to a small percentage of your portfolio, if any, ensures that its potential losses do not jeopardize your financial goals. Speculative investments like cryptocurrency should complement, not replace, a foundation of diversified assets such as equities, bonds, and real estate.
While the innovative blockchain technology underlying cryptocurrency is intriguing, cryptocurrency’s role in a portfolio should remain minimal and speculative. If you choose to invest in these instruments, only do so with money you can afford to lose. History has repeatedly shown that speculative assets, such as those during the Tulip Mania, South Sea Bubble, Railroad Bubble, Radio Stock Bubble, Tech Stock Bubble, and 2008 Real Estate Bubble, often lead to significant financial losses when these bubbles crash. These bubbles highlight how hype around new technologies can drive unsustainable valuations and inevitable crashes. Long-term investors should focus on stable, regulated, and income-generating assets and approach cryptocurrency with a healthy measure of caution.