Basic Risks and Suitability – Bitcoin & Cryptocurrencies

MON, DEC 18th, 2017

At this time we are neither recommending nor endorsing bitcoin, nor any other cryptocurrency. However, if one wishes to use a small slice of only the purest form of risk capital (i.e., money you can afford to lose if / when it goes to zero) to play in this new and highly volatile market, we think that’s potentially OK. That said it’s imperative to fully understand the risks – chiefly the potential, and even likely, loss of capital – before committing any funds to this market.

Below, we highlight some of these risks as well as provide some things to think about prior to making any trades. It’s essential to note that this, and anything we opine on regarding cryptocurrencies, is for informational purposes only.

-Bitcoin, and cryptocurrencies more broadly, are not investments. It is important to understand the crucial differences between investments and speculation.

-And at this point in time trading cryptocurrencies is purely speculation on price without any consideration for underlying fundamentals or intrinsic value, two time-tested features that shape the core tenets of investing.

-At least for now, we view speculating on cryptocurrencies as akin to gambling. Cryptocurrencies are really only worth what the next speculator is willing to pay for it. If you have trouble imaging a loss (large or small) in these cryptocurrencies, you shouldn’t be involved in this market.

-Given the lack of a meaningful track record, relevant market statistics, and merit-based evidence, we presently have no recommendation on including cryptocurrencies into a comprehensive asset allocation model.

-We also believe that a “soft accreditation” should be carefully considered before speculating in this space. We define soft accreditation to basically mean: if you’ve never traded or speculated before, cryptocurrencies are probably not a suitable place to start. Experience goes a long way in these Wild West-type markets.

-Picking up on that last point, cryptocurrencies are unique – beyond just the ABCs of what they are – in that there are multiple ways to lose the entire value of your digital account. Not only can these cryptocurrencies go to zero, but they can also be hacked, stolen, or wiped out entirely through other methods that standard investments like stocks and bonds cannot be.

-There are risks that regulators – the SEC, IRS, Federal Reserve, etc. – and / or legislative bodies like the U.S. Congress could come in and attempt to shut down, control, or otherwise restrain activity and underlying tenets of these markets. There are also similar risks at the global level (i.e., other counties pursuing regulation or intervening in markets).

-The cryptocurrency landscape can change daily. What you hear and read today may not be true tomorrow. It’s that new; it’s that misunderstood; it’s that complex. Don’t believe everything you hear. And take even the core ideas swirling around these cryptocurrencies with a grain of salt. (For example, are these digital coins actually even “currencies”? Most sensible analyses of what a currency truly is would conclude that they are not).

So big picture, what’s our counsel? What’s appropriate? Should cryptocurrencies be included in one’s portfolio or asset allocation? We think it’s perhaps prudent to think about it in this way: *We presently have no asset allocation guidance to provide; individuals should take all of the above bullet points into consideration before committing any capital to cryptocurrencies. In philosophical terms, treat our views on what’s appropriate regarding cryptocurrency participation the same as if someone asked “how much should I spend playing craps in Las Vegas this weekend?” In other words, what can you reasonably afford to lose? Any and all trades made in bitcoin and cryptocurrencies should be taken in the context of one’s holistic financial situation. 

The investment team at Albion Financial Group is well versed in bitcoin / cryptocurrencies and blockchain technology. Please reach out to us at 801-487-3700 or if we can answer your bitcoin, investment, or financial planning questions.

Albion Cryptocurrency Team


Disclaimer: Information provided is for educational purposes only. This is not a recommendation to buy or sell any security or cryptocurrency.  There are significant risks associated with cryptocurrency that are unique and must not be taken lightly.  It is critical that you perform your own due diligence prior to engaging in any buy or sell transaction.  The value of bitcoin can, and may, ultimately go to zero.             

About Albion Financial

Established in 1982, Albion Financial Group is an independent, fee-only financial planner and investment manager located in Salt Lake City, Utah.