What Should You Know About Cryptocurrencies and NFTs

 Bitcoin is at $58,000! An NFT Recently Sold for $69 Million! Should I Buy? (As of mid-April 2021)    

At times certain new forms of investments attract a lot of attention. Over the past dozen years, Bitcoin, self-described as both an “innovative payment platform” and “a new kind of money,” has certainly been noticed among investors. In fact, over 4,000 cryptocurrencies like Bitcoin are currently in existence. But with all this new information, platforms, and currency, many investors are left with questions.

Let’s start with the basics. Digital currencies, or cryptocurrencies, are stored in a “digital wallet” – a type of online account, in which transactions are verified and records maintained by a decentralized system. Through the application of blockchain technology, transactions are recorded and stored. Digital currencies can be utilized to purchase merchandise from some sellers, often anonymously. There are also “digital current exchanges” that allow individuals to buy and sell digital currencies via different traditional currencies (such as the U.S. dollar).

Due to the lack of a centralized or regulatory system, most digital currencies are not backed by a country’s central bank, nor is their value backed by the ability of a country to tax its citizens.

So why do digital currencies have value? Supply and demand.

Most digital currencies possess a limited (scarce) supply. Take bitcoin for example. There’s currently over 18.5 million bitcoin in circulation, and there will only be 21 million bitcoins that are digitally “minted” and “mined” in the future. This limited supply drives up demand, thus driving up value. Scarcity with perceived value coupled with periods of demand can at times create a frenzy for Bitcoins and drive the price higher.

Due to this ever-changing, and unregulated landscape, there is no reliable way to predict price. If demand exists, to some measure price can remain supported. When demand wanes, large swings in price momentum occur and the price will fall – often precipitously.

A crucial point to note is that cryptocurrencies possess no real intrinsic value – a key measure of any investment. Over the long-term cryptocurrencies have not proven to be a good store of value. Prices are driven by supply (often finite) and demand (which varies over time).

Another digital currency that has gained popularity in recent months are non-fungible tokens (“NFTs”). NFT’s digitize and “tokenize” certain artwork, sports highlights, and even memes. These digital assets can be bought, sold, and traded. NFT ownership and provenance are always tracked by a blockchain.

In alignment with our investment philosophy, we regard both cryptocurrencies and NFTs as speculative investments. When new investments like these appear with early gains, the stories that follow can often allure investors to part with hard earned funds. Particularly with cryptocurrencies and NFTs, it is common that investors will see high transaction costs to even access these types of investments. Additionally, the volatility of cryptocurrencies and NFTs increase the risk of loss for their entire value. Finally, due to the lack of regulation and information available, ARGI’s evidence-based investment research currently does not support any current allocation to these emerging asset classes.

With that being said, we view our role as prudent investment managers is to help our clients understand all aspects, risks, and rewards regarding our clients’ investments strategies. If you’re interested in exploring these types of investments, we’re here to help you better understand what these investment opportunities could mean for you.

One day crypto/NFT may become an asset class that does contain intrinsic value, and could be part of an overall portfolio allocation. In today’s marketplace, there are multiple investment opportunities that possess true value, as opposed to many of the digital currencies and NFTs – which may be mere pieces of paper floating on a digital wind.

This original blog was posted on April 15, 2021 at: https://argifinancialgroup.com/argi-insights/ 

Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is a professor of finance within its Gordon Ford College of Business.

Called “Dr. Bear” by his students, Dr. Rhoades is also a financial advisor at ARGI Investment Services, LLC, a registered investment advisory firm headquartered in Louisville, KY, and serving clients throughout most of the United States.

The author of the forthcoming book, How to Select a Great Financial Advisor, and numerous other books and articles, he can be reached via: bear@argi.net.