Cryptocurrency is not an investment, and not everyone is caught up in the thrill

On a spring day in 1844, Samuel Morse sent the first telegraph message to a train depot in Baltimore via the alphabet code he had invented. The same return message to Washington, D.C. — the biblical phrase “What hath God wrought? — was witnessed by Morse and a delegation of dignitaries and congressmen. At that moment, the timely sharing of information was transformed forever. We went from the Pony Express to the internet in only a few decades.

Similar evolution is happening in finance today, and we don’t know yet if cryptocurrencies will have a minor or major impact on national or global economies in the decades to come. What we do know is that the cultural buzz and popularity of digital currencies has never been higher since the top currency Bitcoin was introduced in 2009.

In fact, crypto mania is hard to miss. According to a Pew Research survey, while an estimated 16 percent of Americans own some form of digital currency, 90 percent have heard the buzz, including some of our curious clients. Banks small and large offer cryptocurrency services for their customers. Major sports arenas in Miami (FTX) and Los Angeles (crypto.com) are named after digital currency platforms. Celebrities such as Tom Brady and Matt Damon are featured in glitzy ads promoting their favorite crypto platforms with the theme, “the future has arrived.”

In 2020, pro football player Russell Okung requested that half of his $13 million annual salary be converted into Bitcoin and is believed to be the first pro athlete ever to be compensated in cryptocurrency. New York City Mayor Eric Adams said last November that he would take his first three paychecks in Bitcoin. Unimaginable a decade ago, there is now a Bitcoin ATM a short walk away from New York’s City Hall, and the nation of El Salvador recently accepted Bitcoin as a legal tender.

It would take a few dozen Ph.D.-level dissertations to explain all the data points about how cryptocurrencies — of which there were an estimated 4,000 globally at the beginning of 2021 — are made. Suffice it to say they are essentially created from software algorithms that is then “mined” by ambitious and energy-sucking computer code savants using blockchain technology. These computers store tremendous amounts of data to create verified currency that can be held or sold. What is clear is that the rise of cryptocurrency reflects a cultural shift that embraces:

• A new way to diversify one’s holdings — especially among younger, tech-aware and tech-trusting investors and a statement about the future

• An anti-establishment ethos: a decentralized move away from banks (especially central banks) and governments

• High risk and potentially high rewards for speculators who understand the ins and outs of a chaotic industry Let us be clear, crypto is not an investment, and not everyone is caught up in the thrill.

JPMorgan Chase CEO Jamie Dimon said the industry was offering “fool’s gold.” The context was simple: The price moves on a day-to-day basis that makes cryptocurrencies such as Bitcoin the most speculative high-risk “investment” on the planet. For example, in 2021, Bitcoin rose from $33,203 per one Bitcoin on Jan. 1 to $67,617 on Nov. 9 to $48,410 on Dec. 15.

While pricing is transparent, it’s not the same as researching a company or fund history. There is no business model for pure speculation, and values rise and crash with regularity and with little rhyme or reason.

It might also be ecologically unsound. A September New York Times story reported that researchers determined the “(computing) process of creating Bitcoin to spend or trade consumes around 91 terawatt-hour of electricity annually. That’s more than the total amount of electricity used by Finland, a nation of 5.5 million.”

In addition to a less-than-stellar reputation for providing anonymity for criminal transactions, crypto has also proven ripe for fraud. In November, the U.S. Justice Department announced it would sell off more than $56 million in cryptocurrency to help reimburse investors who lost $2 billion in a Ponzi scheme disguised as the cryptolending platform BitConnect. It was the largest and most costly scam so far, but only one of many, due to its anonymity, that have taken place globally.

Tentative steps are being taken to make cryptocurrencies malleable to buy goods and services, and likely federal regulations are coming. It remains to be seen whether the most popular currencies turn out to an alternative asset, such as gold, or a 21st century version of the speculative Dutch tulip mania bubble that gripped merchants in the 17th century.

More than any current prospect in an era where a lot of money searches for a profitable home in uncertain times, crypto requires serious due diligence (be prepared to learn a new dictionary of terms), planning and a stomach for high risk.

Caveat emptor.

Tom Sedoric is partner, executive managing director and wealth manager and D. Casey Snyder is partner, senior vice president and wealth manager of The Sedoric Group of Steward Partners in Portsmouth.