Every few months or so, interest in cryptocurrencies seems to bubble up among our clients and people I meet who want to know what I think. But lately, the level of interest appears to be more rampant. According to the Financial Planning Association, half of financial advisors have fielded questions from their clients on cryptocurrencies. That’s up from 17 percent since 2020.
When asked about Bitcoin or some other cryptocurrency as a potential investment, I often refer people to two recent blog posts—Bitcoin Revisited: With Markets Uncertain, is it Time to Buy? and Investors Need to Know When They are Investing or Speculating. In the Bitcoin article, I argue that cryptocurrencies are not investments and should not be treated as such. How can anyone take cryptocurrencies seriously as an investment when an utterance from Elon Musk can send the market crashing? In the latter article, I contend that people who jump into a stock or vehicle such as cryptocurrency based on a single issue, event, or meme are not investing; they’re speculating and should expect to lose their money.
Looking Past Crypto to the Underlying Technology
As it relates to cryptocurrency as a speculative vehicle, my stance hasn’t changed. Anyone who wants a part of it needs to know they aren’t investing. However, my thinking is evolving around certain aspects of cryptocurrencies, which I think hold promise for significant investment potential, and that is the underlying blockchain technology that drives the cryptocurrency markets.
Essentially trading cryptocurrency wouldn’t be possible without blockchain, which is the technology that underpins digital currency. The technology enables digital information to be distributed but not copied, which means each piece of data can have just one owner. These individual “blocks” of data are added to a “digital ledger,” which is stored in multiple locations and updated continuously. The records are public and verifiable and, with no central location, it’s difficult to hack since the information resides simultaneously in millions of places.
Unlike Crypto, There’s Real Value in Blockchain
As I wrote in the Bitcoin article, cryptocurrency has no real value other than what someone wants to pay for it. For investors, the real value of cryptocurrency is in the underlying blockchain, which is going to be a transformative technology for many industries. Going forward, cryptocurrencies may come and go, but blockchain will thrive in a digitally wired world. For thoughtful investors, the real value in crypto is in the potential of blockchain.
What we are seeing is similar to what we experienced in the dotcom boom and bust. You may recall how thousands of internet-based companies sprung up during the dotcom boom. At the time, the internet had emerged as a game-changing technology. Everyone had an idea about how to leverage it for profit, and investors were blindly jumping on board, driving valuations to ridiculous levels. People weren’t investing in companies; they were investing in vehicles, speculating really, to ride the dotcom wave. When the bubble burst, hundreds of companies folded overnight, leaving only companies with sound business models to actually take advantage of the technology that had developed.
While hundreds of dotcom companies failed, it was not seen as an indictment of the underlying technology–the internet. The technology didn’t bust. Investments in companies with no revenue or proven business models went bust. However, internet technology went on to spawn some of the most successful companies in the world, including Google, Microsoft, and Amazon.
The same thing is happening now with cryptocurrencies that would not even exist without the underlying technology. As with the dotcoms in the late 1990s, people today are riding the wave of the vehicles that travel on the technology. Eventually, some cryptocurrencies may crash and burn, bringing down speculators with them. But blockchain technology will continue to thrive, most likely in many different forms to address specific industry needs.
Investing in What’s Knowable is Still Key to Building Wealth
Looking ahead, thoughtful investors will focus on the knowable regarding cryptocurrency, which is the future of blockchain. We can’t know with any certainty which cryptocurrencies will survive, much less thrive. But we can know how blockchain technology will be used, not only to drive cryptocurrency but also by various industries.
When you understand blockchain as a digital ledger that keeps records of buyer and seller history, it can have transformative value for countless industries. Several high-profile companies, such as Intel Corp. (INTC) and IBM Corp. (IBM), are making significant investments in products and applications to exploit the potential of digital ledger technology (DLT) for financial technology, healthcare, and global shipping.
It may be a while before we fully understand blockchain technology’s market and earnings potential outside of cryptocurrency. But it is still a much more thoughtful way to invest in its potential than riding the cryptocurrency roller coaster.
