Don’t Be a Crypto-Luddite

Trading volume tends to be light during Thanksgiving Week, as investors turn their attention from Wall Street to their families. National holidays are opportune times to step back from the daily white noise to reflect on overarching investment trends.

On November 21, news reports surfaced that Binance chief executive Changpeng Zhao will admit to violating U.S. laws as part of a $4 billion settlement resolving a years-long probe into illicit financial activities at the world’s largest cryptocurrency exchange. The charges include money laundering.

Changpeng Zhao’s stunning fall from grace got me to thinking about the lay public’s perception of cryptocurrency. It also reminded me of Sam Bankman-Fried’s legal woes.

In one of the biggest financial frauds on record, FTX founder Sam Bankman-Fried was found guilty by a jury on November 2 of stealing at least $10 billion from customers of his now-bankrupt cryptocurrency exchange. Sentencing is scheduled for March 2024.

The tousled-haired millennial was founder and CEO of FTX, which at its zenith was the world’s second-largest cryptocurrency exchange. FTX filed for Chapter 11 bankruptcy protection last year after the company imploded and panicked customers withdrew billions. Bankman-Fried had been praised in the financial media as a game-changing wunderkind. But now, he stands accused of seven counts of fraud and faces 115 years behind bars.

As Warren Buffett famously said: “Only when the tide goes out do you discover who’s been swimming naked.”

I’ve always harbored a healthy skepticism over crypto, but I don’t side with those who glibly dismiss crypto as a fad (or an outright scam) that will one day disappear.

Below, I debunk a few myths about crypto, by examining the pros and cons.

Love it or hate it, crypto represents a lasting revolution in finance, investing and consumer behavior. Consider this: Bitcoin (BTC) has risen about 130% in price over the past 12 months. This whopping increase in value largely reflects surging demand as crypto investors anticipate the approval and listing of Bitcoin exchange-traded funds (ETFs). This bullishness has extended throughout the crypto segment and the momentum is likely to continue into 2024.

I believe that every portfolio should have some sort of exposure to crypto, depending on risk appetite. But first, a quick re-cap of comments from crypto’s harshest detractors.

Billionaire super-investor Warren Buffett has compared cryptocurrencies to 17th-century Dutch tulip mania. Buffett’s colleague at Berkshire Hathaway (NYSE: BRK.A, BRK.B), Charlie Munger, has publicly attacked Bitcoin, calling it “disgusting” and “contrary to the interests of civilization.” He said cryptocurrencies in general are “useful to kidnappers and extortionists.”

Bank of England Governor Andrew Bailey also warned about crypto coins: “Buy them only if you’re prepared to lose all your money.” Economist Nouriel Roubini called Bitcoin “the mother or father of all scams.”

However, it’s undeniable that crypto is changing global finance and human society in a permanent way. The critics notwithstanding, proactive investors can leverage crypto (or its underlying technology) for profit.

And smart people are known to adapt. Warren Buffett has changed his mind about gold as an investment. He might do the same with crypto.

One “Master of The Universe” who recently pulled a 180-degree turn on crypto is Larry Fink, CEO of BlackRock (NYSE: BLK).

My colleague Brad Briggs, editorial director of our subsidiary Street Authority, is a crypto expert. He recently told me in a video interview:

“Larry Fink, who runs BlackRock, used to deride and laugh at cryptocurrency. He’s not laughing now. In fact, BlackRock has filed an application for an exchange-traded fund based on Bitcoin, and Fink is making the rounds in the media, calling it ‘digital gold.’ BlackRock is home to some of the brightest minds in finance.

For my full interview with Brad, watch this video: Why Crypto Is Poised For a New Bull Run.

According to research firm Statista, revenue in the cryptocurrencies market is on track to reach US $37.9 billion in 2023. This revenue is expected to show an annual growth rate (CAGR 2023-2027) of 14.40%, resulting in a projected total amount of US $64.9 billion by 2027 (see chart).

The inevitable demise of paper money…

One trend is certain: paper money is on its way out. Crypto is hastening the demise of old-fashioned cash and expediting the prevalence of digital payments.

Competition from cryptocurrency is prompting central banks around the world to forge digital versions of their national currencies. Ecuador has rolled out its own official digital money, with China, Japan, Sweden, and the Bahamas following suit to varying degrees. The folding paper money in your wallet is destined to become a relic.

Which is not to say that cryptocurrencies will replace the U.S. dollar as the world’s dominant currency.

Cryptocurrencies are only backed by the faith of the people who own them, whereas the U.S. dollar is backed by the U.S. government. Investors still trust the greenback, even during economic hard times. It’s why domestic and foreign investors scoop up trillions of dollars in U.S. Treasury securities, even when interest rates are low.

But crypto is becoming more common in a wide variety of financial transactions. It’s not just small purchases at point-of-sale terminals at retail stores. Electric car maker Tesla (NSDQ: TSLA), for example, accepts cryptocurrency for vehicle purchases.

As I’ve explained in previous columns, crypto is made possible through computer algorithms operated on super-fast platforms called “blockchains.”

Blockchains are replacing intermediaries such as bankers, accountants, and lawyers. Indeed, we’re witnessing the emergence of a new type of cryptocurrency called “stablecoins” that strive for stable values. The idea is that an entity will issue its own cryptocurrency that’s backed by a fixed asset (e.g., U.S. dollars or gold), giving it a stable value.

But keep in mind, the value of a stablecoin backed by, say, the dollar is still reliant on a government-issued currency. Dollars may decrease in overall importance, but crypto isn’t about to dethrone the U.S. dollar anytime soon.

Social media ecosystems are emerging that use stablecoins, whereby members of the social network can safely exchange cryptocurrency and engage in other commercial activities.

This trend spells opportunity for makers of ultra-sophisticated chips, especially graphical processing units (GPUs), that are used by blockchains. These GPU chips allow a computer to present graphics.

Blockchains have other uses. They let businesses store encrypted data in a ledger. Blockchains are used in finance, supply chains, and data storage. This gives the makers of GPUs for video games additional prospects in commerce.

Cryptocurrency users leverage GPUs to speed up the network. Major chipmakers have recently released several GPUs dedicated to cryptocurrency mining.

Direct investments in crypto coins or crypto-linked ETFs can be extremely volatile and unsuitable for risk-averse investors. But make no mistake: crypto is here to stay, in one form or another. I’m a skeptic, but not a Luddite.

Our investment team will continue to keep an eye on this transformative technology, as its investment opportunities unfold. From my perspective, the best way to profit from crypto is through pick-and-shovel plays as represented by blockchains.

But maybe crypto isn’t for you. If you’re looking for proven ways to make money with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

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This article originally appeared on Investing Daily.