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McKenzie Robinson | SBJ

‘Picking a Unicorn’: Thousands of digital currencies make investing in them a puzzle

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Cryptocurrency is a mystery to many, and that makes sense. The word itself comes from the Greek “kryptos,” meaning hidden.

There are over 4,500 cryptocurrencies, or peer-to-peer digital cash systems that aren’t regulated by a centralized system, with more created and disappearing all the time, according to finance company The Motley Fool. The first of these to be created, 12-year-old Bitcoin, also is the most widely known, with a reported value of $826 billion.

The other largest cryptocurrencies, according to The Motley Fool, are Ethereum, valued at $390 billion; Binance Coin, $79.5 billion; Cardano, $66.3 billion; and Dogecoin, $63.4 billion.

Al Jazeera recently reported the total market blew past $3 trillion in valuation, hitting the $3.3 trillion mark on Nov. 8.

As more individual investors discover cryptocurrencies – now easily purchased through apps like PayPal or at crypto ATM machines – the key question for business owners is when, and if, to invest.

Derek Fraley, CEO of Systematic Savings Bank, doesn’t recommend it.

“With as much volatility as there is in crypto right now, I think it would be a tough call,” he said. “Which one are you going to pick? You pick Bitcoin and someone else does Dogecoin.”

According to Fraley, it’s not time yet for businesses to add crypto to their portfolios.

“As far as how a business does it, I don’t think it’s a good idea,” he said. “I just don’t think it’s played out enough yet.”

Fraley added as a means of exchange, it’s not time yet to accept crypto, except maybe for a luxury car company or similar high-end business.

“If I’m a plumbing company, I don’t know that I’m as excited about someone paying me in crypto,” he said.

Systematic is a smaller community bank, and that makes a difference, according to Fraley.

“If I had a very large bank, I would be advocating that my wealth management side be prepared to hold digital assets or execute trades for them,” he said. “It’s time for banks to really start researching where this is going.”

And Fraley noted banks are required to keep track of transactions, checking senders and recipients of money against a list maintained by the Office of Foreign Asset Control.

“Crypto is intended to be anonymous,” he said. “As it exists now, it’s not really fit for the U.S. banking system. That would make us completely uncompliant.”

Big-name investors
One of the companies known to have the most Bitcoin in its portfolio is business analytics platform MicroStrategy. That company, one-tenth of which is owned by global investment bank Morgan Stanley, holds 114,000 BTC in reserve at a value of $5.1 billion, according to a September tweet by CEO Michael Saylor.

Another company with Bitcoin in its portfolio is electric vehicle manufacturer Tesla, which invested an aggregate $1.5 billion in the cryptocurrency in February, according to Decrypt, which covers the decentralized web. Tesla then sold 10% of these holdings in June. CEO Elon Musk said in a tweet Tesla’s purpose was “to prove liquidity of Bitcoin as an alternative to holding cash on balance sheet.”

Tesla announced in March that it would begin accepting payments in bitcoin for its products and services, but then in May reversed that decision. Musk tweeted at the time crypto’s environmental cost is too high.

Bank of America Global Research confirms Bitcoin has higher emissions than American Airlines or Conoco Phillips, and if it were a country, its emissions would exceed those of Greece, Chile and the Czech Republic, with nearly 120 terrawatt hours consumed annually.

Cryptocurrencies are “mined’ into existence, according to the Association for Computing Machinery, which explains mining as solving complex math problems to generate new bitcoins in the network. Working out the problems requires a lot of computer power and electricity. Digiconomist estimates mining accounts for 0.29% of the world’s annual electricity consumption.

Some other familiar investors in Bitcoin include Square Inc., which enables credit card payments on personal devices and also has point-of-sale technology at many restaurant and retail establishments. Square’s Cash App allows customers to make or receive payment in Bitcoin at no extra fee.

In September, El Salvador became the first country to accept Bitcoin as legal tender, though media reports reveal protests and technical issues marred its rollout. President Nayib Bukele tweeted about some of the appeals of his country prior to adoption: great weather, world-class surfing, no property tax and “no capital gains tax for #Bitcoin, since it will be a legal currency.”

Shawn Gallagher, associate portfolio manager for financial services firm Piatchek & Associates, pointed out investing in cryptocurrencies offers big rewards, but also huge, or even total, losses. His company’s brokerage firm, Kestra Financial, doesn’t currently support crypto.

“If you came into Piatchek & Associates and said, ‘I want to buy half a Bitcoin, $30,000,’ I couldn’t do it for you,” he said.

The best he could do is sell $30,000 in shares of Coinbase, a platform that supports cryptocurrency.

For the investors he serves, Gallagher said he uses the 5% rule.

“We don’t recommend putting all of your eggs in one basket,” he said. “Five percent of your total portfolio can be in one thing, and that includes crypto. If you want to take 5% of your money and put it into Bitcoin, if Bitcoin goes to zero, you’ve still got 95% of your portfolio out there.”

Gallagher characterized crypto buyers as younger people. Most of Gallagher’s clients are nearing retirement age, he said.

“They’re all so different,” he said of currencies available. “Bitcoin is structured differently than Dogecoin, and there’s a zillion of them, with a new one popping up each week. It’s picking a unicorn, is what you’re doing.”

Daniel Larsson consults on cryptocurrency, which he has been involved with since 2011. He has a computer hardware background.

“I build what most people would refer to as Bitcoin mining devices,” he said.

Larsson said payment services such as Square are an easy on-ramp to crypto for businesses.

“There are plenty of services where you don’t actually see cryptocurrency,” he said, noting payment services act as a go-between to convert crypto to U.S. dollars.

“The problem for business is at the end of the day, you need money,” he said. “You can’t really pay the electric bill or your taxes with a variety of cryptos.”

Larsson said cryptocurrency is still the Wild West, with plenty of risk for investors.

“If you assume that a business does not want to carry a risk, accepting Bitcoin and holding it becomes almost like barter, accepting a currency of fluctuating value,” he said. “If you immediately sell it, you’re really accepting dollars.”

Larsson compared crypto to the dot-com frenzy, which ended in a crash in 2000.

“It’s very similar to the internet boom, where everyone was throwing money at everything,” he said. “It’s so hard to qualify what’s going to be a future market leader, since it’s part of a new ecosystem.”

Added Larsson, “Unfortunately, it makes the system rife for fraud and manipulation. Just as you can have 10,000% gains in something that Elon Musk decides to tweet about, you can invest in something that just disappears.”

The rewards are an incentive to invest, though Larsson doesn’t think a lot of products today are obviously undervalued.

“There are definitely reasons to invest in crypto,” he said. “There will be several cryptos that will go up a lot and several that will go down a lot, just like shares. It’s just a matter of doing the better research.”


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