The Dark Tower
During the pandemic I reread The Dark Tower, Stephen King's eight-book series which blends the genres of fantasy, horror, science fiction, and Western. It's an impressive piece of work that I revisit every few years in either book or audiobook format.
The story follows Roland Deschain, the last gunslinger of Mid-World, as he searches for the Dark Tower. The epic tale includes multiple trips to our world and several parallel worlds. Somewhere around book three Roland begins to question his sanity because his mind holds true two different versions of events that happened in parallel worlds. The decisions he must make in the future depend heavily on which version of events are correct.
To be clear, I am not a gunslinger. Nor am I questioning my sanity. However, I am conflicted about about two truths:
Crypto is extremely risky and could end to significant losses.
Crypto, specifically the underlying blockchain technology, could revolutionize the financial system and, like the early days of the internet, it presents an incredible opportunity for investors.
How does a financial planner, one who cares about his clients and recommends well-diversified portfolios comprised mostly of index funds and the occasional individual stock, talk to clients about cryptocurrencies?
I'm Not Alone
Ask 10 different financial planners which investments to use in a portfolio and you'll receive 10 different answers, with some general overlap of ideas. The same is true of crypto. When it comes to this subject, the financial planning forums I frequent have had some lively discussions, with the most common responses being:
This is no different than the tulip mania of the 1600s!
There's something to the underlying technology, but this is way too risky for my clients!
My clients have been buying crypto on their own, but I won't provide advice about it!
It's probably time to begin talking about crypto with my clients!
My impression is that the subject of crypto is similar to the Dotcom tech bubble of the late '90s. I was in college during that time, so I don't know what financial planners were telling their clients. Obviously, some bought into the craze while others avoided tech stocks altogether.
For example, I recently listened to an interview with legendary investor Jeremy Grantham. He refused to buy tech stocks during that period and ended up losing 50% of his clients. Fortunately, his firm rebounded nicely in the aftermath of the bubble. In the end, he made the right call but I'm sure it was difficult for him to tell clients "no" while watching his business crumble.
Regardless of what advisors think about crypto, or whether or not cryptocurrencies are "investments", many of our clients are curious and some have already purchased crypto.
Digital Assets, Not Currencies
I'm intellectually curious about many subjects, including crypto, which I've taken to calling digital assets. Why digital assets instead of cryptocurrencies? While these assets can be used to pay for things, I cannot understand why anyone would pay for a good or service using a "currency" that has a history of fluctuating 20% or more in a short period of time, sometimes within 24 hours.
Over the past year I've done a lot of reading about digital assets; how they work, potential use cases, etc. During that time, I've come to believe the truth, like many things, is somewhere in the middle.
Some digital assets are definitely a scam (I'm looking at you, dog-themed tokens). Amazon survived and flourished after the Dotcom crash and I believe some digital assets will, too. I just don't know which ones.
Some industries will be revolutionized by the underlying technologies (banking, trading, and gaming require fast, secure transactions, which could be powered by blockchain technology). Unfortunately, the timing and scope of these changes are impossible to predict right now.
So What's the Best Approach?
I believe planners owe it their clients to have an open discussion about the considerable risks and potential upsides of digital assets. Here's a list of some of the most pressing issues:
Regulatory. When it comes to money, most governments have a vested interest in maintaining the status quo. This is especially true in the United States, where the dollar is used as a global reserve currency. Digital assets may not be banned, but they could be regulated to the point where their use is significantly diminished.
Obsolescence. If you think of digital assets as software or programmable money, it's possible that even better, more sophisticated forms could be created, quickly replacing older, obsolete digital assets.
Volatility. As I mentioned earlier, I cannot understand why anyone would spend an asset that could fluctuate wildly in value over short period of time.
Cyber risk. Buying digital assets via a mobile app isn't difficult, but there have been many cases of exchanges being hacked. I suspect exchanges will be targeted again, especially as investors and institutions pour money into this category.
Password and/or seed phrase management. Owners of digital assets can transfer their assets to a hardware wallet, also known as cold storage. Doing so can secure the asset but requires some technical expertise. More importantly, it requires proper management of passwords and seed phrases. I know many people who can barely remember the passwords to their Netflix accounts, let alone a wallet containing a potentially significant portion of their savings.
24/7 trading. Unlike traditional financial markets, trading in digital assets takes place 24/7. I'm not sure everyone will be willing to monitor their portfolio on evenings and weekends.
Takeaways
Are digital assets any different from the tulip mania of the 17th century or the Dotcom boom of the '90s? I don't know, but this surge may feel different from the others because we're living through a period of upheaval: the COVID-19 pandemic disrupted the world's systems, supply chains are broken, people are rethinking how and where they want to be employed, and the internet and social media have changed the ways in which we communicate and trade.
Digital assets have the potential to revolutionize industries and provide incredible opportunities and returns for investors. However, the risks are considerable and anyone buying or holding digital assets should familiarize themselves with the risks. The asset should fit within your financial plan and your risk tolerance. More importantly, you should never invest more than you can afford to lose.
As always, I'm happy to answer questions about this topic or any other.
Downtime
Here are some things that have my attention when I'm not working:
Listening:
Podcast: I started listening to a new podcast, How We Survive, which examines what's needed for the transition away from fossil fuels. The first episode is great if you've ever wondered where we're going to get enough lithium for all the batteries in our fancy electric cars and other devices.
Watching:
Dune. This week, the only entertainment that matters to me is Dune on HBO Max. I have high hopes for this adaptation of the sci-fi classic.
