Could we please stop calling crypto an “asset class?” It is not an asset class. It's a popularity contest.
With a real asset class, you actually own something:
- Stocks: an equity interest in a company and a share of its future earnings;
- Bonds: a promise from a company to pay an amount certain plus interest;
- Real estate: a building or a piece of land;
- Gold: a precious metal that has industrial uses and can be used to make jewelry; or
- Commodities: a barrel of oil, a bushel of soybeans, pork bellies, etc.
Other asset classes are derivatives of the above.
The “market” determines what these assets are worth on a given day, but they are real things that have value independent of what the market says they are worth at a particular moment.
Not so with crypto. When you buy crypto, you own nothing. Except your right to sell your share of nothing to another willing buyer.
The value of your crypto is entirely determined by what others will pay for it on a given day. It has no independent value or inherent utility. It is a marker in a popularity contest.
Most people have given up claiming that crypto is a currency. No one claims anymore that it is a hedge against inflation or the stock market anymore, at least not with a straight face.
It is disruptive and uses cool technology, but you don’t own an interest in the disruptor or the blockchain when you buy a token. Watch out for anyone who suggests otherwise.
Does that mean buying crypto is a bad thing? Not at all. You might make a lot of money and you will definitely have a good story to tell. Just like if you put your money down on FanDuel or some other sportsbook site. But don’t imagine that you are making an investment in a real asset class.
The financial services industry is like a great white shark when it comes to smelling opportunity; and when it comes to crypto, the industry clearly smells blood in the water. None of the usual suspects wants to be left out of the potential feeding frenzy. They have cranked up their marketing machines to chum the waters.
So, have fun and put a little of your hard-earned money in the game. You might hit it big. But don’t buy into the tale that it is just another investment with reliable, expected future returns, volatilities and correlations to other asset classes. That story is designed to make you let your guard down.
Look out the window. The value of your crypto will be totally determined by the people you see, and others like them. Do they look hungry? Maybe it’s a good time to buy!
Scott MacKillop is CEO of First Ascent Asset Management, the first TAMP to provide investment management services to financial advisors and their clients on a flat-fee basis. He is an ambassador for the Institute for the Fiduciary Standard and a 45-year veteran of the financial services industry. He can be reached at [email protected].
