Bitcoin Mythology Is Veritable Gold Mine for Advisors

Indulge me as I paint with some broad strokes for a moment. If we are to believe that markets function efficiently, or at the very least, do so most of the time, then various asst classes should do what they're supposed to in specific market settings.

For example, it wasn't surprising that longer-dated bonds came under pressure earlier this year amid soaring 10-year Treasury yields. When inflation rises, as is happening today, gold, real estate and other hard assets typically prove resilient. And when interest rates rise, bank stocks usually outperform, which is happening this year.

Point is, there's not much in the way of conjecture, conspiracy theories and hearsay with older asset classes. Bitcoin, well that's a different matter. The combination of relative youth – the cryptocurrency has been around since just 2009 – and a penchant for volatility make bitcoin ripe for conjuring up myths.

That also makes bitcoin, and the broader universe of digital assets for that matter, a prime avenue for advisors to, well, advise. Now is the ideal time for just that because it's reasonable to surmise clients have plenty of crypto-related questions, particularly because bitcoin is in the midst of a dramatic price decline. It was less than three months that the largest digital currency traded above $63,300. As this is piece is being penned, bitcoin is struggling to hold $34,000.

So Many Bitcoin Myths

Ground zero for bitcoin lore and mythology is the assertion that it because it's so volatile, it's not a legitimate store of value on par with traditional assets. However, it pays to understand why bitcoin can be volatile and while the store of value criticism isn't all it's cracked up to be.

As ARK Invest crypto analyst Yassine Elmandjra points out, policymakers usually look to achieve three monetary goals – fixed exchange rates, free flowing capital and independent monetary policy – but achieving two is the norm.

“A monetary authority choosing to fix exchange rates and allow the free flow of capital, for example, cannot control growth in the supply of money,” he says. “Likewise, a monetary authority choosing to fix exchange rates and control money cannot accommodate the free flow of capital, and one choosing to accommodate the free flow of capital and control the supply of money cannot fix exchange rates.”

Another myth and one that advisors almost certainly field inquires about from clients is bitcoin bubble talk. This seems to ratchet up through every big rally and subsequent price decline. M

Much of the bitcoin bubble myth is rooted in critics trying to value the digital coin like a traditional asset. Of course, that's a fools errand because bitcoin doesn't generate cash flow, has no earnings and doesn't have a credit rating.

“A monetary asset like bitcoin, however, is nonproductive, its appreciation based on how effectively it preserves or enhances value over time,” adds Elmandjra. “In a way, the value proposition is circular: a monetary asset will appreciate as more people demand it, and more people will demand it if it is an effective monetary asset.”

More Myths to Dispel

An obstacle on the road to further bitcoin adoption and one of the reasons why the Securities and Exchange Commission (SEC) has yet to approve a bitcoin exchange traded fund is the links of cryptocurrencies to criminal activity.

Indeed, currencies that can be moved outside the lines of traditional banks or payment platforms are sure to lure bad actors, but think about the lunacy of this argument. If criminal activity was the basis for not using a particular currency, than the world should be without dollars, euros, pounds, yen, yuan and more. Point is money launderers existed before bitcoin and they found ways to commit their misdeeds without digital assets.

One more thing and this is an area an increasingly environmentally savvy client base could express concern regarding bitcoin: Energy use/carbon footprint tied to bitcoin mining.

“Easier to quantify, Bitcoin’s energy footprint is open to superficial criticism,” says Elmandjra. However, as measured by electricity costs alone, Bitcoin is much more efficient than traditional banking and gold mining on a global scale. Traditional banking emits 1,368 Megatonnes (Mtoe) of carbon per year and gold mining emits 144 Mtoe. Bitcoin emits 61 million Mtoe, less than 5% and 45% of traditional banking and gold mining, respectively.”

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