Howard Corey, who has more than 15 years of financial services industry experience, joined Cutter Associates in 2021 as a Senior Research Analyst. Howard’s broad experience in both wealth and asset management includes client services, portfolio operations, multi-asset class trade execution, and client performance reporting.
Before joining Cutter, Howard was a Wealth Advisor with Shorepoint Capital Partners. His prior roles include Chief Operating Officer at One Charles Private Wealth, an SEC Registered Investment Adviser, and Principal at Partners Capital Investment Group, where he managed the US Client Services Team and was responsible for multi-asset class trading and client reporting for both private and institutional clients.
Howard earned a bachelor of arts in economics from Roanoke College and an MBA from Vanderbilt University’s Owen Graduate School of Management.
Jun 15, 2022
With news of this week’s crypto crash, we explore why investors have been so drawn to these investments and what’s behind the hype.
If you’ve read one of the many recent surveys of millennial investors, I clearly fall into the minority of my demographic, since I have less than 25% of my investment portfolio in crypto. In fact, I have significantly less than that. My views on crypto were akin to the old man telling the neighborhood children to “Get off my lawn,” and while I dabbled over the years and threw relatively small dollar amounts at various cryptocurrencies, I never made any serious commitment to it. I have fantasies of owning some beachfront property in Puerto Rico along with the other crypto dreamers, but my own reluctance prevented me from dipping all but a toe in the water (and maybe that’s for the best).
That admission aside, crypto, along with GameStop and a few other meme stocks, have cornered the market with respect to being the de facto water cooler (or Microsoft Teams) investing talk in 2021 and into 2022. So, what are cryptocurrencies, and do they make sense as an element of a diversified investment portfolio? Read on to find out more …
What Are Cryptocurrencies?
Cryptocurrencies are a digital, or virtual, currency that is secured by cryptograph, and generally are decentralized networks built on the blockchain. Although the two most popular cryptocurrencies, as measured by market cap, are Bitcoin and Ethereum, thousands of currencies are in use and available for investment today. For the US-based retail investor with a brokerage account at one of the household name platforms, you’re likely choosing between Bitcoin, Ethereum, or a combination of the two. If you’ve opened an account on one of the many existing crypto exchanges, then you have hundreds, if not thousands, of investment options.
What makes crypto unique is that it’s not regulated by any central bank or authority. Rather, it’s a peer-to-peer network that’s responsible for validating crypto transactions. Once validated, these transactions are permanently recorded on the distributed ledger, or blockchain, and the individuals responsible for validating the transactions are rewarded with cryptocurrency (an activity called “mining”).
What’s the Investment Case and What Are the Risks?
Much research has been done on the use of crypto in an investment portfolio. Historically speaking, the addition of a Bitcoin allocation to the portfolio was extremely beneficial given the price appreciation that the asset experienced in the past five years. It was additive to returns and meaningfully improved the Sharpe ratio, while not substantially increasing risk. So, the inclusion of Bitcoin in a diversified investment portfolio at no more than a 5% weighting may make sense. Crypto detractors will certainly point to the volatility as the principal risk of investing in it, followed by cybersecurity and fraud risks and the risk of increased regulation. The argument that crypto is a store of value simply does not hold up given the volatility, and it’s nearly impossible to value using any type of valuation model.
What’s an Investor to Do?
It’s difficult to say ─ and given that Cutter is not in the business of providing investment advice, you won’t find that answer here. What I can tell you is that a host of resources are at your disposal to educate yourself on crypto, the blockchain, NFTs (if that’s your thing), and all things related to DeFi (decentralized finance). The destruction of the world’s fiat currencies provides some additional ammunition to crypto bulls. However, is that enough to outweigh the plethora of risks? Ultimately, the prudent answer is one that I would give to anyone investing in any single security ─ do your homework and invest no more than what you can afford to lose. Because while riches were had with crypto, as we saw this week, the pendulum can quickly swing in the other direction and leave investors holding the bag.
