April 20, 2021

Over the past week several headlines about cryptocurrencies have been eye-popping.

First headline: the IPO of Coinbase dominated the business headlines last week. Coinbase (COIN), the cryptocurrency exchange, completed its direct listing on the NASDAQ last week. The shares opened at $381, valuing the company at nearly $100 billion. Yes, that is with a “B”. This is a market capitalization larger than 350 companies listed in the S&P 500, including Twitter, CVS, GM, and FedEx. After rising to $429 per share, Coinbase has settled to a more ‘modest’ $342 per share at the close on Friday, April 16, a significant loss for those speculative investors who were confident they were getting in on “another hot idea.” Analyst valuations of Coinbase range from $16 Billion to over $100 Billion. That is a large difference that speaks volumes about how difficult it is valuing anything in the cryptocurrency area.

Second headline: Bitcoin dropped as much as 15% on Sunday, April 18. It recently had set all time highs but dropped considerably this past weekend. Ether, another cryptocurrency dropped almost 18% this weekend as well. Lage percentage gains and drops are not uncommon in the cryptocurrency area and were discussed in detail in our February 2021 newsletter.

Investment or Speculation?

Yes, Bitcoin has risen dramatically in price over the past year. Why? How is Bitcoin or any other cryptocurrency valued?

With a publicly traded company, the future value of a share of stock can be estimated using forecast future earnings, growth rate of the company, and cash flows among other metrics. There is real data available to make these predictions.

With cryptocurrency, the value is based purely on supply and demand. It can go higher, or it can go lower. There is no data to support any level of pricing, present or in the future. It looks like the values cryptocurrencies are based more on speculation than any real data. This is not an investment; at best it is gambling.

Investing as Part of Financial Plan

Most investors are looking towards profitable investments to stay ahead of inflation, save for a house, college, or retirement, or are looking to maintain a specific lifestyle. The best advice to achieve these goals is to use a sound investment strategy as part of a complete financial plan or Life Financial Plan (FLP) as it called at Prato Capital.

A sound investment strategy starts with a balanced portfolio of equities and fixed income that is diversified over those asset classes to minimize risk as much as possible. This provides a predictable growth pattern over time that greatly increases the accuracy of the FLP and the ability to achieve those financial goals the investor wants.

Conclusion

We all know people who have made money at the blackjack table. Very few would consider Las Vegas and the casino a great place to start an investment plan. We view cryptocurrency much like gambling for the simple reason that there is no data or history to support any level of pricing, now or in the future. This does not help a financial plan and will make the plan less accurate. For the financial goals of our clients, we are looking towards investments that are backed by almost 100 years of history and Nobel Prize winning research to provide the growth needed for their FLP.

As part of a Financial Life Plan, an investor is best served with a well thought out investment plan and leaving the speculation to others.