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The Bitcoin Craze is Speculation, Not Investing

Dec 19, 2017 / Commodities, LG Research, Asset Class Research

We’ve been getting some questions from clients and advisors about bitcoin. While we are certainly aware of the cryptocurrency enthusiasm and are following it loosely through the reading we do, we haven’t done enough work (nor do we plan to at this point in time) to justify writing a substantive paper on it. We focus our efforts on seeking to understand the risk/reward tradeoff of allocating capital to various asset classes and active managers across several forward-looking macroeconomic environments.

At an even higher level, we focus on investing our clients’ assets in marketable securities. Importantly, there isn’t a registered offering available to investors, as the SEC pointed out in this statement.

We view bitcoin and other cryptocurrencies as speculation, as opposed to investing. Furthermore, there is no cash flow or way to fundamentally judge the intrinsic value of when to buy or sell it, so we wouldn’t be able to add any value for our clients by advising them on it. While the distributed ledger technology (blockchain) may disrupt industries like title companies, custodians, etc., we would leave decisions to take advantage of companies that may do that disrupting up to our active managers, who do bottom-up individual security selection work.

In any event, it is not in keeping with our investment discipline to take direct positions in any currency, let alone bitcoin (if one can even consider it a “currency” at all). Even well-established currencies are notoriously difficult to assess or trade. Instead, we gain exposure to currencies through the asset classes we invest in on their own merit (for example, international stocks) or the decisions of individual active managers (the foreign currency exposure in certain bond funds we own).

One final point is now that bitcoin is tradable in futures markets, it’s conceivable that the managed futures strategies we own could include bitcoin in their investment universe in the future. If an identifiable and sustained trend (either up or down) in its price occurs, our managed futures strategy funds may be able to capture it and provide a benefit to our client portfolios. However, senior research analyst Jason Steuerwalt says that at this time, bitcoin is likely too volatile for practical implementation.

—Litman Gregory Research Team


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