“Well, bitcoin is a currency. Bitcoin has no underlying rate of return. You know, bonds have an interest coupon. Stocks have earnings and dividends. Gold has nothing, and bitcoin has nothing. There is nothing to support bitcoin except the hope that you will sell it to somebody for more than you paid for it.”
John Bogle
“It is one thing to think gold has some marvelous store of value because man has no way of inventing more gold or getting it very easily, so it has the advantage of rarity. Believe me, man is capable of somehow creating more bitcoin… They tell you there are rules and they can’t do it. Don’t believe them.”
Charlie Munger
“Bitcoin is a way to have programmable scarcity. The blockchain is the data structure that records the transfer of scarce objects.”
Balaji Srinivasan
“Think of Bitcoin as a bank account in the cloud, and it’s completely decentralized: not the Swiss government, not the American government. It’s all the participants in the network enforcing.”
Naval Ravikant
It has been an interesting past year for sure. I am going to share the indices we follow below. The equity markets continued to perform well in the first quarter as shown below. However, we continue to be big believers in diversification. I saw a great quote from Adam Grossman on his blog Humble Dollar touting the benefits of diversification in a very eloquent way.
“Markowitz’s fundamental insight—for which he won a Nobel Prize—does carry a key lesson for every investor: Correlations are paramount. I can’t tell you when or if the stock market will see a correction. But the good news is, you don’t need to worry about building a strictly optimal portfolio, in the textbook sense, to protect yourself. You just need a sensible mix of stocks, bonds and other asset classes that aren’t tightly correlated. As you think about your portfolio and the risk posed by today’s stock prices, this is, I think, the most important thing.”
| Data Series | 3 Months | 1 Year | 3 Years | 5 Years | 10 Years |
| S&P 500 | 6.17% | 56.35% | 16.78% | 16.29% | 13.91% |
| Russell 2000 | 12.70% | 94.85% | 14.76% | 16.35% | 11.68% |
| Russell 2000 Value | 21.17% | 97.05% | 11.57% | 13.56% | 10.06% |
| MSCI World ex USA (net div.) | 4.04% | 45.86% | 6.34% | 8.92% | 5.21% |
| MSCI World ex USA Small Cap (net div.) | 4.88% | 65.17% | 6.89% | 10.55% | 7.14% |
| MSCI Emerging Markets (net div.) | 2.29% | 58.39% | 6.48% | 12.07% | 3.65% |
| Bloomberg Barclays U.S. T Bond 1-5 Years | -0.59% | -0.05% | 3.30% | 1.91% | 1.73% |
| ICE BofA 1-Year US T Note | 0.07% | 0.17% | 2.14% | 1.52% | 0.92% |
As you can see, small cap US (Russell 2000) and small cap value US (Russell 2000 Value) have performed very well last quarter. Since we tilt to small and value a bit more in our portfolios, that outperformance over the S&P 500 definitely helped our portfolios. That sensible allocation we believe helps portfolios in the long-term.
Bitcoin
We have been getting a lot of questions about Bitcoin and cryptocurrencies in general. Normally, we draft our own content in our newsletter. However, when we see something from one of our fund companies that is clear, we like to share that with you. I am going to share a piece regarding cryptocurrencies from Dimensional Fund Advisors, as well as a link from Avantis Investors. As you can see by the quotes at the beginning, I balanced 2 more pessimistic views versus 2 more optimistic views. We do not know which outcome will prevail. However, we do know that technology evolves, and that alone gives us pause that Bitcoin will be the winner in the end.
We presently see investing in cryptocurrencies as more of a speculation play than an investment. We view investing as the holding of companies in which we expect a return in the form of earnings, dividends and capital appreciation in stocks, and interest and return of principal in bonds.. (See Bogle’s quote at the beginning). While we do not speculate in portfolios at McCartney Wealth Management, we realize some clients like to speculate on the side. We would advise to speculate only with a small portion of your portfolio if you are going to do so.
Bitcoin is popular because it was one of the first cryptocurrencies to come out of blockchain technology. Being one of the first does not mean it will prevail.. A big piece of Bitcoin’s perceived value is that it is a decentralized currency, without regulation. In order for many companies and banks to support cryptocurrencies, there will need to be regulation due to laws around money laundering, which could potentially dilute the perceived value, or cause other cryptos to be adopted over Bitcoin. No one knows if Bitcoin is in a bubble or will be broadly accepted as a form of currency in the future.
In looking at some of the bigger bank and payment processing companies’ statements on cryptos, they are generally vague on Bitcoin, but in theory can/will support cryptos in the future. This language leaves the support open to a broader range of cryptocurrencies and the blockchain in general, but not necessarily Bitcoin.
Below are what we perceive to be the pros and cons of Bitcoin and cryptocurrencies at present.
Pros:
- Some see Bitcoin or other cryptocurrencies as a diversification in currency or hedge against inflation
Cons:
- Unregulated currency – there are no legal rights should something go wrong
- Cryptocurrency prices are subject to wide fluctuations
- There was no central market for pricing (although this is starting to change with Coinbase)
- Currently limited means of exchange, and may be difficult to liquidate quickly at a reasonable price
- Possible security issues, as exchanges and platforms are subject to breaches, especially if quantum computers become mainstream Quantum computers and the Bitcoin Blockchain | Deloitte Netherlands
Below is a piece by Weston Wellington of Dimensional Fund Advisors regarding Bitcoin and cryptocurrencies. If you want to read the piece at Dimensional’s site, the link is here. Tales from the Crypto: How to Think About Bitcoin
If you want to read another view, Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University and a consultant to our friends at Avantis Investors, published this short piece Bitcoin Lessons in Hindsight, Aspirations and Risk | Avantis Investors
Enjoy. Until next time,
Mike and Emily
Tales from the Crypto: How to Think About Bitcoin
By Weston Wellington Vice President
“Everything you don’t understand about money combined with everything you don’t understand about computers.”—HBO’s Last Week Tonight with John Oliver, March 11, 2018
Bitcoin and related cryptocurrencies (now numbering in the thousands) are the subject of much debate and fascination. Given Bitcoin’s dramatic price changes, it is not surprising that many are speculating about its possible role in a portfolio.
EXHIBIT 1
Price of Bitcoin for the last 10 years, March 2011–February 2021
Past performance is not a guarantee of future results.
In its relatively short existence, Bitcoin has proved extraordinarily volatile, sometimes gaining or losing more than 40% in price in a month or two. Any asset subject to such sharp swings may be catnip for traders but of limited value either as a reliable medium of exchange (to replace cash) or as a risk-reducing or inflation-hedging asset in a diversified portfolio (to replace bonds).
Assessing the merits of Bitcoin as an investment can be problematic. Adding it to a portfolio could mean paring back the allocation to investments such as stocks, property, or fixed income. The owner of stocks or real estate generally expects to receive future income from dividends or rent, even though the size and timing of the payoff may be uncertain. A bondholder generally expects to receive interest payments as well as the return of principal. In contrast, holding Bitcoin is similar to holding gold as an investment. Even if Bitcoin or gold are held for decades, the owner may never receive more Bitcoin or gold, and unlike stocks and bonds, it is not clear that Bitcoin offers investors positive expected returns.
Putting aside squabbles over the future value of Bitcoin or other cryptocurrencies, there are other issues investors should consider:
- Bitcoin is not backed by an issuing authority and exists only as computer code, generally kept in a so-called “digital wallet,” accessible through a password chosen by the user. Many of us have forgotten or misplaced computer passwords from time to time and have had to contact the sponsor to restore access. No such avenue is available to holders of Bitcoin. After a limited number of password attempts, a user can permanently lose access. Since there is no central authority responsible for Bitcoin, there is no recourse for the forgetful owner: a recent New York Times article profiled the holder of more than $200 million worth of Bitcoin that he can’t retrieve. His anguish is apparently not unusual—a prominent cryptocurrency consulting firm estimates that 20% of all outstanding Bitcoin represents stranded assets unavailable to their rightful owners.1
- Mt. Gox, a Tokyo-based Bitcoin exchange launched in 2010, was at one time the world’s largest Bitcoin intermediary, handling over one million accounts in 239 countries and more than 90% of global Bitcoin transactions in 2013. It suspended trading and filed for bankruptcy in February 2014, announcing that hundreds of thousands of Bitcoins had been lost and likely stolen.2
- The UK Financial Conduct Authority cited a number of concerns as it prohibited the sale of “cryptoasset” investment products to retail investors last year. Among them were the inherent nature of the underlying assets, which have no reliable basis for valuation; the presence of market abuse and financial crimes in cryptoasset trading; extreme price volatility; an inadequate understanding by retail consumers of cryptoassets; and the lack of a clear investment need for investment products referencing them.
The financial services industry has a long tradition of innovation, and cryptocurrency and the technology surrounding it may someday prove to be a historic breakthrough. For those who enjoy the thrill of speculation, trading Bitcoin may hold appeal. But those in search of a sound investment should consider the concerns of the Financial Conduct Authority above before joining the excitement.
______________________________________________________
FOOTNOTES
- Nathaniel Popper, “Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes,” New York Times, January 12, 2021.
- Alexandra Harney and Steve Stecklow, “Twice Burned – How Mt. Gox Bitcoin Customers Could Lose Again,” Reuters, November 16, 2017.
- “Prohibiting the sale to retail clients of investment products that reference cryptoassets,” Financial Conduct Authority, June 10, 2020.
DISCLOSURES
The opinions expressed are those of the author and are subject to change. The commentary above pertains to Bitcoin cryptocurrency. Certain Bitcoin offerings may be considered a security and may have different attributes than those described in this paper. Dimensional does not offer Bitcoin.
This material is not to be construed as investment advice or a recommendation to buy or sell any security or currency. Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.
The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.