Understanding Cryptocurrencies: Speculation or Investment?
You’ve probably seen plenty of headlines touting Bitcoin and other cryptocurrencies as incredibly lucrative investment opportunities. The idea of blockchain technology, on which Bitcoin and other cryptocurrencies are based, was just an idea 15 years ago and has now created a space for itself in daily news and price alerts. The launch of Bitcoin ETF’s in 2024 has added further fuel to this fire.
But what exactly is blockchain technology? And what is its relationship to cryptocurrency? Blockchain is a digital system for recording transactions and data in a way that is tamper resistant and decentralized, meaning no single entity controls the data; it is like a public ledger that everyone in a network can see and add to, but the historical data cannot easily be changed. Cryptocurrency is a digital or virtual means of exchange that uses blockchain technology to record transactions.
Cryptocurrencies operate on blockchain networks, making the transactions secure, transparent and decentralized. But because cryptocurrencies are not physical objects, like the dollar or the euro, they can only be stored in a “digital wallet”—a virtual bank account that enables account holders to make online transactions. While Bitcoin may be the best-known cryptocurrency and largest by market capitalization, according to Coinbase, there are more than 11,000 cryptocurrencies for sale today.
Cryptocurrencies offer some compelling characteristics that may make you curious about their appeal. The accounts cryptocurrencies are stored in have lower fees than a traditional bank account. Since transactions are anonymous, there is greater security compared to other on-line payment methods because you are not sharing credit card or personal information over the internet. And, due to a lack of intermediary institutions and government regulation, cryptocurrencies provide increased flexibility compared to traditional currencies, including little to no costs for wire transfers, near frictionless international payments and no need for ATMs or brick and mortar banks.
We are also starting to see increased adoption of blockchain technology for use in supply chains, real estate, gaming and data integrity. However, it is important to distinguish blockchain technology from cryptocurrency itself, as many use cases of blockchain operate on other “networks” that have little or nothing to do with Bitcoin. Supporters of cryptocurrency see it as the future of finance and are eagerly investing, believing that they will only increase in value over time. And while the growth of cryptocurrency over the last ten years is undeniably exciting, it is essential to separate hindsight bias and feelings of missed opportunities from rational investment decision making. When viewed through a critical lens, considerable risks become apparent, and it is easier to see why the rise of cryptocurrency is based on speculation and is not a sound investment opportunity for long-term investors.
The many risks of cryptocurrencies
Unlike traditional fiat currencies, cryptocurrencies are not backed by any central authority, like the Federal Reserve. While some argue this is a benefit as no single government can control the currency, it also means it comes without stabilizing mechanisms and minimal regulatory oversight. As such, there is the potential for higher price volatility and a considerable amount of unquantifiable risk. The users of the failed cryptocurrency exchange FTX witnessed this firsthand in 2022.
Although cryptocurrencies, Bitcoin and Ethereum specifically, have shown decreased volatility in the past few years, they are still at the high end of the volatility spectrum. According to a June ‘24 CFA Institute study, Bitcoin’s annualized volatility is moderating verse its historic range, but still maintains peaks and averages on par or higher than volatile, large tech stocks. And it still has 4x the volatility of the S&P 500 according to J.P. Morgan analysts, which you can see visually in the chart below.

Part of the reason for the volatility is that only a fraction of Bitcoin supply trades on exchanges. Most of it is kept off the market by individual account holders in “cold wallets” for secure storage. This means that, because of the limited supply of coins available to trade, Bitcoin behaves like a thinly traded stock, which adds to the daily volatility. This kind of see-saw market may be enticing for speculators, but it makes cryptocurrencies a poor replacement for assets that offer long-term growth—like stocks—or for those that can provide stability—like bonds.
Beyond volatility, the lack of regulatory clarity presents other risks. Investors have few protections against fraud or mishandling, meaning there is little recourse for recovering your funds. For example, the 2014 collapse of Mt. Gox—a leading Bitcoin intermediary—resulted in the loss of hundreds of thousands of bitcoins. Similar incidents, such as BitConnect, Coincheck, Voyager Digital, and FTX, highlight the precariousness of investing in unregulated markets. Additionally, users of secure “cold storage” wallets face the risk of losing access to their accounts permanently if passwords are forgotten. Back in 2021, an estimated 20% of all outstanding Bitcoin was inaccessible due to such issues.
One final consideration is the energy use required to sustain the usage of cryptocurrency. The amount of electricity necessary to maintain the networks and validate the system is an incredible drain. As we continue to see tension between traditional grid use and rapidly expanding demand from data centers, cryptocurrencies must prove their worth to capture their necessary supply.
How to classify cryptocurrency
When considering an investment for your portfolio, it should be clear what purpose the investment serves. Is it intended to protect you from inflation, serve as income during retirement or provide asset growth?
A fundamental problem when understanding cryptocurrencies, is that it is unclear how to classify them. The U.S. Comptroller of the Currency now defines them as “digital assets” and allows U.S. banks to conduct banking in stablecoins (a type of cryptocurrency whose value is tied to an outside asset, like the U.S. dollar) and participate in blockchain networks. Yet cryptocurrencies are different from other currencies because merchants do not have to accept them, and they are not widely used as a unit of value. The IRS classifies cryptocurrencies as property and subjects them to capital-gains tax, while the Commodities Futures Trading Commission has convincingly argued that cryptocurrencies should be considered commodities. The classification for cryptocurrencies is still up for debate, but they clearly do not yet fit into an established asset class like stocks, bonds or cash.
One development from 2024 that may help with the classification of cryptocurrencies is the decision by the SEC to allow the listing of Bitcoin and Ethereum ETFs. This development provides a new way to access Bitcoin but comes with some issues as well. These ETFs vary in structure, from those that mirror price movements to others holding underlying cryptocurrencies directly. If someone is trying to capture the price movement of Bitcoin and Ethereum, then this could be a suitable vehicle, but if they are trying to participate in decentralized finance and an independent monetary system then an ETF would not be appropriate.
We believe you need to be able to identify the purpose of an investment, and at this still uncertain stage with cryptocurrencies, there is not a clear answer to this question. You will likely keep hearing about the potential for unlimited upside and the rush of excitement from participating in the next or newest thing. However, these are not the qualities of sound investment policies, but of speculations.
That’s not to say that cryptocurrencies are inherently dangerous or that they can never be part of our clients’ portfolios. Rather, it is still an early, uncertain market with a lot of players and a lot of volatility. As with all opportunities, as the cryptocurrency market evolves, we will continue to monitor its metrics and how cryptocurrency may fit into a long-term, diversified portfolio.