Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

Is cryptocurrency really an investment? | Guest column

Undoubtedly you have heard about the new form of money known as digital or “crypto” currencies.

It is a fascinating new development in the financial world and it has caught a huge amount of attention on Wall Street as people try to capitalize on it. To define it, a “crypto” or digital currency (DC), is a form of “money” represented by digital data, or a data file, that can be used for the payment of goods and services online. A couple of the more popular cryptos include Bitcoin and Ethereum, but there are in the neighborhood of 4,500 private cryptocurrencies now identified.

There are a lot of big time players on Wall Street looking to capitalize on the current digital currency craze. They do this in several ways, for example “mining” and acquiring the DCs (or “tokens”); trading in the stocks of companies that purport to mine, use, or own DCs; or trading DC futures. We’ve gotten numerous questions from clients about DCs and “investing” in them. This begs the question: are DCs such as bitcoin truly an investment?

To answer this, let’s first define an “investment.” In my view, an investment involves the process of analyzing and placing money into a vehicle or instrument that one believes has a high probability of providing gain, or a positive return on capital (ROC), based on a definable and predictable source of return such as income (i.e. rent or dividends) or price appreciation based on future earnings. In other words, to be an “investment,” there needs to be a “fundamental” basis for the placement of funds. The “instrument” could be things that are expected to generate a positive ROC such as a bank CD, a high quality stock or bond, real estate, a mutual fund, etc.

So let’s turn to cryptocurrency. Is it an “investment?”

Based on the above definition of an investment, we think not. Crypto does not have definable “cash flow” such as earnings or dividends. Its price is extremely volatile making it a poor store of value. The key to trading or owning crypto is its perceived scarcity value. Many players in the crypto space believe a DC such as bitcoin will only increase in value due to their limited quantity (21 million produced) and increasing number and value of transactions using DCs. While this may be the case, it needs to be understood that the DC is only the medium for transactions; it is not providing the characteristics of an investment.

Trading in crypto is then really more a form of speculation, in my view, which is purely guessing on the future price of something based on non-fundamental factors, such as emotion or fear of missing out. As we do for all our clients’ investments, we believe the best approach for achieving positive ROC is accomplished through investing in diversified holdings of quality stocks and bonds that offer a rational basis for ownership based on sound financial fundamentals.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.


Talk to us

Please share your story tips by emailing editor@kentreporter.com.

To share your opinion for publication, submit a letter through our website https://www.kentreporter.com/submit-letter/. Include your name, address and daytime phone number. (We’ll only publish your name and hometown.) Please keep letters to 300 words or less.

More in Business

t
NASA selects Kent-based Blue Origin for lunar lander contract

Company receives $3.4 billion award to design and build vehicle Moon missions

A few Sound Publishing reporters joined local media in tasting the Mariners’ new season fare, finding the pork rib wings to be one the best items on the menu. (Photo by Bailey Jo Josie/Sound Publishing)
Mariners unveil new ballpark eats for 2023 season

Our reporters sampled tasty barbecue, pizza, ice cream and more that will be served at T-Mobile Park.

t
Ingersoll Rand to close Kent facility; about 69 employees to lose jobs

Industrial machinery manufacturer based in North Carolina

t
Taste ToGo Banh Mi restaurant reopens after Public Health closure

Three-day closure after seven people became ill after purchasing food Feb. 26 at business

t
Harbor Freight Tools to open at former TOP Food location in Kent

Mayor Dana Ralph gives business updates at Kent Chamber of Commerce luncheon

t
Education and Workforce Summit set for Kent’s ShoWare Center

Presented by the Seattle Southside Chamber of Commerce

t
L&I fines Kent contractor in Renton fatal trench collapse last year

Company faces fines of more than $400,000 for safety violations that led to death of Surjit Gill, 36

t
Kent’s Tents and Party Rents owner Bob Schlosser dies at age 67

Didn’t hesitate to donate tables and chairs to local nonprofits for fundraisers

t
NASA selects Kent-based Blue Origin for Mars mission launch contract

New Glenn rocket scheduled to launch from Cape Canaveral, Florida in late 2024

Bed, Bath & Beyond has closed its store at The Outlet Collection in Auburn after 27 years. ROBERT WHALE, Sound Publishing
t
Airways Brewing in Kent to expand patio at The Beer & Bistro Garden

Heated covering, second kitchen to be completed in June

t
Kent’s Zenovia Harris receives King County’s 2023 Larry Gossett Service Award

Kent Chamber CEO honored for ‘her commitment to social justice and leading with equity’