Should I Invest in Ethereum? Why Conventional Christian Wealth Management Strategies May Deliver Better Long-Term Results Than High-Risk Investments
Should I invest in Ethereum or other cryptocurrencies?
It's a question we as wealth managers hear more and more frequently. Cryptocurrencies such as Ethereum, Bitcoin, and Dogecoin have captured the public imagination, and people don't want to miss out on an important new development in economics and finance.
That's understandable.
With any financial move, though, it's wise to educate yourself and apply what you learn to your circumstances and goals before letting go of your hard-earned dollars. Proverbs 27:23-24 says, “Know well the condition of your flocks, and give attention to your herds, for riches do not last forever, and does a crown endure to all generations?”
As you give thought to whether or not Ethereum is the right investment for you, consider the following:
What Is Ethereum?
Ethereum is a form of cryptocurrency, which is a decentralized medium of exchange that is stored in a digital database. So far, no developed country’s government has issued cryptocurrency. Consequently, the product derives its value only from the law of supply and demand.
Although cryptographic electronic money dates back to 1983, the first modern cryptocurrency, Bitcoin, appeared in 2009. Since then, Bitcoin has fluctuated from a value of less than $0.01 in 2010 to more than $60,000 in 2021.
Over the last decade, hundreds of other cryptocurrencies have joined Bitcoin. Some of these have attracted close attention, including Ethereum, which debuted in 2015. Although both Bitcoin and Ethereum rely on cryptography and distributed ledgers for storage and distribution, Ethereum operates using slightly different technology. It also has a much smaller footprint than Bitcoin, about $16 billion to the more established currency's $147 billion.
Is Crypto a Viable Long-term Investment?
In general, cryptocurrency is considered a highly volatile asset. Personal financial planners disagree about the value of cryptocurrency as an asset class although almost all urge caution. Suze Orman, for example, recommends making small investments in crypto provided you can afford to lose all the money. Dave Ramsey, the foremost Christian financial expert, does not recommend investing in crypto unless you are debt free, have fully funded a traditional retirement account, and have discussed crypto with your professional advisor. Ramsey claims cryptocurrency is unstable and does not have an established rate of return.
At Cooke Wealth Management, we tend to agree with Ramsey. Cryptocurrency is new to the investment world and while it may play a role in some investment strategies, we view it more as a speculative investment.
The Volatile History of Cryptocurrency
To understand the volatility of this asset class, we have to look at the history of the oldest cryptocurrency, Bitcoin. In December of 2017, Bitcoin traded at $15,433.73. Just over a month later, it was fluctuating between $6,000 and $9,000. That's a 40-60% drop in value in about 40 days.
At the time, investment professionals expressed concern around the inherently unstable and unregulated nature of cryptocurrency. Unlike fiat currency such as the U.S. Dollar crypto is not backed by a legal government, and unlike a business, it does not trade in a product or service. It's simply valuable because people have decided it is.
Comparing Crypto to Other Asset Classes
Although it's now a $1 trillion market, cryptocurrency is still small, and fairly new, compared to other asset classes such as stocks, gold, debt, or real estate. In addition, Bitcoin makes up about 69% of the crypto market. Smaller players such as Ethereum have an unimpressive global footprint relative to other investment opportunities.
The Future of Cryptocurrency
No one knows what will happen to cryptocurrency in the future. Some predictions say we'll see increased regulation and government oversight. Others focus on the potential growth, or hedge (protection), these currencies might provide.
The truth is, no one knows. It’s hard to say that cryptocurrency will act as a hedge against inflation, market downturns, or other economic risks, simply because we don’t have the data to support these claims. No one does, it simply does not exist. Unlike stocks or mutual funds with decades of performance history to review, we simply can't predict what will happen with any degree of accuracy, and it's disingenuous to say we can.
Can You Bring Crypto Into Your Portfolio Safely?
Yes, you can bring crypto into your investment portfolio safely if you follow wise wealth management principles. For instance, we believe cryptocurrency should not compose more than 5% of your portfolio. Consider sticking with Ethereum, Bitcoin, or another well-known currency. And when investing in a speculative investment, you likely should never invest more than you can afford to lose. Before you put money into any asset, it's always a good idea to talk with your financial advisor and explore how that investment might fit into your overall financial picture and goals.
Can You See Competitive Long-term Returns Without Crypto?
Some media commentators might suggest that cryptocurrency is the only viable investment for the future. If it's not in your portfolio, they seem to say, you risk losing out on the biggest opportunity of our lifetime.
We believe they're wrong.
The best investments can often be the most boring investments. Tuck away a percentage of your money every month into a stock fund with a long history of meeting or exceeding the stock market's rate of return. And watch it grow.
Most millionaires didn't make their money buying Bitcoin or Ethereum.
Why take More Risks Than You Have To?
Cryptocurrency is a risky investment. That doesn't mean it's a bad investment, but it is an uncertain one with a volatile history of both impressive gains and devastating losses.
When considering your investments, remember this: The more risk you take, the more money you stand to gain — or lose.
Your age, income, investment levels, and goals for the future (retirement or otherwise) should all be considered when deciding whether or not to sink money into Ethereum. But in general, your risks need to be measured, match your risk capacity and spread out over time. You'll likely make more money, lose less sleep, and see a greater profit in the long term.
Why Take Unprofitable Risk?
Whether cryptocurrency is a risk worth taking remains to be seen, for some it certainly will be, but for the millions currently invested in it we’ll have to wait and see.
The book of Proverbs frequently admonishes believers to modulate their risks. The message is almost always to be wise, cautious, and diligent. Investing in cryptocurrency can form part of a Christian's long-term wealth management plan. In most cases, however, it is most likely a riskier choice than seems wise to do so.
Careful, diligent investing in a well diversified investment portfolio can return wealth that will let you invest, plan and retire confidently. Crypto probably can't.
As your financial planning professionals in Irvine, CA, CWM is focused on empowering you to be a wise steward of your wealth and achieve your long-term wealth management goals. Contact us if you have more questions about cryptocurrency, Ethereum, or how to save and invest for your future.