Cryptocurrencies and Vanguard: What we think
Over the past several years, cryptocurrencies have garnered global recognition and interest as being a highly volatile and speculative asset class. And it's not just Wall Street that's paying attention—from experienced investors to individuals just beginning their investment journey, many are wondering: Are cryptocurrencies something into which I should look?
What's a cryptocurrency?
A cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren't backed by major governments or developed economies. This decentralization means blockchain technology validates these digital transactions without oversight or intermediaries. While cryptocurrencies are generally meant to serve as a medium of exchange, much of the attention they receive is as a financial investment.
It's hard to talk about cryptocurrencies without acknowledging the savvy technology behind them. Cryptocurrencies are stored and transferred on an online ledger known as blockchain, which is distributed on a peer-to-peer network. These ledgers are public, and once transactions are recorded, they can't be changed. Blockchain technology offers key benefits such as accuracy, transparency, and speed.
Realize the risks
The surging value of various cryptocurrencies—such as bitcoin, dogecoin, and the like—can make it tempting to invest, but consider these risks before purchasing a digital currency:
- With value comes volatility. In recent years, cryptocurrency prices have experienced wider fluctuations than traditional assets (such as stocks and bonds) and some have had dramatic short-term drops. This volatility makes cryptocurrencies impractical as a medium of exchange, and the sudden price movements can encourage impulsive buying and selling. Additionally, these market conditions can make it difficult to liquidate a position in a timely manner, making liquidity risk a real concern.
- Risk without reward. Unlike stocks and bonds, cryptocurrencies don't pay dividends or cash payments, and therefore don't offer any intrinsic value for the sizable amount of risk the investor takes on.
- Who's in charge here? As stated earlier, cryptocurrencies are largely unregulated without the backing of major governments or economies. This lack of regulation makes it unlikely that cryptocurrencies will be able to achieve the value and quality of other currencies. Additionally, the anonymity of the digital transactions lends them to possible illegal activity.
- Cybersecurity scares. Cryptocurrency exchanges are subject to breaches, disruptions, and failures that can jeopardize investors and their personal information. Since cryptocurrencies aren't currently backed by any major governments, investors are unlikely to recover lost funds.
Since cryptocurrencies are highly speculative in their current state, Vanguard believes their long-term investment case is weak. As many of our clients know, our investing philosophy encourages staying the course and tuning out the noise. Our time-tested principles emphasize that long-term investing is essential and reacting to short-term trends can be costly for one's portfolio. While we don't currently offer cryptocurrencies as an investment option, we acknowledge the impact they're making in the investing world. As cryptocurrencies become increasingly mainstream, we'll continue to monitor their development and discern the best path forward for our investors. And as your trusted financial steward, we have some guidance when it comes to your financial strategy.
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All investing is subject to risk, including the possible loss of the money you invest.