To Crypto or Not

One area of the market that has captured a lot of attention is Crypto. Much of the hype behind Crypto has been that it is not necessarily correlated with the broad markets. Crypto is decentralized (not under the umbrella of any government) and viewed as an alternative to the established currencies-the dollar, euro, etc. Unfortunately, many investors are unaware of the risks involved in investing in Crypto and can often suffer significant losses.

Banks, hedge funds, and pensions have been getting into Crypto, making it seem attractive to investors. Often, Crypto is referred to as an alternative investment which usually refers to something beyond stocks, bonds, cash, mutual funds, and exchange-traded funds. There are many types of alternatives, but they have a few characteristics in common:

  1. They are not regulated by the Securities and Exchange Commission (SEC).

  2. Some Alternatives are illiquid.

  3. There is a low correlation between the market and unconventional asset classes.

Based on these characteristics, alternatives are considered highly speculative investments, and only accredited investors with a good understanding of the risks should invest in them. The Securities and Exchange Commission (SEC) defines an accredited investor as a person who has a yearly income of $200,000 if filing single or $300,000 if filing jointly, and has a net worth of $1M, excluding the value of the primary residence or works in the financial industry.

Additionally, like many asset classes, there is an index that tracks Crypto known as the Nasdaq Crypto Index (NCI). This index contains several Crypto positions, including Bitcoin, Ethereum, Litecoin, etc. It is designed to measure the performance of a significant portion of the digital asset market and provide a benchmark for a broad basket of Cryptocurrencies. So how has this Crypto index performed? According to Dorsey Wright & Associates, from 12/31/2022 to 09/20/2022, NCI is down 60%, while the S&P 500 is down just 19% in this same period. So rather than providing a hedge against a significant market drop, Crypto has accentuated the recent market losses. Furthermore, along with the broad markets, two of the most significant Crypto currencies reacted negatively to the latest interest rate hikes and inflation reports, illustrating that Crypto is not immune from negative news and can behave like the broad markets.

Is Crypto worth the risk? Again, this is something each investor and advisor must determine.

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