At a glance:
- A cryptocurrency is a digital currency stored on blockchain technology.
- Cryptocurrencies can be more volatile than traditional investments and involve various other risks.
- Vanguard’s time-tested philosophy can offer perspective on the world of digital investing.
Like most things with a rising price tag, cryptocurrencies have garnered global recognition and interest for their sudden increase in value. And it’s not just the financial services industry that’s paying attention—from experienced investors to individuals just beginning their investment journey, many are wondering, Are cryptocurrencies something I should look into?
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 decentralisation means that 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 it. 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.
Realise 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? 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 jeopardise 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 investors know, our investing philosophy encourages staying the course and tuning out the noise. Our time-tested principles emphasise that investing for the long-term 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 and blockchain become increasingly mainstream, we’ll continue to monitor their development and discern the best path forward for our investors.
If you would like more information please contact your LifePath financial adviser.
Article written by Vanguard, 8 November 2021.