Interest in crypto soars, but case for investing in it still falls short

2024 proved to be a transformative year for crypto. After years of resistance, the US Securities and Exchange Commission (SEC) approved 11 spot Bitcoin exchange-traded funds (ETFs) in January, boosting the asset’s legitimacy and accessibility.

Further bolstering the industry’s outlook, Donald Trump, former crypto critic turned advocate, was re-elected as US president. He has declared his ambition to make the US the “crypto capital of the planet” and has already taken steps to achieve that.

In addition to nominating former SEC commissioner and crypto advocate Paul Atkins to succeed crypto-critic Gary Gensler as the next SEC chair, he has also appointed venture capitalist David Sacks to the newly created role of “White House AI and crypto czar”.

While the feasibility of Trump’s proposal for a strategic Bitcoin reserve remains uncertain, government support for digital assets is expected to strengthen.

Institutions are not sitting on the sidelines either. Issuance of crypto-themed funds has been on the rise while companies such as MicroStrategy are adding more Bitcoin to their balance sheets. A 2024 survey by Sygnum indicated that 57 per cent of institutional investors plan to increase their crypto exposure in the future.

The rise in government and institutional interest culminated in Bitcoin crossing the US$100,000 psychological barrier for the first time on Dec 5, 2024. Although prices have since retraced below this level, Bitcoin still gained an impressive 122 per cent last year. This surge in crypto prices has inevitably sparked a key question among investors: Should I include crypto in my investment portfolio?

No intrinsic value

The absence of intrinsic value remains crypto’s biggest flaw, and that has not changed with rising market prices. Intrinsic value refers to an asset’s true worth, derived from fundamental factors such as earnings, dividends and cash flow. Unfortunately, crypto possesses none of these attributes, which makes valuing it an impossible task.

The ease with which crypto tokens can be created today further underscores their lack of value. Platforms such as Pump.Fun make it possible for anyone to launch tokens in minutes, requiring no blockchain knowledge or coding skills whatsoever.

In November last year, a 13-year-old streamer, known as $Kid, created a meme coin called Gen Z Quant on Pump.Fun. By leveraging a livestream to generate hype, he successfully drove the token’s price up by more than 250 per cent within minutes. He then cashed out with nearly US$30,000 in profits, causing the token’s price to collapse.

Gen Z Quant is just one of the many meme coins speculators buy in the hope of selling them to a “greater fool” for profit. These tokens are fundamentally worthless, and while it may seem fun to participate in a pump-and-dump scheme, you may very well end up being the ultimate fool yourself. With no intrinsic value to back it up, crypto remains a risky investment, driven solely by sentiment and speculation.

The weak investment case for crypto extends beyond meme coins; it also applies to the so-called “legitimate” and “safer” blue-chip cryptos such as Bitcoin and Ethereum.

Consider Bitcoin’s potential role in a diversified portfolio. Parallels are often drawn between Bitcoin and gold due to their shared qualities of decentralisation and scarcity – traits that have earned Bitcoin the label “digital gold”. These same traits have led some to propose Bitcoin as a potential hedge against inflation and market volatility. But can Bitcoin perform that function?

Looking back in history, we observe that Bitcoin has indeed risen in response to positive inflation shocks and could serve as a useful hedge against inflation. However, Bitcoin has not demonstrated the characteristics of a safe-haven asset. Unlike gold, it tends to decline during periods of heightened uncertainty and has shown high sensitivity to interest rates changes.

Most recently, Bitcoin prices fell in tandem with equities on Dec 18, after the Fed announced that it only expects two rate cuts in 2025. Given its positive correlation with equities, Bitcoin cannot and should not replace gold as a reliable hedge against market volatility and risks.

Outside its investment shortcomings, crypto’s effectiveness as a currency is also in doubt. The extreme volatility of crypto prices continues to undermine its viability as a medium of exchange, overshadowing any potential benefits crypto may offer in terms of improved accessibility, lower costs or faster transaction speeds.

Consumers are hesitant to use crypto for transactions, fearing the value of their tokens might surge. After all, nobody wants to repeat the mistake of Laszlo Hanyecz who paid 10,000 Bitcoins for two pizzas in 2010. Similarly, businesses are reluctant to accept crypto payments due to the substantial price volatility and the risk of prices dropping to zero.

Driven by profit motive

Increasing government and institutional participation has reduced the perceived risks of crypto, drawing more retail investors into the market. However, it is important to remember that these organisations are ultimately led by people, and people are fallible.

In Singapore, for example, Temasek invested in crypto exchange FTX, which turned out to be fraudulent. In China, we witnessed the collapse of the real estate sector, a sector in which the Chinese government encouraged its citizens to invest heavily.

On the institutional front, the investment industry tends to sell products that people want to buy, regardless of whether they are sound investments. For instance, despite its CEO’s criticism of crypto over the past few years, JPMorgan has continued to offer crypto funds to its wealth management clients. Similarly, in response to client demand, Goldman Sachs reopened its crypto trading desk in 2021, three years after shutting it down.

These examples suggest that the institutionalisation of crypto is driven more by profit motives than by a genuine belief in its value as a solid investment option.

With Bitcoin delivering stellar returns in 2024, it can be tempting to jump on the crypto bandwagon. However, from a risk-reward perspective, we believe crypto does not warrant a place in investors’ portfolios at this time. Increased adoption of Bitcoin could potentially alter its behaviour over time, such as reducing its volatility. But the case for investing in crypto remains weak for now.

The writer is a research analyst with the research & portfolio mnagement team, FSMOne Singapore, the B2C division of iFAST Financial. The latter is a subsidiary of iFast Corporation.