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Hard Assets & Crypto

Hard Assets & Crypto

 

When Did Crypto Become a Hard Asset?

If Wall St. is good at anything, it’s storytelling; and as the currency story fades, we now hear credible fund managers declare crypto a “hard asset.” What do they mean by that?

According to Investopedia – a hard asset is a physical object or resource that has inherent tangible value, such as gold, silver, oil, natural gas, land, real estate, or equipment.

Nowhere in that definition do we see a crypto described, but promoters emphasize the ways in which crypto qualifies:

  • Scarcity(not mentioned in the definition);
  • Potentialfor long-term value appreciation; and
  • Canbe seen as a store of value, similar to precious 

While we find limited similarities, are the differences more important? For example, an important quality for a hard asset is its inherent tangible value; or uses besides holding value. Houses can be lived in, precious metals are used in manufacturing or for art pieces (fine jewelry), and land can be productive (farming or commerce); so, what is the inherent value of a crypto asset?

A crypto asset is nothing more than a bit of computer code that is tracked on a blockchain ledger. Frankly, we see more value in the blockchain ledger than the crypto itself; and we are not the only ones. Many financial institutions are implementing blockchain technology without needing anyone’s crypto code to make it work. We see that crypto has little or no inherent value for us except where certain coins allow for “smart contracts.”

Note: Smart contracts allow the coin-holder to benefit from some activity like royalties on music or executing other rights attached to the computer code (Cardano and Ether are good examples of this.) Currently, there are very few uses for these features, and they could grow in the future.

Let’s look at another obvious difference – hard assets have a physical presence and crypto doesn’t exist without a computer to display it. How is crypto a hard asset again? If crypto doesn’t fit the classic definition, are there other “assets” similar to crypto that we can examine as hard assets?

 

Other Things That Are Not Hard Assets

Beanie Babies were very popular among collectors in the late 20th Century. Certain Beanie Baby dolls were scarce (dedicated websites tracked market values), but these toys had no inherent value, or valued alternate use. Once collectors felt there were too many versions of scarce Beanie Babies, the market fell apart.

Another classic example comes from 17th Century Netherlands (then called Holland). By 1634, frenzied buying of the rarest tulip bulbs pushed some prices as high as a house. Unlike a house, no one can live in a tulip bulb. Its only inherent value is the brief beauty it provides each year when it blooms.

Finally, let’s consider Pyrite, or fool’s gold. Like all precious metals, Pyrite is scarce and has limited industrial value in sulfur production. Its worth, however, is still about $1 per ounce as opposed to about $2,000 per ounce for gold. Gold has far wider and more valuable uses than Pyrite and it has a far higher inherent tangible value.

 

Scarcity Is Not Inherent Tangible Value

Every example from above had scarcity in common with crypto, but does scarcity somehow create or enhance inherent value?

While scarcity is a component of inherent value (a limited supply helps to support value), it’s not even mentioned in the Investopedia definition. As we demonstrated above, scarce things are not investable when they lack an alternate use with a stable value.

And this is where Wall St. is sliding a fast one past us. By focusing on non-critical issues that are also present in hard assets, Wall St. wants us to see crypto as a “must have” because it recently started selling funds of differing crypto assets.

In the not-so-distant past, Wall St. also wanted us to see safety/value in sub-prime mortgages and SPACs (giving money to a group that will buy a company or pay you back with interest.) Those situations didn’t work out well for most investors and we feel certain this one will not either.

 

Investor Beware

We are not blaming Wall St. for this development so much as showing it as it really is – a marketplace with some strict regulation that matches buyers with sellers in securities. There is no room for conscience when armies of buyers and sellers jockey to get the best prices all day long; Wall St only exists to make these transactions more efficient.

Judging whether Wall St sells securities at a fair value is not the job. Most players are limited to matching each side of a trade and executing it. It is entirely on investors with their advisors to determine where fair value lays and many players on Wall St. count on investors getting this part wrong.

We, like other advisors, exist as the counterbalance to the market when investors lack the knowledge and resources to compete directly. Our market, business and the economic analyses all factor in our choices and it’s really on us to find all the little details that make a difference, like whether a crypto is a hard asset.

 

Conclusion

Crypto is not a “must have” hard asset. It’s among the softest assets because it has no physical form or valuable alternate use today. Some crypto may earn its way forward and we will take a far harder look then.

Meanwhile, crypto is a hard pass.

 

Life UnLocked Partners, LLC is a Registered Investment Advisor (RIA) registered with the state of California, providing investment advisory services where registered or exempt from registration. Registration does not imply a certain level of skill or training. Investing involves risk, including potential loss of principal. Past performance is not indicative of future results. This material is for informational purposes only and does not constitute investment advice or a solicitation to buy or sell securities. For more information, please request our Form ADV or visit www.lifeunlocked.partners.