PODCAST EPISODE 238: Crypto and Principles for Investing




      • 00:00 – Episode begins, Paul welcomes listeners.
      • 00:50 – Dimensional Fund on Crypto
      • 01:28 – The price of Bitcoin.
      • 03:15 – Key considerations on bringing cryptocurrency into your portfolio.
      • 07:20 – Where cryptocurrency might fit in a portfolio.
      • 08:16 – Paul on expected return.
      • 09:00 – Paul on mitigating uncertainty.
      • 09:40 – Paul on Liquidity needs.
      • 10:35 – Episode ends, thank you for listening.



Dimensional Fund Video – Crypto: Currency or Investment?

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Full Episode Transcription



Welcome to your business your wealth. I’m Paul Adams, co founder of sound financial group. Glad you guys could be here today, we are going to watch a short clip from dimensional fund advisors. They did this great little clip on cryptocurrency and it talks a little bit about it. Many of you have been interested in cryptocurrency and not sure how to get into the market etc. And this is going to give you some of the very wide basics on cryptocurrency. And I want you to listen for a few principles of planning or any investment or asset you would acquire that he talks about in this video. And I’m going to come right back at the end for a moment just to share with you what those three principles are and how they can apply to your life. I hope you guys enjoy.


Well, welcome and thanks for joining us for a discussion on cryptocurrency. We know this has been a popular topic in the media and with investors. We want to focus the conversation today around where cryptocurrency might belong in an investment portfolio and review some key concepts to potentially consider before making the decision to purchase cryptocurrency. Our subject matter expert Joining me today is Philip Meyer bronze head of investment solutions analytics and vice president at dimensional really great to see you in the studio today, Philip, it’s great to be here. Excited to talk about cryptocurrency and let’s start first with the price of Bitcoin. It’s been extremely volatile and interesting to see. And I’m sure that’s why it’s been in the news today.


Yeah, absolutely. I think the price is probably the one metric that everyone’s looking at, that’s interested in the space and for at least two reasons I can think of so one of scores the just the rise that we’ve seen when measured in US dollars, for example, Bitcoin has gone up from well close to zero just over 10 years ago to just over $30,000 today. So certainly a storied rice in many ways, but on the other hand also arise that’s been accompanied by a lot of volatility. So a lot of fluctuation in bitcoins price when measured in US dollars. And that includes the most recent two months when Bitcoin peaked at about $65,000 in April of 2021. Now down to just over $30,000, so a 50% drop in the span of six weeks. And it’s not the first time that’s happened. So certainly a very volatile experience as well. And I think that reflects a lot of the uncertainty in the space are for this asset, whether that’s just uncertainty around technological and economic viability. So is this actually something that will be adopted to some degree in the future political uncertainty, we’ve been getting news out of China, for example, recently clamping down on Bitcoin mining, certainly uncertainty around the impact on the environment, Bitcoins, enormous electricity usage, and what that may imply for its future adoption. And I think one thing that’s important to keep in mind here also is that, despite the rise that we see charted from zero to 30,000, or in total market value, just over $500 billion. Today, it’s still only a tiny fraction of the overall investable opportunity set. So I think if bitcoin were to be included in a portfolio at all, it certainly seems to be very clear to be a tiny, tiny sliver of one’s portfolio.


Let’s talk more about that, Philip. If we’re thinking about implementing cryptocurrency as part of our investment portfolio, what are some key considerations we might look at?


Yeah, I think it’s important to have a clear framework that links your goals as an investor. So what’s the portfolio intended to do for you to each one of the potential components of that portfolio? So how can each investment or acid and a portfolio help you achieve your goals as an investor better, and three very common goals that investors have are a positive expected return. So many investors would like to grow wealth on expectation, mitigating uncertainty, so forgiven expectation, reducing the uncertainty around that expectation is typically something that’s the goal of investors. And then third liquidity provision. So cash function, in other words, helping provide for short term liquidity or expenditure needs. So these are three very common goals. And whether it’s Bitcoin or any other potential addition to your portfolio, I think it’s important to reflect on how a potential asset like Bitcoin can or cannot help you with any one of these goals. Well,


let’s first start with expected return. Can you talk more about that? Absolutely. So


for expected return again, the goal is to grow well, fun expectation, and we have a traditional well established toolkit, of course, to achieve that goal stocks, bonds, and particular corporate bonds are priced to give you a positive expected return. Now with Bitcoin, it doesn’t quite work the same way so bitcoins don’t buy you any claim on future cash flows. If you own a Bitcoin today, gonna own a Bitcoin 10 years from now. So not necessarily positive expected returns, certainly a lot of uncertainty around the return expectation.


Yeah, when I think about Bitcoin, it’s what you’re paying today and you’re hoping that someone will buy it from you at a higher price in the future and that’s your expected return. earn reminds me of when I used to collect Beanie Babies as a little kid hoping that one day I could sell my beanie babies for 10 times more. Now that’s not the case are currently sitting in my house and my two and six year old boy play with them. But that’s the idea, right? You’re hoping that somebody will pay more for that Bitcoin in the future?


And that very much seems to be the idea. So really, the way to Make Money With Bitcoin is to find somebody down the line, who will pay you more for that Bitcoin than you paid when you first acquired it. So very different, again, from having a positive expected return on a stock or a bond.


Now let’s talk about more mitigating uncertainty. Let’s touch on some points there.


Yeah, I think again, it’s important to keep in mind, what are the traditional tools, so for mitigating uncertainty, reducing uncertainty, the traditional tool, our tools are government bonds, or if you think about inflation, adjusted wealth and uncertainty, for example, it would be Inflation Protected government bonds, so again, well positioned without traditional toolkit, but the question today is, Can Bitcoin or cryptocurrencies linked to that goal, and we’ve already discussed the volatility, the enormous fluctuations in its value. So I think it’s fair to say that given that volatility, it’s not necessarily something that can help you mitigate or reduce uncertainty. If anything based on its historical track record an enormous volatility in the track record, you should probably expect it to increase the volatility potentially increase the uncertainty, if you were to include it in your portfolio.


So might even do the opposite. So thinking about the last consideration, liquidity can cryptocurrency serve as short term cash need for you and your portfolio?


Well, after all, they are called cryptocurrencies. So maybe there’s a role there. But on the other hand, the volatility comes in once more. So what I need from cash or some kind of asset that helps me with short term liquidity provision is of course, that I need to be sure that it buys me what I wanted to buy. So if I paid for for groceries, or pay my rent at the end of the month, I need to be sure that that’s going to be possible that the asset, the cash, the currency, hold it value, holds its value, up until that point, and that’s, again, given the volatility given daily price movements of 10 20%, which are not uncommon with Bitcoin and other cryptocurrencies, not something that necessarily allows you to connect Bitcoin to that third goal of providing for short term liquidity needs. Very good,


well, hard to measure expected return, lots of volatility, maybe some issues with liquidity, Phillip, it’s hard for me to see where cryptocurrency might fit in an investment portfolio. What’s your take on that to close today?


I think that’s a valid conclusion. And I think it also demonstrates the value of having a rigorous framework. So if you clearly link your goals as an investor, and we’ve covered three today, to how each individual component of your portfolio can help you achieve those goals. And then you see, well, there’s no role for a proposed asset today it was Bitcoin and maybe something else tomorrow, then I think it’s also good to know that, well, maybe there isn’t a role, maybe there’s no need to necessarily invest in Bitcoin especially. And I think that’s the good news here. If there is a well established toolkit that helps you achieve the goals we’ve discussed today, and we’ve given the example stocks, bonds, corporate government bonds, and then of course, cash for the short term liquidity provision.


Great. Well, thanks so much, Philip, really appreciate your time. And you being here in the studio today. Hopefully, you found the discussion helpful. And on behalf of all of us at dimensional. Thanks for tuning in, and we hope you have a great rest of your day.


Did you catch the three principles? Well, here they are. Number one is expected return that any asset we get one of the things we want is some expected return. And what we should understand before investing something is what is the source of the expected return in publicly traded stocks is that the underlying company or companies in an investment portfolio are going to grow in an entrepreneurial free market environment through time that allows our assets to grow in value in a home it might be its capacity to be rented, or remodeled and then sold in the case of flipping homes. So you can kind of see that in some very basic assets. And he points that that is not exactly the same with cryptocurrency. Second is mitigating uncertainty. Now one thing you can do with an asset class is be able to buy an asset class or shape your investments in such a way that the volatility, the uncertainty of daily returns fits the life in the plan that you have for your life and your family. So are you managing uncertainty, that’s a reason why we own car insurance, life insurance, disability insurance, why we have a will and a trust, all of those things. And managing uncertainty is an important part. cryptocurrencies don’t offer much of that, because we don’t have enough history of how they move as it relates to markets, or how they’re responding right now, as he mentioned, to government scrutiny both in the United States and across the world. And last but not least, is an assets ability to be quickly converted to cash in some dependable manner because everybody has liquidity needs. So that’s the third principle is liquidity needs that he talked about and the importance of you making sure that you have the appropriate amount liquid, which he doesn’t get into but the reason that’s so important is so that your other investments have enough time to be there to grow, to get through the market volatility and bring us out on the other side with greater net worth greater returns greater assets, which we don’t get a chance to enjoy if we abandon a strategy, or any strategy partway through its implementation. Anyway, I hope that was useful to all of you guys and I was always here at sound financial group and to your business, your wealth podcast. We hope that this has been a contribution to you being able to design and build a good life



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