Cryptocurrency Risks
The past few weeks have reminded investors of the risks involved in allocating capital to cryptocurrencies and related assets. Cryptocurrencies, in large part, are not backed in value by probabilistic cash flow generation, as is theoretically the case with stocks and bonds. Rather, the posited value of a cryptocurrency is derived from the idea that spenders will eventually create sufficient demand to use these non-fiat currencies to the point that supply-demand pressures will support a higher price point.
In the past few weeks, two of the world’s largest crypto firms, FTX and BlockFi, filed for bankruptcy. This was due in part to operational and financial practices that were questionable at best, and due in part to the fact that many cryptocurrencies have no intrinsic underlying value as defined by traditional financial valuation.
As additional crypto firms are facing solvency questions, investors should understand the multitude of risks associated with this asset class in order to make informed decisions.
Read more on this subject here
- Anthony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management
