The president of the United States and his family are selling and promoting memecoins. The vice president told a Bitcoin convention in Las Vegas last month that “crypto finally has a champion and an ally in the White House.”
Before taking office, the new chairman of the Securities and Exchange Commission was a cryptocurrency investor, adviser and advocate. And the Department of Labor last month rescinded its warning against putting cryptocurrency in retirement portfolios.
To say that these are good times for Bitcoin and other digital currencies is like stating that tariffs are rising sharply under the Trump administration. It’s obvious that the world is changing in dangerous ways, but we don’t yet know all the consequences. What is clear is that the rise of cryptocurrency is beginning to affect working people who are saving for retirement or for a child’s education or for the purchase of a home.
In fact, cryptocurrency may already be snuggled in your nest egg, whether you know it or not. I pointed out last year that many retirement portfolios — including my own — contained Bitcoin indirectly, through broad, diversified index funds that owned a company then known as MicroStrategy. It changed its name in February to just plain Strategy, which its founder, Michael J. Saylor, said was better for the brand. The company runs a declining software business, but it keeps growing anyway. Its main assets, if you want to call them that, are Bitcoin and market frenzy.
What’s more, just last month the S&P 500 welcomed into its ranks Coinbase, a company that owns Bitcoin and other cryptocurrencies outright and, more important, serves as a major trading platform and repository for all manner of digital assets. In addition, Tesla, the automaker led by Elon Musk and an important member of the S&P 500, owns more than $1 billion in Bitcoin.
Scores of other publicly traded companies have followed in Strategy’s footsteps and now hold Bitcoin or other cryptocurrencies on their balance sheets, in addition to traditional assets like cash or bonds. The shares of Bitcoin-heavy companies usually trade at a higher value than their underlying Bitcoin holdings. That won’t last forever. When Bitcoin plummets — as it did a few years ago — these companies, and the many investors who hold shares directly or through broad diversified funds, will be hurt, too.
Moreover, since the start of last year, the S.E.C. has allowed exchange-traded funds to hold Bitcoin directly — giving people and institutions that may be reluctant or unable to buy cryptocurrency outright an easy way of buying it. In April, there were already 91 such funds, according to ETF.com, a tracking site.
The largest of these, BlackRock’s iShares Bitcoin Trust, held more than $72 billion in Bitcoin as of Wednesday, the company said. For May, it ranked third among all exchange-traded funds for cash inflows, according to Morningstar, trailing only Vanguard S&P 500 ETF and Invesco QQQ, which tracks the Nasdaq 100 index.
BlackRock has begun to place small dollops of this Bitcoin fund into investment portfolios as an “alternative asset” aimed at increasing investment diversification.
In short, crypto is spreading. And unless you have gone to a lot of trouble to specifically exclude digital assets from your holdings, there’s a good chance that you are already a crypto investor. Given the current political alignment in the White House and Congress, I expect that the U.S. government will be encouraging entrepreneurs to sell you more cryptocurrency — or, really, to place more crypto into your accounts — without asking you for permission.
Yet More Crypto
The prospects for even greater uses for cryptocurrency are undoubtedly on the upswing.
Consider that a start-up called Circle Internet has generated the most hoopla for an initial public offering so far this year. It began publicly trading its stock on June 5 and is already worth more than $25 billion. If you’re broadly diversified through mutual funds or E.T.F.s, you will probably soon own a sliver of the company.
Circle’s main product is cryptocurrency, but of another kind: a so-called stablecoin, backed by U.S. dollars.
Stablecoins have been marketed as a secure way of transferring money outside the traditional finance system. I’m underwhelmed by the concept. Transferring money is something banks already do well. Using advanced digital technologies to add speed and cut costs is something the banking system can embrace and regulators can monitor. But this is something else.
Legislation that advanced in the Senate on Wednesday could give a significant boost to private, nonfinancial companies that run stablecoin systems. These include Circle and World Liberty Financial, which is partly owned by the Trump family.
Scott Bessent, the Treasury secretary, spoke approvingly of the outlook for stablecoins in Senate testimony on Wednesday, envisioning a privately run market, backed by U.S. Treasury bills, that could reach $2 trillion.
“I think that two trillion is a very, very reasonable number, and I could see it greatly exceeding that,” he said.
That could well be the future. But it would need to be accompanied by tight regulation, if the stability and integrity of the financial system are to be protected.
The Implications
While I’m not thrilled by the spread of cryptocurrency into mainstream portfolios, I’m not panicking. Yet.
Using Bitcoin as a small ingredient in diversified portfolios isn’t what I’d recommend, personally, but it could be useful. In an interview, Geoff Kendrick, global head of digital assets for Standard Chartered in London, said he had found that allocating 1 or 2 percent of a diversified portfolio to Bitcoin could improve overall returns and dampen volatility. Bitcoin’s price movements often aren’t correlated with those of the stock market, Mr. Kendrick said, particularly when the traditional financial system runs into a spate of trouble, as exemplified by the 2023 collapse of Silicon Valley Bank.
That said, I remain skeptical about Bitcoin. I’m still not sure that it is a financial asset, in the sense that stocks and bonds, which both have core intrinsic values, assuredly are. Bitcoin trades more like a commodity, say, gold or oil, though it’s far less useful in the physical world.
Nonetheless, some people are willing to speculate in it directly. Its price crashed spectacularly in 2022 — pulling the prices of stablecoins down, too — but Bitcoin has soared lately. Demand for cryptocurrency has risen, while Bitcoin supply has increased only at the stately pace anticipated in Bitcoin’s original mathematical design. In the two years through Thursday, Bitcoin rose about 265 percent, compared with 39 percent for the S&P 500.
In short, as long as Bitcoin and other cryptocurrencies, including stablecoins, remain a tiny part of a diversified portfolio — 1 or 2 percent sounds right to me — I won’t be too worried.
There’s too much else to think about. After all, as a global, diversified index fund investor, I’m exposed to all kinds of companies and factors that I haven’t investigated, don’t entirely understand and would never accept on their own. But humble acceptance of the overall marketplace is the point of broadly diversified investing.
Diversification is what Harry Markowitz, the Nobel Prize winner who created modern portfolio theory, called the only “free lunch” in investing because by holding everything, including things you don’t completely endorse, you can reduce your overall risk.
In small doses, it’s possible that cryptocurrency can be helpful. But, I emphasize, the doses need to be very small.
When you start talking about private cryptocurrency markets amounting to trillions of dollars, however, you’re talking about real money. That makes me very worried, indeed.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
The post There’s a Good Chance Crypto Is Spreading in Your Retirement Account appeared first on New York Times.
