Morningstar - Q3 2022 - 27

TRENDS
Morningstar Experts Venture Into Crypto
At the 2022 Morningstar Investment Conference
in May, Karla Paxton hosted a panel called
" Why Aren't More Women Talking About Crypto? "
Paxton, a senior vice president of business
development at Morningstar, is an individual
cryptocurrency investor. She sat down with
Morningstar experts Madeline Hume, a senior
analyst who covers cryptocurrencies, and
Jasmin Sethi, associate director of policy research.
This excerpt from their discussion has been
edited for length and clarity.
Karla Paxton: Can you describe your own journeys
into crypto investing?
Madeline Hume: At this point, we don't consider
cryptocurrencies a viable investment vehicle
using the traditional long-term lens that we apply
to investing for concrete goals like retirement,
saving for college, things of this nature. It's
a technology, and we're still experimenting with it.
That doesn't necessarily make it a compelling
business model.
In my own portfolio, I treat cryptocurrency as
kind of an entrance fee to engage
with the technology, understand how it works,
and get acquainted with the pitfalls of
it. I funded my cryptocurrency portfolio with
gains from my retail stock portfolio, so
that I wasn't putting any of my own money at
risk. Not everybody can do that. For people
considering taking their wages in cryptocurrency
or taking out loans to put their money
in it, it's not necessarily appropriate. But if you
have enough that you could take to
the casino or take to the racetrack and treat
it as a sunk cost and a way to engage
with the market, that's typically the way to
go with crypto.
Jasmin Sethi: I have been very nervous about
investing in crypto. I'm also a lazy investor.
I don't like to research individual coins. I don't
even like to research individual stocks. I'm
a mutual fund/ETF person. I felt more comfortable
using a robo-advisor to invest in a diversified
basket of crypto.
Paxton: Why do cryptocurrency investor demographics
skew toward young, white, wealthy males?
Hume: Cryptocurrency investors are a pretty
tribalistic bunch. A lot of these Reddit communities
have stemmed from software programmers
who have taken this on as a project. What do the
demographics of coders look like? It skews
male, younger, wealthier, and oftentimes there
are fewer minorities represented.
When people use the term socioeconomic,
they often really mean economic. But
the socio part is equally important, especially
with cryptocurrencies, because people
rely on their networks of friends and neighbors.
We see that social factor driving interest
in and speculation in cryptocurrencies.
That typically means a network of guys in
their mid-20s. Other people get left out
of that conversation.
Sethi: I do think that women are probably
smarter in not having gotten into this
speculative asset class that we're not even
sure is an asset class. To be clear, we're
not here as an advertisement for crypto.
We're not telling everyone to run out and start
a crypto portfolio if you haven't thought
about doing so before. This is a way to broaden
access to information and provide some
different thoughts about it.
Hume: One of the potential reasons that
women are not as engaged with cryptocurrency
is that women are not as prone to taking
risk, especially risks that they don't understand.
With cryptocurrency, there are still a lot of
unknowns. We certainly aren't recommending that
more women get into crypto. But we know
that more-diverse perspectives typically allow for
better investment research and outcomes.
We want more voices in the room, not necessarily
more dollars in the Coinbase COIN account.
Paxton: Fidelity is going to allow investing in
cryptocurrency in 401(k) accounts. What are the
potential pitfalls?
Hume: From an investor's point of view, it is
difficult to find parallels to another asset
class in terms of the volatility of cryptocurrencies.
Fidelity's allowance of cryptocurrencies
in 401(k)s runs up to 20%. Now, it's up to plan
sponsors whether they accept that maximum, but
a 20% allocation to cryptocurrencies in a
401(k), from our view, is wildly inappropriate. If you
have a 60/40 portfolio, and you have just
a 2% allocation to bitcoin, that's 50% of your
volatility budget right there.
It's also hard to find parallels where a plan
sponsor has allowed individual securities on a
401(k) lineup. For the most part, 401(k) lineups
included diversified baskets of securities,
commingled investments, mutual fund vehicles.
Fidelity doesn't have a lot on the line here-
it's the plan sponsors that bear the fiduciary
responsibility.
Cryptocurrencies have interesting characteristics
from an institutional investor's perspective,
given that they are relatively uncorrelated. But
whether that translates to an actual investment is
something we're still analyzing in great
detail. For individual investors, I would say there
aren't any shortcuts to retirement savings.
That hasn't changed with the advent of
cryptocurrencies. There are three ingredients to
saving for retirement: diversification, compounding
returns, and time. Bitcoin is not going to
allow you to circumvent any one of those.
Sethi: This announcement came very soon after
the Department of Labor's guidance on
crypto in 401(k) accounts. Looking at that guidance,
it's very hard to imagine plan sponsors taking
Fidelity up on this. Forget 20%. Even 5% would put
a lot of burden on plan sponsors in terms
of their fiduciary duty, considering the valuation
risks, the hacking risks, and so forth. If any
plan sponsors do take Fidelity up on that,
it will be interesting to see what safeguards
they put in place. Will they allow only a very small
percentage or put up some kind of financial
acumen barrier? Time will tell.
27
https://www.morningstar.com/stocks/xnas/coin/quote
Morningstar - Q3 2022

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