Cryptocurrencies, digital media of exchange originally designed in response to the global financial crisis, are intriguing from an investment perspective. From the beginning of 2017 until now, their combined market value has risen by more than 1000% (Exhibit 1).
 

Speculation, Not Investment

While everybody wants an investment that gains 1000% in a year, cryptocurrencies do not satisfy the basic prerequisites that define traditional investments such as stocks, bonds and real estat —which we traditionally think of as assets with return potential. Stocks provide a claim on the expected future earnings of a company that can be realized as dividend payments or price appreciation. Bonds produce periodic interest payments and, under normal circumstances, return the investors’ principal at maturity. Real-estate investments provide rental income and the
potential for price appreciation.

The fair value of these traditional investments is typically estimated based on forecasted earnings, forecasted income or assets. However, the fair value of cryptocurrencies is anyone’s guess since they neither generate earnings nor are backed by assets. So while the dramatic and accelerating growth of cryptocurrencies may seem attractive, the only underpinning of this appreciation is the willingness of one investor to pay more than the previous investor. What happens when that stops?

The Real Value of Cryptocurrencies
As technology disruptors, cryptocurrencies and blockchains, or the public digital ledgers where cryptocurrency transactions are recorded, do appear to have promise. The digital assets tend to attract individuals seeking a degree of privacy they can’t get from conventional banking and payments systems. Meanwhile, corporations, entrepreneurs, venture capitalists, and even central banks and government institutions are more interested in the underlying technologies driving cryptocurrencies.

Many organizations are looking at how this technology can be used to improve operations and business outcomes. Their aim is to create a direct, secure and verifiable person-to-person system for payments that would be entirely private and digital, thereby removing traditional third-party intermediaries like banks. Whether this leads to actual paradigm shifts or just fosters marginal enhancements to businesses remains to be seen. Ironically, wider acceptance of these technologies may require more centralization and third-party verification, which would
cause them to become more similar to the systems they were designed to replace.

We are confident that our underlying investment managers have the tools to identify companies that may be affected by blockchain-related trends. Should viable cryptocurrency-related investments arise, it will be because the fundamental value of the business case can be cited.

Our View

The cryptocurrency market is just beginning to mature and the supportive value of digital coins remains difficult to price. We view them as speculative instruments at best and possibly worthless at worst, making them an unsuitable investment choice for pursuing important financial life goals—particularly for investors who can’t afford the high risk of permanently losing money.

In our view, it is far too early to consider including cryptocurrencies or blockchain-driven enterprises in a strategic investment portfolio. The recent introduction of derivatives on certain cryptocurrencies is an interesting development, but hardly one on which to build a solid investment case.

Important Information

Past performance is not an indicator of future performance.

Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should
it be construed as a recommendation to purchase or sell a security, including futures contracts.

In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.Narrowly focused investments and smaller companies typically exhibit higher volatility. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.

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