Cryptocurrencies represent digital or virtual currencies that rely on cryptographic techniques for security. Unlike traditional currencies regulated by governments, cryptocurrencies operate on decentralized networks based on blockchain technology. This means they are not controlled by any central authority, such as a bank or government entity, and the foundational moment arrived in 2008 with the release of a whitepaper by an anonymous figure or group known as Satoshi Nakamoto, introducing Bitcoin, the pioneering cryptocurrency. Nakamoto's proposal outlined a decentralized digital currency, leveraging blockchain technology—a distributed ledger system—to enable secure, peer-to-peer transactions without intermediaries. In 2009, the first Bitcoin transaction occurred, marking the practical launch of the cryptocurrency.
Major Currencies, Advantages, and Disadvantages
One of the major cryptocurrencies, besides Bitcoin (BTC), which is often likened to digital gold, is Ethereum (ETH), which introduced smart contract functionality, allowing developers to build decentralized applications (dApps). Ripple (XRP) primarily facilitates swift and low-cost international money transfers, while Litecoin (LTC) aims to improve transaction speed and storage efficiency.
Advantages of cryptocurrencies include decentralization, which reduces the risk of government interference, and enhanced security through blockchain technology. They offer accessibility for global transactions without intermediaries and have spurred innovation in finance, introducing concepts like decentralized finance (DeFi) and non-fungible tokens (NFTs).
However, cryptocurrencies have notable disadvantages. Their prices can be highly volatile, posing risks for investors. Regulatory uncertainty exists worldwide, with governments exploring how to regulate these digital assets. Security concerns persist at the level of individual wallets and exchanges, which can be vulnerable to hacking and fraud. Additionally, some cryptocurrencies face challenges with scalability to accommodate a high volume of transactions efficiently.
WHVP's Stance on Crypto Currencies
Our stance on cryptocurrency suggests cautious consideration within investment portfolios. We do not actively advocate for an allocation. Still, if a client insists on a small allocation (typically 1% to 2%) as a means of diversification, we acknowledge the potential benefits of exposure to the asset class. However, we always emphasize the necessity for investors to possess a high tolerance for extreme volatility and the willingness to lose the allocated amount in a potential worst-case scenario.
While we recognize the technological advancements and investment opportunities within cryptocurrencies, we maintain a conservative approach focused on wealth preservation, which does not align with that asset class. As such, we have yet to recommend that clients actively include cryptocurrencies in their portfolios. WHVP's perspective suggests an openness to exploring crypto inclusion in the future, contingent upon a longer track record for cryptocurrencies and improved tools for analysis, aligning with our ethos of understanding technological advancements while prioritizing conservative investment strategies for wealth preservation.
Despite the risks involved, we understand that some individuals may perceive potential benefits in diversifying through cryptocurrencies. Regardless of our company's stance, our partner banks haven't had a suitable crypto offering that could be easily booked in the portfolio, but this has recently changed.
The Option Today: Holding Crypto through a Liechtenstein based Private Bank
As an internationally positioned wealth manager, one of our partner banks in Liechtenstein combines tradition with innovation by providing access to the growing crypto asset class. This innovative opportunity enables clients to trade and manage crypto assets within a regulated banking environment, contributing to a portfolio's risk/return profile. While acquiring and managing crypto assets may pose relative complexity compared to traditional stocks or bonds, this bank's offering provides various advantages, including diversification opportunities, attractive pricing, collateral utilization for Lombard loans, and regulatory protections under the Liechtenstein Banking Act. Our partner bank operates under the oversight of the Liechtenstein Financial Market Authority, assuring clients of a secure custody solution for crypto assets and adhering to the strictest security standards. This ensures that crypto assets receive the same regulatory protection as securities, safeguarding them even in the event of the bank's bankruptcy. While we still do not actively advocate for a crypto position, we are pleased to have an option for clients seeking this kind of investment in their offshore portfolios. Please get in touch with us if you want to learn more about this option, including the pricing schedule.
And in the Future: Crypto Allocation through ETFs
In addition to the development above, numerous crypto exchange-traded funds (ETFs) applications are pending with the Securities and Exchange Commission (SEC), signaling a potential shift in the investment landscape. Industry experts anticipate a favorable response from the SEC by Spring 2024 regarding these crypto ETF applications. Once approved for American investors, crypto ETFs are expected to streamline the process of including cryptocurrency exposure within investment portfolios. This approval would significantly ease the accessibility for clients seeking crypto exposure, providing a regulated and familiar investment vehicle within the established framework of ETFs. This development is anticipated to open new avenues for investors interested in diversifying their portfolios with cryptocurrencies, offering a more straightforward and regulated means of participation in this evolving asset class.
If crypto ETFs receive approval from the SEC, it would streamline access for investors seeking exposure to cryptocurrencies, even those with offshore bank accounts in countries like Switzerland or Liechtenstein. These ETFs offer a convenient avenue for gaining exposure to crypto assets without directly holding or managing individual cryptocurrencies. These ETFs function similarly to traditional investment vehicles, making them familiar and accessible through existing investment platforms or channels offered by offshore banking institutions. Investors could seamlessly participate in these ETFs, allowing them to diversify their portfolios with cryptocurrency exposure while benefiting from the security and regulatory oversight these investment products provide.
Offshore banks in jurisdictions like Switzerland or Liechtenstein often offer their clients a wide range of investment options. With the introduction of SEC-approved crypto ETFs, these offshore banking entities can integrate these products into their investment portfolios, providing their clients with an additional avenue for diversification, aligning with their investment preferences and risk tolerance.
Do you want to stay current on our blog posts and market outlooks? Sign up for our free market report sent out every six weeks: