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As investment managers we always look forward to December as it is such a welcome break in routine. This time of year we check to ensure clients have complied with Required Minimum Distributions from IRAs and consider harvesting gains or losses in preparation for year-end tax calculations. We look back and think about the major events throughout the year, how they effected markets and our portfolios, how we addressed each event and finally what we learned. We wish you lots of love and happiness this holiday season!

The one topic clients, prospects, and the guy who installed my new hot water heater were most interested in exploring this year were our thoughts on cryptocurrencies and Bitcoin specifically. More on that later. The general idea is that bitcoin lower case, which is the actual currency is a unique string of code that can be owned or exchanged with another party. The code itself is very secure because it is tracked on a public ledger for all to see so it cannot be duplicated or altered.

That ledger is called Bitcoin capitalized. In order to own bitcoin one must agree to the rules of the Bitcoin ledger. One such rule is there will only be 21 million units of bitcoin, ever. This is an interesting rule because if a finite number of units may ever be created than the possibility of inflation due to new units being issued is eliminated.

Recently it was reported that around 17 million units are in existence so we are rapidly approaching the limit of all possible units. It is precisely this scarcity that some would argue favors higher prices for bitcoin in the future. Another interesting rule is that the ledger itself is open for all to see.

When a transaction takes place that transaction is recorded on the ledger which is held on computers all over the world. It is the very nature of this de-centralized ledger which makes hacking super difficult if not impossible. Some argue that it is this methodology that is the true value to humanity, not the scarcity of individual bitcoins. The implications are potentially so far-reaching as to be almost unquantifiable. How about protecting your identity from theft?

Keeping records of property ownership? Imagine for a moment an individual wants to transfer value to another individual or company digitally. We do this all the time. Autopay service from our checking accounts at banks or paying for an item with our Visa card. Banks and credit card companies earn money serving as intermediaries in these types financial transactions. If cryptocurrencies become mainstream, banks become significantly less important.

Banks are one thing, but how about governments? If people are less interested in traditional currency than interest payments from Government Bonds are less appealing, so the cost of borrowing interest rates would have to rise.

How would the government tax the exchange of digital code for something else? Would you have to pay your taxes in dollars? What if dollars and other currencies lost strength relative to cryptocurrencies, thereby meaning the purchasing power of incoming taxes would be less and less. Bitcoin and other cryptocurrencies are already being used around the world in countries with fragile or poorly-regulated banking systems.

However, the potential for abuse is enormous. What about terrorists being financed with cryptocurrencies? A final note before we move on to our thoughts on cryptocurrencies within the context of investing.

We have presented our understanding of cryptocurrencies as best we can given our modest understanding of a rapidly evolving, highly technical phenomenon. Our hope was to introduce the reader to general concepts within this space, a deeper dive into cryptocurrencies shows that there is so much more to it. A currency alternative is just one of many forms this technology has taken.

Some entrepreneurs are literally founding new businesses capitalized by issuing cryptocurrencies. In that regard cryptocurrencies are more like stocks than currencies. From our point of view this is how governments and regulators are finding their way in the door. This is one of the many risks to cryptocurrencies. They truly are a direct threat to some of the largest and most powerful institutions in the world.

On the other hand, cryptocurrencies are something out of a science fiction novel where borders and currencies disappear in favor of a single unit of exchange for all of humanity; a way to find common ground. Pie in the sky, absolutely. But is it possible? While unlikely any time soon we have to concede that it is possible.

Some think this technology and its possibilities are as big if not bigger than the internet. With this in mind…. The definitive answer is maybe. Markowitz believed that investors could maximize or optimize returns given a specific level of risk, noting that risk is an inherent part of higher reward.

It is a wildly volatile, speculative asset with the potential for staggering returns both positive and negative.

Within the context of Modern Portfolio Theory that type of asset may well have a home within prudent portfolios. However, in the context of a well-diversified portfolio perhaps there is a place for volatile, speculative assets. When that time comes we will discuss the appropriateness of the holding with individual clients and make determination whether to hold the asset class on a case by case basis.

Until then we will remain focused on managing our three largest asset classes; cash, stocks, and bonds. For a while, we think. Exactly how long is a while, you ask? Best guess is Summer of Spring is probably more realistic. We expect a correction. Not a full-blown repeat of but a normal, healthy correction.

The expectation of a correction after a protracted bull market is not sufficient cause to fundamentally realign a portfolio. The tricky part about investing is not buying when things are bad, it is actually not selling when things are good. Long term it is devastating to portfolio returns to sit out rising markets because of fear of a correction. By definition doing so really only exposes investors to flat or down markets. Do we worry about a sharp pullback?

Of course, all day every day. This thinking is based on the routine ebb and flow of markets over time. Trump has within his party has evaporated. Trump will either not seek reelection or is defeated in the primaries.

Collusion with Russia seems unlikely or unlikely to be proven. How does the market react to an intra-term transfer of power? Frankly, we expect fairly well.

Agree with his politics or not Mr. Pence is predictable and markets like predictable. President Trump not seeking or losing re-election likely has no measurable effect on markets. Of greater importance to the markets would probably be the Democratic nominee.

Joe Biden and Elizabeth Warren would likely each invite a different reaction, for instance. As always, please feel welcome to contact me directly to discuss, correct, or berate me for our current thinking. Stress-testing opinions and beliefs helps to improve future outlooks. We are so thankful to serve you and truly value our relationships. Personally, I feel I learn more than I teach when working with our clients and appreciate your trust, your kindness and your willingness to share the story of our firm with your friends and neighbors.

We wish each of you another year of health, love and prosperity! Monarch is a Registered Investment Adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Speaking of bubbles… 13 Dec.

Speaking of bubbles… The one topic clients, prospects, and the guy who installed my new hot water heater were most interested in exploring this year were our thoughts on cryptocurrencies and Bitcoin specifically. With this in mind… …is it time to dive in?

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