Crypto was an available category back in 2011, when there was only one Crypto – Bitcoin. Today it is no longer a meaningful term and, if anything, it leads to a regression in understanding.
Fidelity’s chart above is a prime example, advising clients to conservatively invest 40% of their wealth in “equities,” 59% in “fixed income,” and the remaining 1% in “Crypto.”
These categories are meaningless because, in most cases, Crypto “is” a stock; In other cases, Crypto “is” fixed income.
For example, the MKR token, which is based on the Ethereum network and is the top 100 Crypto asset by total market capitalization on CoinGecko, sounds like it should belong to Crypto, but wait a minute, as a MKR holder, you have the right to receive MakerDAO’s income.
MakerDAO is actually an offshore bank, and you can enjoy buybacks, voting rights, and a claim on the remaining assets after paying creditors in bankruptcy, which is equity! Yes, buying MKR is the economic equivalent of buying stock in Bank of America.
Similarly, DAI tokens, a payment instrument (aka stablecoin) issued by MakerDAO on Ethereum, are the 25th most valuable asset on CoinGecko by total market capitalization. It sounds like Crypto too, doesn’t it? But DAI pays 5 per cent interest on top of its dollar peg. That puts it indisputably in the fixed-income category, just like Bank of America’s uninsured interest-bearing accounts.
So what exactly is Crypto?
The term “Crypto” describes a database technology, not an asset class. Various asset classes such as stocks, bonds, options, and savings accounts (or various combinations of them) can be recorded and stored in Crypto databases, just as MKR is issued on Ethereum, one of the most popular Crypto databases. These Crypto databases are in the same category as Azure SQL databases or Oracle databases, both of which record assets, but neither is an asset class in itself.
So now you can see why Fidelity’s recommendation that clients invest 99% in equities + fixed income and 1% in Crypto is ridiculous. This is a category perception error, like Fidelity recommending that people hold 99% equity + fixed income, with the remaining 1% stored in an Oracle database.
Telling customers that investing 1% of their wealth in a general-purpose asset stored in an Oracle database isn’t just a category error sounds pretty reckless. All kinds of crazy financial information appeared in the Oracle database, including sports betting and doomsday options. As for the Crypto database, it is notorious for being riddled with financial scams like Ponzi.
Crypto does not refer to an asset class, but rather a database technology that describes the occurrence of assets. The best thing to do is, let’s get rid of the word altogether.