Morningstar - Q3 2022 - 7

Letter From the Editor
Value of Crypto
Jerry Kerns
As digital assets such as cryptocurrencies have
plummeted in value, an interesting question
is raised: Is now finally a good time to buy? With
traditional investments such as stocks,
mutual funds, and exchange-traded funds, this
is a key question. Models and tools such as
the Morningstar Rating for stocks help investors
find the answers. Stocks with 4 and 5 stars
are cheaper than what Morningstar's analysts
think they're fundamentally worth. With
the stock market down more 20% so far this year,
deals are popping up all over the place,
as the Morningstar Equity Star Rating Tracker
on Page 76 dramatically illustrates. (See
" Spending Shifts Back to Services, " Page 44, for
some specific examples.)
But we can't say the same thing about
cryptocurrencies after their prices have been
cut in half. After all, there is no Morningstar
Rating for crypto. Are they now " undervalued " ?
Who knows? How do you price something
that doesn't have any obvious intrinsic value? Sure,
crypto is built on a groundbreaking technology,
and users can exchange it for some goods
and services, but its value in the end is based
purely on supply and demand. If demand
goes to zero, so will the price. Crypto doesn't pay
interest, it's not backed by a central monetary
authority, and you can't make valuable
jewelry out of it. Its value derives entirely from
what people believe it's worth (whatever
their motives). Is bitcoin worth $100,000, $10,000,
$1? No one can say.
So, wondering whether now is a good time to
buy is, in a way, the wrong approach to
crypto. Hoping for value at a certain price is
pointless. The value is what you are willing to pay
for it, nothing else. Morningstar's Madeline
Hume touches on this theme in her Spotlight
article " Promise and Peril " (Page 31). " The absence
of intrinsic valuations disqualifies cryptocurrency
as a fundamental investment, " she writes.
morningstar.com/products/magazine
7
" As high-octane securities with a spotty past,
investors should treat any purchase of
cryptocurrencies as a sunk cost. " That's not to
say crypto has no future. On the contrary,
Hume envisions several ways crypto and the
blockchain could innovate, thrive, and
even replace traditional financial functions. But
until that future is more formally in view,
investors should treat an investment in crypto
as they would a day at the casino.
If cryptocurrency lacks the qualities of a
fundamental investment, Fidelity's announcement
that it will allow 401(k) plan sponsors to let
participants put sizable chunks of their retirement
contributions in crypto is baffling. Thankfully,
Morningstar's Jasmin Sethi thinks few
sponsors will take Fidelity up on its offer, but in
" With Crypto, Advisors Need to Tread
Carefully " (Page 17), she says that the issue
raises many questions for fiduciaries.
Finally, at this year's Morningstar Investment
Conference in May, Hume and Sethi
sat down for a conversation about their own
experiences with crypto ( " Morningstar
Experts Venture Into Crypto, " Page 27). Hume
takes a smart approach: " 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. " For now, those seem to be far and away
the best reasons to buy.
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Morningstar - Q3 2022

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