PRIMER

Wealth Management Global Investment Office | April 14, 2021

Investing in Cryptocurrency
Denny Galindo, CFA
Investment Strategist

Lisa Shalett
Chief Investment Officer
Head of the Global Investment Office
Morgan Stanley Wealth Management

Bitcoin is back in the headlines after a three-year respite. It’s discussed on CNBC
daily, and political figures, financial gurus and regulatory officials are repeatedly
asked for their opinion. At this point, much attention has been focused on what
Bitcoin is and how it works, but that in some ways, is the easy part. Assuming the
underlying blockchain technology works, is Bitcoin or any other of the
cryptocurrencies something investors should consider for their portfolios? That’s
the more difficult question.
Our March 17 special report, “The Case for Cryptocurrency as an Investable Asset
Class in a Diversified Portfolio,” discusses how cryptocurrencies are slowly gaining
mainstream acceptance—it explores increasing regulatory guidance, an abundance
of new products, rapid adoption by major financial institutions and expanding
liquidity. This report builds on “Bitcoin: A New Technology,” which is published
monthly in Morgan Stanley Wealth Management’s ChartBook under “Client
Conversations & Primers.” This report also reviews the basics: How do
cryptocurrencies work? How are they different? What is a blockchain, a miner and
“consensus?” Ultimately, we are more interested in how cryptocurrency fits into the
bigger financial picture than how the technology works. There are many resources
to review beyond this primer, including Morgan Stanley & Co. research and
“Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment
Professionals,” a January 2021 publication from the CFA Research Foundation. 

For additional information about the risks of cryptocurrencies, please see the Important Information in the Disclosure section of this report.
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This
material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance. 
INVESTING IN CRYPTOCURRENCY

Investors’ reasons for interest in Bitcoin and other environmental perspective, “mining,” or creating,
cryptocurrencies typically center on one or more of three cryptocurrency requires enormous processing power, hence
investment theses. has an outsized impact on global energy consumption.
Growth of mining might require greater electrical output than
First, Bitcoin could act as digital gold, a "safe haven" from fiat would otherwise be necessary.
currency debasement. The March special report discusses
how pandemic-driven government deficits, aggressive Our report starts with a short history of Bitcoin. The second
monetary policy and a lack of appropriate alternatives has section explains cryptocurrencies and how Bitcoin, the largest
made this argument more convincing to many. Investors with cryptocurrency, works. We include explanations of Bitcoin’s
similar thinking might review the valuation section that important breakthroughs, the mining process and how the
compares the valuation of Bitcoin to the valuation of gold cryptocurrency networks reach consensus on valid
and the case study of gold’s 18-year rise from an illegal transactions. The next section discusses methods to value
investment to part of a conventional portfolio in the 1980s.  Bitcoin, which includes relative value and replacement value.
The fourth section introduces Bitcoin’s unique four-year
Second, some view cryptocurrency as a new asset class that halving cycle, and why it might be an important reason for
will increase in value as more institutional investors Bitcoin’s low correlations with other assets. In the fifth
incorporate it into their portfolios. The special report section, we examine the parallels between the rise of gold as
highlights the four pillars of institutional adoption: new an investable asset to the rise of Bitcoin currently. Section six
products, expanding regulatory framework, deep pools of discusses the considerable environmental impact of Bitcoin
liquidity and the need for portfolio diversifiers. Advocates of mining. The final section highlights some of the main risks
this theory see the rise of Bitcoin in the light of the disruption associated with investing in Bitcoin and other
occurring in other sectors and industries. When penetration in cryptocurrencies. 
a large addressable market is low, an investment in a
disruptive innovator can have attractive returns as long as
market penetration continues to increase. The adoption- Bitcoin Case Study: Maturation
focused thesis is prevalent in technology stocks, which are of an Asset Class
less dependent on valuation and more reliant on the trend of
adoption. These investors might be interested in valuation The original Bitcoin white paper was published in a
based on operating metrics such as network value to cryptography group on Halloween 2008.5 The code began
transactions that value Bitcoin based on the pace of adoption. running on Jan. 3, 2009, and on Jan. 12, the first transaction
took place. On May 22, 2010, what is famously known as
Third, some see Bitcoin and other cryptocurrencies as an “Bitcoin Pizza Day,” a software developer hoping to promote
uncorrelated, volatile asset appropriate for diversification Bitcoin as an everyday transactional currency offered to pay
under Modern Portfolio Theory. In our March 17 special 10,000 bitcoins ($530 million today) for two pizzas.6
report, we showed hypothetically how a small Bitcoin
allocation to a conventional portfolio of 60% stocks and 40% After that, Bitcoin transactions caught the attention of those
bonds would have fared from 2014 through September 2020. interested in a low-cost money transfer system that was both
A number of firms (CoinShares,1 Bitwise,2 Galaxy3) have “permissionless” and anonymous—open to anyone with a
performed variations of this analysis in the past several years computer and connection. Unsurprisingly, some people
using different Bitcoin allocations, different time periods and interested in permissionless, anonymous currencies were
different rebalancing frequencies. In general, they found that using Bitcoin on the dark web for illicit transactions.7 Even so,
small allocations of Bitcoin tended to improve hypothetical Bitcoin demand grew and, due to the limited supply, prices
performance of a traditional portfolio. A key assumption with began to increase. New users began to see the currency as a
these analyses is that correlations remain low. Our kind of digital gold: more as a store of value than as a
examination of the bitcoin halving cycle might help explain payment system.
why its low correlations to other assets are likely to endure.
Bitcoin first appeared in the mainstream media in 2013 as
The list of risks related to cryptocurrency is extensive. Some concerns about Cyprus’ banking system made the idea of a
of the risks—product dynamics, volatility and uncertain stateless currency more attractive.8 Later that year, the price
valuation frameworks—are familiar. There are also unique of one bitcoin topped $1,000 for the first time, and
risks that other assets don’t have. For example, a regulators began to examine it more closely. The Internal
cryptocurrency’s encryption could be breached. Or it could Revenue Service (IRS) provided tax guidance,9 and states such
have a catastrophic software bug—there have already been as New York10 began to add regulations. This led to the first
two severe bugs in Bitcoin4 and many more in other burst of a Bitcoin bubble—an 84% drop in price. Even so, the
cryptocurrencies. It could become the object of a disruptive number of transactions continued to grow. Other
cyberattack by a foreign government. Finally, from an cryptocurrencies such as Ethereum emerged, drawing on the

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 2
INVESTING IN CRYPTOCURRENCY

design of Bitcoin to run code that could do more than send Then, just before the halving, the COVID-19 pandemic
and receive currency. The 2016 halving slashed Bitcoin supply changed the narrative again as central banks began to print
and started a second bubble. By this time, cryptocurrencies money to support the economy and governments began to
were disrupting the traditional way venture capital was raised run up record deficits. Concerns about currency debasement
by making it possible for tech startups to raise money and inflation spiked, and investors began to look for hedges.
through initial coin offerings (ICOs.)11 A few institutional investors gravitated toward Bitcoin. In May
2020, the halving cut supply growth by 50% just as demand
If the 2013 bubble was about a self-sovereign store of value was increasing for macroeconomic reasons, resulting in a
and payment system, the 2017 bubble was about Bitcoin as an perfect storm: Since the March 2020 low, Bitcoin has risen
investment. Early in 2017, the Securities and Exchange twelvefold. Was it the halving that cut supply? Was it the
Commission (SEC) issued the first of many denials for a macroeconomic backdrop that boosted demand? That debate
Bitcoin exchange-traded fund (ETF).12 Later, at the end of is not likely to be resolved until the next halving takes place
2017, the Chicago Mercantile Exchange (CME) launched in 2024. In December 2020, Bitcoin surpassed its old 2017
Bitcoin futures, providing a way for Wall Street firms to high, leading many who had written it off to take another
participate in the market.13 Again, the parabolic price look (see Exhibit 1).
advances captured headlines as retail investors hoped to beat
the Wall Street firms to a new asset class. Regulators began When institutions gave Bitcoin a second look, much had
to clarify which ICOs were securities14 and enforcement changed since 2017. To start with, Bitcoin liquidity has
officials went after some of the worst actors of the second increased sharply. Greater regulatory guidance has enabled
cryptocurrency bubble. In the end, despite the arrival of more products, more risk-mitigation strategies and more
futures, most of Wall Street never arrived, and adoption arbitrage opportunities. Futures and options have allowed for
declined in 2018. more hedging, retail-focused platforms have brought more
potential buyers online and the institutional adopters have
In 2019, Bitcoin had survived its second global bubble. filled large orders. By February 2021, liquidity at the largest
Institutions such as the Intercontinental Exchange (ICE) and exchanges was over $25 billion in daily average volume versus
Fidelity Investments that had announced products during the only $5 billion in late 2017 (see Exhibit 2). More liquidity has
bubble year slowly built out new cryptocurrency offerings allowed more institutions to enter the market (see our March
and a financial infrastructure for cryptocurrency, including 17 special report).
tricky issues such as custody.15 Leading up to the third halving
in May 2020, many debated whether the supply restriction
was already priced in—there had been a big spike in mid-2019
—or whether there would be a third bubble.

Exhibit 1: Bitcoin’s Volatile Journey to $1 Trillion Market Cap

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of Feb. 28, 2021

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 3
INVESTING IN CRYPTOCURRENCY

Exhibit 2: Bitcoin Volume Has Increased While Bitcoin is by far the largest cryptocurrency, there are
Since the 2017 Peak 10,000 alternatives including nine over $14 billion in market
capitalization.
The largest cryptocurrencies are created through mining,
which involves using computer power to solve complicated
algorithmic problems to create coins. Bitcoin was the first
cryptocurrency, designed in 2008 by an anonymous person or
group named Satoshi Nakamoto, and launched Jan. 3, 2009.
Today, there are thousands of cryptocurrencies, crypto assets
and crypto commodities, though Bitcoin still accounts for
roughly 55% of the value of the entire asset class (see Exhibit
Note: Fiat includes USD, GBP, EUR, KRW, CNY StableCoins include USDT 3). Importantly, Bitcoin demonstrated how a decentralized
(Tether), USDC (USD Coin) , GUSD (Gemini Dollar)
Source: CryptoCompare as of Feb. 28, 2021 store of value and payment system could replace a
centralized systems.

At this point, it seems unlikely that Bitcoin and other Exhibit 3: Bitcoin Is by Far the Largest Cryptocurrency
cryptocurrencies will disappear unless the code fails and can’t
be repaired. Placing a valuation on cryptocurrency is difficult
now and may always be challenging, given the extreme
volatility of the asset. Another 85% drop would take the price
back below $10,000. Yet, after surviving three bubbles,
recovering from them and going on to new highs, Bitcoin will
likely remain a fixture on the investment scene.

What Is Cryptocurrency?
Cryptocurrencies are virtual currencies with no physical form Source: Coinmarketcap.com as of April 7, 2021
that operate on a peer-to-peer basis without a central
authority. They are digital and, unlike the US dollar, they have
no physical form and no central repository. The decentralized A decentralized payment system is fundamentally different
nature of cryptocurrencies requires computers to use than a traditional payment system. Instead of all transactions
cryptography, computerized encoding and decoding of being routed through a central party (such as the Federal
information to verify transactions and prevent counterfeiting. Reserve or a bank payment network), transactions are routed
Unlike traditional currencies, which use a trusted third party in a decentralized manner through nodes that anyone can set
such as a credit card company or bank to verify that the funds up by downloading and running software. Because anyone can
are available to complete a transaction, cryptocurrencies rely run the software, it is called “permissionless,” and because
on a network of computers to confirm the transaction and the network is made up of many nodes that are equal to each
that the spender has the coins to transfer. When a transaction other in influence, it is “decentralized” (see Exhibit 4). If one
is initiated, it is broadcast to the network where it awaits node has an issue, it does not affect the other nodes.
verification from computers that solve an algorithm to
determine if the transaction is legitimate.

Exhibit 4: How Value Transfer Works in Traditional and Crypto Worlds

Source: CFA Institute Research Foundation “Cryptoassets: The Guide to Bitcoin, Blockchain and Cryptocurrency for Investment Professionals,” January 2021

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 4
INVESTING IN CRYPTOCURRENCY

Three important conditions have allowed cryptocurrencies to system to work and cannot be copied, yet they retain the
flourish: flexibility of a fully digital asset that can be moved within
minutes and stored on any device with computing power.
They’re “trustless.” Apart from the open-source software,
investors do not have to trust any entity at any step in the Bitcoin is the scarcest asset—if it works. Digital scarcity
transaction. The only way to move a cryptocurrency is for the enforced by code is unique. As the rate of Bitcoin inflation
user to input their “private key,” or password. Economic falls, it has the potential to become the most scarce, fungible
incentives and mathematical checks keep actors honest, asset on the planet—that is, one bitcoin is the same as
because the reward for honesty is so much greater than the another. Bitcoin has the potential to be something completely
potential gains from dishonesty, and the mathematical checks new, an asset for which supply can never increase faster than
make it easy to find dishonest participants. its predetermined schedule.
They’re “permissionless.” Anyone can access the network as a Many cryptocurrencies have an almost zero supply response.
miner or user with minimal computing and connectivity Miners can’t step up production too much because supply
requirements. There are no accounts or approvals needed, growth is strictly enforced by code. It’s true that higher prices
allowing anyone to participate. encourage people to spend more resources (electricity or
cash) to mine or buy cryptocurrency, but these transactions
There’s a limited supply. Before crypto, text, music and movie do not affect supply. Put differently, spending more will
files could all be copied. There was no way to know who had change a miner’s share of coins mined, but won’t impact the
the original copy of anything and no easy way to create number minted. So far, 18.6 million coins have been mined
scarcity. Using a distributed blockchain, only new assets and a maximum 21 million will be reached around 2140. With
explicitly authorized by the code can be created. No entity has the recent halving in May 2020, Bitcoin’s annual supply
the power to change the code; it is instead adopted by increases only about 2% per year, roughly the same as gold.
universal consensus. Finally, it is easy to detect invalid copies After the next halving, which should occur in 2024, Bitcoin
of the assets by tracing each asset’s history on the blockchain. supply will grow less than half the rate of gold. Thus, if the
When combined, these three characteristics are unique. code doesn’t fail—and that’s a big if—it could become the
Digital scarcity such as the rights to a trademark, a song or a first truly scarce, fungible and divisible asset in history.
movie has been enforced by the courts, a centralized and Cryptocurrencies such as Bitcoin use different techniques to
permissioned system. On the other hand, cash is a process transactions and keep track of the balances owned by
permissionless asset, but it had all the limitations of a each address, but they have a few common elements (see
physical object. It cannot be sent instantly or stored on a Exhibit 5).
phone or computer. It, too, required trust in the courts or in
law enforcement to remove counterfeit bills from circulation.
Bitcoin and other cryptocurrencies do not need a judicial

Exhibit 5: Bitcoin Uses Blockchain for Transaction Verification

The Bitcoin blockchain is a record of all the Bitcoin transactions that have ever occurred. Each account balance at any point in
time and each transaction between two accounts is stored. There are thousands of copies of the file on computers around the
world. As long as a copy of the blockchain exists, the Bitcoin system can function. Since there is no one server or computer
that holds a master copy, a hacker, government or other organizations would have to alter the data in multiple locations.
However, this does not entirely insulate the process from theft, as third parties such as exchanges and wallets that interface
with blockchain technology have been hacked recently.

Source: CoinDesk, Blockchain.info, Morgan Stanley Wealth Management Global Investment Office

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 5
INVESTING IN CRYPTOCURRENCY

For Bitcoin, there is a block of transactions processed roughly certain series of numbers is allowed to produce the block and
every 10 minutes. These blocks are comprised of unspent earn the block reward. The only way to find a number is
transaction outputs, that is, a certain number of bitcoins (or through trial and error, which requires a miner spend heavily
fractions of bitcoin) have moved from one address to another. on computing power and equipment.
The blockchains allow the tracking of each coin as it was
created, sent, divided, aggregated and sent again. When all The high upfront costs incentivize miners to process blocks
these blocks are stacked in chronological order, it shows a correctly so they can earn a reward. This process is called
chain of custody of every bitcoin ever mined. “proof of work.” It means a block producer must prove they
spent real resources on performing a difficult task in order to
In the Bitcoin system, block producers are called “miners.” be paid. The official chain is the longest chain with the most
The miners run code that checks to make sure all the work (calculations). Other blockchains reach consensus by
transactions in a block follow all the rules. No coins can exist awarding blocks randomly to block producers that have a
in more than one place, and the total number of coins must certain amount of the underlying cryptocurrency deposited in
match the coins expected. If someone sends a bitcoin, that escrow (which is known as “proof of stake”), or who are on a
bitcoin must have been in that user’s address. If the list of “approved” block producers.
transactions meet all the checks, a new block of transactions
are added to the blockchain. An important design There are various ways for producers to become “approved”;
consideration for cryptocurrencies is how to select which some are centralized and some are decentralized such as
producer produces each block. In Bitcoin, block producers winning a lottery, meeting various technical requirements or
race to be the first to perform the checks and are rewarded winning a vote of coin holders. Cryptocurrencies rely on
with newly created (mined) coins (see Exhibit 6). Currently, a cryptography to make changes to the blockchain, to connect
block producer gets a 6.25 bitcoin block reward blocks, and to ensure they stay in the correct order and to
($350,000-$400,000) plus transactions fees (about encrypt the users’ passwords when they are requesting
10%-15% of the block reward) for each successful block. transactions. Encryption enforces that if one person sends
cryptocurrency from one account to another, the instructions
Different blockchains have different rules for who can cannot be intercepted and rerouted to a third account, unless
produce a block. This allows users to reach a consensus on a user has the key (password) or has cracked the encryption.
which is the valid blockchain—and which are incorrect or
even fakes. For Bitcoin, the first entity to find an encrypted
number that meets all the rules and happens to start with a

Exhibit 6: Miners Are the Computers Behind the Bitcoin Network

Source: CoinDesk, Morgan Stanley Wealth Management Global Investment Office

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 6
INVESTING IN CRYPTOCURRENCY

Exhibit 7: Bitcoin Is Decentralized as No One Party Controls Entire Network

The decentralized nature of Bitcoin means no one party controls the entire network. There are complex economic relationships between
various parties that may encourage users to follow the rules. However, some portions of the network are more centralized (software
developers, miners, fiat gateways) than others, potentially increasing concentration risks. Below we compare the various stakeholders.
Stakeholder What They Do How Decentralized?
All bitcoin software is open source. Bitcoin Core software, Roughly 98% of nodes (computers connected to the
the most popular version, verifies transactions (no network) run “Bitcoin Core” nodes, but there are six teams
Software
overdrafts, follows technical specifications), and includes a with more than 25 nodes and at least 12 versions of
Developers
wallet to store coins. Anyone can contribute, test, or verify software
the code but roughly 100 developers contribute to “Core”
Nodes (computers connected to the network) hold There are over 10,000 public nodes on the Bitcoin
complete copies of the blockchain, run software that network. Node operators choose which developer’s
Node Operators
validates for issues like double spending, and relay Bitcoin software to run
transactions to miners
Anyone can theoretically download free software and Processing power and electricity are the main inputs to
mine bitcoin. Miners take transactions from nodes, verify mining. Currently, 10 groups mine ~91% of the blocks with
Miners
transactions, combine them into blocks, and broadcast the the largest group mining ~15%
new blockchain to the network
Fiat gateways allow currency to be electronically The top 10 exchanges globally account for around 85% of
exchanged for bitcoins. Fiat gateways include domestic bitcoin trades versus all fiat currencies – roughly $13
Fiat Gateways and international exchanges, bartering sites that allow billion is traded per day
people to meet up and exchange cash for bitcoin, and
bitcoin ATMs
Bitcoin owners store their money in a “digital wallet.” Bitcoin ownership is hard to estimate because people can
Owners can store bitcoin with third parties such as have many different accounts. Based on data from the
Owners
exchanges or wallet providers, hardware wallets similar to two largest wallet providers there are 65+ million
USB drives, or on their computers or mobile devices accounts

Source: Coin Dance, Blockchain.info, Morgan Stanley Wealth Management Global Investment Office

Is There Any Way to Value Bitcoin? operating metric such as annual production relative to peer
companies. Using this approach, the value of bitcoin is
sometimes valued relative to gold or to the value of the
An often heard complaint about cryptocurrency is there is no
money supply of a country.
way to value it. We do not believe this is true. There are
multiple ways to value cryptocurrencies—there’s less Gold is the most popular relative benchmark on a market-cap
consensus over which is the “best.” Given crypto’s emergence basis. It’s also popular with those investors who are attracted
as a new asset class, we expect a debate about valuation. to Bitcoin as a hedge against the debasement of fiat
That said, it is helpful to place valuation techniques into currencies. Bitcoin has often been described as “digital gold”
several broad categories. or “gold 2.0.” Valuing it that way, the market sees that gold
has the added benefit of a simple valuation framework.
Relative Value Approach
Relative value approaches are used in valuing equities and If you think of Bitcoin as a commodity, gold has many of the
lend themselves to valuing Bitcoin. Using a relative value same properties (see Exhibit 8). Both are scarce, both have
approach for equities, an analyst identifies similar companies supply growth around 2% a year, and both are divisible and
and uses that to benchmark the valuation. There are sub- “fungible”—one bitcoin or one ounce of gold are the same as
categories of relative value, market-cap relative value and any other. Both make it easy to store large amounts of value
operating-metric relative value. For example, when comparing in small places. Bitcoin is easier to store, move globally and
market caps between different car companies, one might find break into smaller pieces, which some advocates say make it
that an automobile company is worth about $10 billion; on better than gold. Gold has been around longer, works without
average; therefore, an above-average automobile company electricity, has a more stable regulatory framework and is not
should be valued at more than $10 billion. Alternatively, subject to hacks, code bugs or the failure of encryption
another analyst might use an operating metric, such as technology—all of which, say gold’s advocates, make it
earnings. An analyst may value auto companies at a multiple superior to Bitcoin.
of earnings, or a multiple of sales, or a multiple of an
 

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 7
INVESTING IN CRYPTOCURRENCY

Exhibit 8: Comparing Cryptocurrencies What’s gold’s market cap? Gold held by exchange-traded
and Precious Metals funds (ETFs) and by governments as currency reserves
  Cryptocurrencies Precious Metals together come to around $2.4 trillion—more than three
The largest cryptocurrency
Precious metals have times greater than Bitcoin’s current total valuation. The most
History been used as a store of optimistic take would be to compare Bitcoin to all the gold
was invented in 2008
value for centuries
ever mined. According to the World Gold Council, total
The largest cryptocurrency Thousands of tons of
Mining creates new coins through precious metals are above-ground gold—including jewelry, reserves, private
mining, a software process mined each year holdings and other fabrications—comes to 201 kilotonnes. At
Cryptocurrencies typically Precious metals are today’s prices that would suggest an $11 trillion market cap of
have a fixed supply. For finite resources; gold—or 10 times more valuable than Bitcoin (see Exhibit 9).
Scarcity
example, 21 million bitcoins amount depends on the
can be created natural environment
Transfer or pay Store of value, medium Exhibit 9: Bitcoin Market Capitalization Is
Usability electronically using of exchange, industrial One-Third That of Investable Gold
software applications
Cryptocurrencies are more Precious metals are
Volatility and
volatile and have less less volatile and have
Liquidity
liquidity more liquidity
Limited acceptance and
potential for further
declining acceptance;
potential technology flaws;
regulatory oversight
uncertainty; concerns Storage/transportation
 Risks and around account security; costs; physical property
Drawbacks relies on electricity and is stolen; changing
internet connectivity; regulations
market manipulation
potential; highly Source: Bloomberg, Haver Analytics, coinmarketcap.com, World Gold Council
speculative and risk of as of April 13, 2021
substantial loss in short
amount of time

Source: Bitcoin.org, CoinDesk, Morgan Stanley Wealth Management Global

Investment Office

Exhibit 10: Is Bitcoin “Money” as Traditionally Defined?

Source: Federal Reserve Bank of St. Louis, Bitcoin.org, Morgan Stanley Wealth Management Global Investment Office

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 8
INVESTING IN CRYPTOCURRENCY

If you think about Bitcoin as a currency, it should be Exhibit 12: Bitcoin’s Market Value Is Greater
compared to the value of the money supply. Since both Than That of the Russian Ruble
Bitcoin and most money is electronic in nature, M2 money
supply seems a better proxy than M1. M2 includes M1
(currency and coins held by the nonbank public, checkable
deposits, and travelers' checks) plus savings deposits
(including money market deposit accounts), small time
deposits under $100,000 and shares in retail money market
mutual funds. If Bitcoin was the currency of a country, its
valuation would be similar to the M2 money supply of Russia.
Morgan Stanley & Co. Research calculated that
cryptocurrency total market cap is about 2% of global M2
(see Exhibit 11).
Source: Haver Analytics, Bloomberg as of Jan. 31, 2021
Exhibit 11: Bitcoin Is Valued at About 2% of Global M2
Money Supply
How Would an Economist Look at
Bitcoin as a Country?
If we think about Bitcoin as a country, it imports electricity
and exports digital gold (used for Bitcoin savings accounts).
That’s a pretty simple economy.
Start with Bitcoin’s GDP, which would be mining profits,
especially if a three-year compounded annual growth rate is
used to smooth out the cycle. Moving digital gold from one
person to another nets out to zero impact on GDP; only the
Source: Macro Bond, Morgan Stanley & Co. Research as of March 4, 2021 mining of new digital gold is additive. To use a different
analogy, mining new digital gold is closer in nature to the
impact of new home sales on the economy than existing
How can we determine if a currency like Bitcoin should be home sales. Is Bitcoin GDP growing faster or slower than
more or less valuable than the Russian ruble, the Canadian other countries? It’s certainly volatile. As with all commodity-
dollar or the Swiss franc? We would look at population producing countries, GDP is dominated by the price of its
growth, GDP growth, liquidity, volatility, supply growth and chief export.
the history of the central banks. Did Bitcoin have a stronger
Next, consider Bitcoin’s “population,” which is the number of
or weaker monetary policy than Russia historically? Which
addresses, or users. If a country’s population is increasing, it
has a better history of not over increasing supply? Which is
generally has higher demand for money.
more volatile—the Russian economy or Bitcoin? Is Bitcoin
growing faster than Canada or Switzerland? What’s the yield Finally, look at Bitcoin’s money supply, which would be the
of a Bitcoin-denominated savings account versus a Swiss total supply of Bitcoin. Bitcoin held at a custodian is more like
savings account? Currently, the value stored in Bitcoin is vault cash (currency held in the vault) or a savings account
between the value stored in Russian rubles and the value (some actually pay interest). Bitcoin held directly by a holder
stored in Swiss francs (see Exhibit 12). is more like M1 cash in circulation.
If we use these metrics when comparing Bitcoin’s valuation to
the M2 money supply of other countries, Bitcoin looks quite
favorable (see Exhibit 13).

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 9
INVESTING IN CRYPTOCURRENCY

Exhibit 13: Bitcoin “GDP” Is Growing Fast Due to “Population” Growth

M2 Growth
Country M2 Year Over Year GDP Growth Population Growth 25 Yr. vs. US Dollar
($ billion) (%) (%) (%) (%)
South Korea 2,881 10 2.3 0.1 -30
Canada 1,676 19 2.0 1.2 8
Switzerland 1,192 7 1.5 0.7 29
Bitcoin 860 3 13.6 11.1 n/a
Russia 755 14 2.9 0.0 -94
Brazil 716 29 1.6 0.6 -78
India 663 20 3.3 0.8 -55
Singapore 542 11 1.3 1.2 5
Mexico 515 13 -0.3 1.0 -63
Indonesia 480 12 5.0 1.2 -83
Note: GDP for countries is 2019 GDP Growth - a "normal" year. GDP Growth for Bitcoin is Mining Profit 3 yr CAGR from Dec 17 - Feb 18 to Dec 2020 - Feb 2021
Source: CEIC Data, Bloomberg, BitinfoCharts

Operating Metrics Approach to transaction value. If new users hold bitcoin through trusts
or derivatives, their transactions might not show up in the
Bitcoin blockchain as user transactions shift to futures
Comparing total network value to average daily transaction
exchanges or other trading venues.
value is another valuation method. It makes sense that the
value of daily transactions would capture how much a
network is being used. Higher daily transaction value should Exhibit 14: The Bitcoin Network Trades
mean the network is more valuable because it is more widely at 2017 Multiple of Transactions
used in the same way that a widely used credit card
processing network is more valuable than a smaller network.
If someone buys bitcoins at a higher price today than
yesterday, the daily transaction value increases alongside the
price as each transaction is valued higher. Next, assuming the
multiple remains the same, this higher daily transaction
volume is used to justify a higher total network value, which,
in turn, implies a higher price for each individual coin. Finally,
as buyers bid up the price of each bitcoin, it trades at a lower
network/transaction value multiple, kicking off the process
again. It’s similar to valuing a stock using the average daily Source: BitinfoCharts as of March 31, 2021
Network value divided by 30-day Average Transaction Value.
dollar volume of shares traded. As trading volume rises, the
valuation method would justify higher stock prices.
While this network value to transaction framework wouldn’t Replacement Value Approach
work well for equities, it does make sense for currencies. A
currency that is widely used and very liquid is more valuable Analysts of some commodities such as oil and gold often use
than a little-used currency with lower volume and less replacement value or cost-of-production frameworks.16 In
liquidity. If a majority of the daily transaction value transfers theory, a commodity’s price should not remain below its cost
represent real economic activity, it makes sense that the of production, which includes a fair profit on the capital
network should trade at a consistent multiple of its usage employed—otherwise producers would withhold supply until
over time (see Exhibit 14). Monitoring this network value-to- prices recovered. For Bitcoin, analysts track miners’
transaction multiple can help an investor know whether they profitability to assess the cost of production. That cost is
are buying bitcoin at a high price or low price given its daily variable because the algorithm that enables Bitcoin
usage. It can also show whether an investor is buying at a high production continuously estimates how long it took to
or low price versus its history. produce 2,016 blocks. If it took longer than 10 minutes per
One potential flaw in this metric is that changes in block, the system’s “difficulty adjustment” will make the next
technology and adoption can alter the ratio of network value block easier, meaning each block will use less electricity—and

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 10
INVESTING IN CRYPTOCURRENCY

the mining becomes more profitable. When the formula is

more difficult, more electricity is used and profitability drops. Cyclical/Technical Approach
This automatic adjustment ensures that blocks occur roughly
every 10 minutes, leading to a steady amount of Bitcoin In currency markets, various technical or cyclical indicators
produced by the miners even if new miners join or old miners are sometimes used for shorter-term projections. Cyclical
leave the network. techniques are particularly good for Bitcoin because its four-
year cycle is known in advance. Comparing Bitcoin’s progress
The difficulty adjustment is an interesting market-timing in this cycle to its previous ones can be a helpful indicator
indicator.17 The Bitcoin price tends to peak when difficulty (see Exhibit 16).
increases but mining profitability declines, and it tends to
trough when difficulty falls for an extended period, resulting Exhibit 16: So Far, This Cycle
in unprofitable miners leaving the market. The last time Looks Similar to the Prior Two
miners quit in large numbers was the fourth quarter of 2018.
Estimating the profitability of the entire mining industry is
difficult because of miner’s variable costs for electricity and
equipment—and their operational know-how. Many data
providers try to estimate the mining profitability of the
network.
Some Bitcoin analysts try to estimate how much the
adjustment will change based on how fast recent blocks have
been found. A rising difficulty adjustment suggests that some
miners, perhaps with the best equipment or the lowest
electricity cost, are able to produce blocks for less than they
can sell the mined Bitcoin. A falling difficulty adjustment
means price is less than some miner’s costs. Because miners
generally do not sell below costs, a falling difficulty
adjustment could be a sign a price bottom is near. The last
Note: Chart begins at the halving date and shows price versus the halving price.
three sustained declines in the difficulty adjustment were in After 300 days bitcoin is trading at six times the price of the most recent
November and December 2018, near the recent multiyear halving but was trading at four times the 2017 halving price in 2017 and 64
bottom in price; in July 2020, after the halving; and early times the 2013 halving price.
Source: Bloomberg as of March 27, 2021
November 2020, when miners moved from locations with
cheap hydropower during the rainy season to locations that
were cheaper year round. While mining machines were In the current cycle, the price seems to be rising faster than in
transported, the network slowed and difficulty dropped, but 2016 but slower than in 2012. However, there is no reason
prices continued to rise because the miner difficulty drop was that should continue. Prior to this cycle, some Bitcoin
due to a temporary regional phenomena rather than industry advocates expected each cycle to appreciate at a slower pace
structural profitability (see Exhibit 15). than the previous cycle, as the rate of appreciation in 2016
was slower than 2012. Nevertheless, a comparison to
Exhibit 15: Bitcoin Difficulty Adjustments previous cycles illustrates that this cycle has already lasted
Can Signal Turning Points or Disruptions longer than the 2013 cycle though only two-thirds as long as
the 2017 cycle.
Another cyclical indicator is the price to the 200-day moving
average. On average, Bitcoin trades at 1.5 times its 200-day
moving average; currently, though, it’s trading at 2.3 times. In
2017, 2019 and earlier this year, large corrections occurred
from this level. However, in the last three price peaks in
March 2013, December 2013 and December 2017, the 200-
day average was more than 4.0 (see Exhibit 17).

Note: Mining difficulty represents the estimated number of random attempts a

miner must try before solving a mathematical equation. A difficulty of
20,000B means a miner expects to try 20 trillion numbers before arriving at a
valid answer.
Source: Blockchain.com as of March 1, 2021.

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 11
INVESTING IN CRYPTOCURRENCY

Exhibit 17: On Average, Bitcoin Has Traded Bitcoin’s code creates an artificial shortage every four years
Close to Its 200-Day Moving Average that is meant to reward early adoption. After each halving,
the reward to miners for producing a new block in the
blockchain is cut in half, thereby reducing the supply of
freshly minted Bitcoin entering the system (See Exhibit 18).

Exhibit 18: By Design, the Rate of Bitcoin

Issuance Decreases Every Year

Source: Bloomberg as of March 28, 2021

The Bitcoin Cycle

What is behind the recent appreciation of Bitcoin? In our
view, the best explanations are: the Bitcoin cycle is favorable; Source: Blockchain.com, MSWM estimates as of April 8, 2021
arguments about Bitcoin as an answer to currency
debasement are more persuasive today; growing institutional
adoption makes it easier for the next step to be taken. We’ll Bitcoin’s fourth cycle has just begun and some clear patterns
examine each argument. are starting to emerge (see Exhibit 19). There are three phases
of each cycle: a normal bull market/recovery (2011- 2012,
One of the unique aspects of Bitcoin is its four-year “halving”
2015-2016, 2019-2020), a parabolic bull market (2012-2013,
cycle. A parabolic spike has followed each of the three
2016-2017, 2020-2021) and a catastrophic bear market (2013-
halvings so far. Although there are only three data points, it is
2014, 2017-2018). (See Exhibit 20).
starting to seem like the halving causes the Bitcoin cycle of a
price spike followed by a collapse.

Exhibit 19: Bitcoin Appears to Be Beginning Fourth Cycle

Source: Bloomberg as of March 13, 2021

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INVESTING IN CRYPTOCURRENCY

Exhibit 20: Will Bitcoin's Third Halving Cycle Look Like the First Two?
  Parabolic Bull Catastrophic Bear Recovery Bull
Price at Return Return
Cycle Price at Halving Return (days) Price at Trough Price at Halving
Peak (days) (days)
First Halving $1,137 +9,375% $183 (84%) +262%
$12 $663
Nov. 28, 2012 Nov. 29, 2013 366 days Jan. 14, 2015 411 days 542 days
Second Halving $19,783 +2,939% $3,156 (84%) +209%
$651 $9,740
July 9, 2016 Dec. 17, 17 526 days Dec. 14, 2018 362 days 514 days
Third Halving +607%??
$8,636 ???? ???? ???? ???? ????
May 11, 2020 332+ days
Source: Bloomberg, CMC Markets as of April 8, 2021

While we do not know whether the cycle will continue to However, Bitcoin is unique in two ways. First, the supply
repeat, it does help explain why Bitcoin’s correlation to other cannot increase faster than its predetermined code. Second,
asset classes is so unique. We believe investors should be with most commodities, higher prices decrease demand, as
aware of the halving cycle even if it does not repeat because people may drive less or eat less beef and more chicken. In
it is an important reason why Bitcoin has low correlation to Bitcoin, higher prices have increased demand as positive
other assets (see Special Report). A simple strategy during momentum drew more buyers. Equities sometimes see
the past eight years was to be long Bitcoin in the halving year increased demand due to momentum, but not supply shocks.
as well as the year preceding and following it and be short The supply shocks of the commodity world and the
the fourth year of the cycle. Simple strategies rarely continue momentum elements of the equity world combine in Bitcoin
to work and are eventually priced into the market. However, to create a very volatile asset.
the strategy would have worked in 2020 and 2021,
suggesting it may not be priced in yet. Even if this simple A product in which demand increases with price is called a
system works in the future, it doesn’t help today; Bitcoin may “Veblen good.”18 The term is reserved for luxury cars or items
have already seen its four-year peak in March 2021 at that provide a status associated with ownership of the item.
$62,000, triple the prior high. When the price starts increasing, fewer holders sell and more
momentum buyers enter the market, causing an accelerating
price curve. Unlike other commodities, Bitcoin miners cannot
Halving’s Effects on increase production (see Exhibit 22). We have observed that
Supply and Demand Google searches for Bitcoin increase as its price rises, which
seems consistent with a Veblen good.
As with all commodities, cutting the supply in half will create
a supply shock and a price spike—and that’s essentially what Exhibit 22: Most Google Cryptocurrency
the halving cycle does (see Exhibit 21).  Searches Are for Bitcoin and Ethereum

Exhibit 21: Why Is the Halving Cycle Important?

Note: The y-axis indicates the popularity of Bitcoin/Ethereum searches versus

all Google searches between 2016 and 2021. The value 100 indicates that the
time the point of maximium popularity versus other searches between 2016
and 2021.
Source: Coindesk, Bloomberg as of April 8, 2021 Source: Google Trends

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 13
INVESTING IN CRYPTOCURRENCY

Momentum eventually stops and reverses when prices can go nature of institutional adoption (see Exhibit 23).
no higher, and momentum buyers turn into panicked sellers.
Sometimes a shock kicks off a bout of downward momentum. Small Cycle Theory. Some expect these parabolic moves to be
Once prices begin their decline, it is impossible to know when one-time events and for crypto to revert to the return profile
it will end and at what price. In the last two down cycles, it of other assets. As Bitcoin’s market cap grows, it takes more
took around a year to trough, and went down 84% peak to money to lead to the same returns, and each bull market
trough. Bitcoin hit $61,243 on March 12. If that was the cycle should get smaller. The 2017 bubble had a lower return than
peak, a similar cycle decline could take Bitcoin below the 2013 bubble, though it lasted longer. Plus, with each
$10,000. halving, the impact of newly minted coins on total supply
diminishes. In the first halving, the production of new coin
dropped to 15% inflation from 33% inflation, an 18% reduction
2020 Halving Cycle—Average Peak, in supply. In the second halving, annual production fell to 4%
Lower Peak or Higher Peak? from 7%, a 3% reduction, which had a lesser impact on the
price. The third halving only reduced supply to 2% from 3%, a
The halving cycle does seem to be occurring again. Perhaps it 1% decline. Small cycle adherents believe the current cycle
is a coincidence and the pandemic is the major driver of this will see less appreciation than the 2017 cycle. Eventually, as
cycle. For now, there is no way to know if a new cycle would the total supply grows, the impact of a smaller supply
have occurred without the pandemic. It’s likely that debate associated with future halvings might be barely noticeable.
that will continue in the years leading to the next halving in
2024. There are three schools of thought regarding the Average Cycle Theory. Some expect this cycle to play out in
length and magnitude of the current cycle: Is it small, average the same way as the prior two cycles. If so, it should last
or is it a supercycle? This debate matters because the small between 60 and 220 more days (from March 31) and should
cycle advocates believe the cycle might already be over. The peak between 2,939% and 9,375% of the halving price versus
cycle is approaching the length in days of the first cycle, and only a 630% gain currently. Under this theory, Bitcoin prices
if returns decline each cycle, the return this cycle may have would reach in excess of $100,000. While possible, making
peaked. On the other hand, supercycle advocates point to the predictions based on two data points is a risky endeavor.
unprecedented money supply growth and the one-time

Exhibit 23: Thus Far, This Cycle Looks Smaller Than the Previous Two

Note: Days of cycle chart assumes peak occurred March 13, 2021 at $61,078. On March 13, the 200-day moving average was $24,793 versus $31,187 today.
Source: Bloomberg as of April 8, 2021

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 14
INVESTING IN CRYPTOCURRENCY

Supercycle Theory. This theory posits that Bitcoin’s increased The similarities between the rise of gold and the rise of
penetration and adoption coincides with the steepest ascent Bitcoin are striking. While Bitcoin launched in 2009, it was
in valuation. Further, given the vast amounts of currency fairly obscure until 2013, when the price hit $1,000 for the
printed by global central banks, the Bitcoin cycle may be first time. In 2014, the first Bitcoin bubble unwound, and it
much bigger than expected as fiat currencies depreciate. was mostly forgotten after an 85% peak-to-trough decline.
Moreover, others argue that because owners of Even so, in the same way the Coinage Act of 1965 that
cryptocurrencies can now borrow against holdings, they will removed silver from US coins foreshadowed the eventual
be more likely to hold on and avoid selling and thus, trigger breakdown of the gold standard and fixed exchange rates, the
taxable events. Bitcoin bubble had captured the imaginations of
technologists, developers and a few pioneering financial
We take no position on whether this cycle will be a small, institutions. The macroeconomic backdrop was also
average or super cycle. But it is important to understand the important. Money supply growth in the 1970s was in the low
various arguments. In our experience, cycles that last too long teens, which was unprecedented then, yet less than today’s
inevitably lead to leverage and eventually forced selling, growth. Investors everywhere were looking for ways to beat
causing the cycle to unwind swiftly as levered holders sell. rampant inflation and prompted some investors to consider a
new investment. Retail investors were entering the market in
What Would the Emergence of a earnest as the deregulation of the SEC in 1975 abolished fixed
New Asset Class Look Like? rate commissions and opened the door for discount brokers,
the Robinhoods of that day. A new generation of baby
In thinking about why Bitcoin has been appreciating, we boomers was less tied to old styles of investing and were
considered three explanations: the Bitcoin halving cycle, the open to something new. Now, M2 growth, which has been as
global macro environment and institutional adoption. In high as 26%, is raising the same kind of concerns about
addition to all the institutional adoption developments of inflation while growth in millennial investors is allowing new
2020 and 2021 outlined in the special report, we can also products to gain traction.
look to the past. The last major asset class incorporated into
For Bitcoin in 2015, as with gold in 1970s, a growing number
portfolios was the rise of gold in the 1970s and 1980s. Some
of people were using the new asset. The next Bitcoin bubble,
argue that the institutionalization of emerging markets or
in 2017, was driven by the idea that there might eventually be
commodities in the ‘80s, ‘90s or ‘00s are other examples, but
an exchange-traded fund (ETF) and there were additional
those were just different types of stocks or different types of
signs of institutional adoption. Although hopes for an ETF
hard assets. Gold was the first non-income-asset to be added
were dashed in early 2017, soon Bitcoin futures came along.
to portfolios and offers a good case study. Importantly, once
Interestingly, the introduction of Bitcoin futures near the peak
the process of institutionalization was kicked off with gold
in December 2017 resembled that of the gold peak in 1974,
futures in the 1970s, there were two large bubbles over an
when COMEX futures were first introduced. Both peaks were
18-year period of growing institutional adoption. The
followed by bear markets that lasted more than a year before
introduction of CME Bitcoin futures in December 2017 could
the resumption of a bull market. More institutions were
have been a similar watershed moment that made the rise of
involved and there were many ways for investors to get
institutionalized cryptocurrency much more probable.
exposure to the new asset.
Paul Tudor Jones, a well-known macro trader, advocated
The next bull market in gold lasted a little more than three
Bitcoin in his May 2020 investor letter. He compared its rise
years (August 1976-January 1980), while the Bitcoin bull
to the rise of gold as an investable asset in the 1970s. Recall
market has lasted between one and two years, depending on
that gold as an investment was illegal in the US until 1974,
if you count the bottom at March 2020 or December 2018.
which is also when COMEX gold futures began trading. The
Bears might say that Bitcoin has already risen higher than the
gold price had been fixed at $35 an ounce since 193319, but
1970s’ gold bull market and “the end of the bubble is nigh.”
was $184 by the end of 1974.20 Then, a two-year bear market
On the other hand, there are reasons to think the bull market
set in, and the price was nearly halved. By January 1980, gold
could last at least as long as gold’s 1970s run. While Bitcoin
touched a daily high close of $850, a record that would stand
has made large strides this year, relatively few financial
for more than 25 years. From the mid-1970s to the early
institutions have holdings. So there is a long way to go there.
1980s, gold became widely available through brokerage firms
Furthermore, gold started out from a higher base: It was a
and retail-oriented products. In 1989, “Gold and Gold Stocks
known asset in 1971 and had been used as a store of value for
as Investments for Institutional Portfolios” was published by
millennia. An upstart new technology-based asset is certain to
Wharton’s Jeffrey F. Jaffe in the Financial Analyst Journal.21
take longer to gain broad institutional adoption than one of
Gold had completed its 18-year transition from a new
the oldest assets in the world (see Exhibit 24).
investible asset to a recognized element of institutional
portfolios.

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INVESTING IN CRYPTOCURRENCY

Exhibit 24: Crypto's Maturation as an performing mathematical calculations. The more successful
Asset Class Has Been Twice as Fast as Gold’s Bitcoin becomes, the higher its price; the higher its price, the
more competition for bitcoin; and thus the more energy is
expended to mine. 
As the price of Bitcoin rises, more and more energy is likely to
be used to maintain the network as more miners join. Bitcoin
advocates argue crypto mining requires less energy than US
laundry dryers, an estimated 7% of energy consumption. They
also remind critics that 39% bitcoin energy consumption is
renewable because it has the lowest kilowatt-per-hour cost—
after large upfront costs are paid. Advocates suggest that
bitcoin mining can make wind power and solar power more
economical because it can be used at night or in the fall and
Source: Bloomberg, Morgan Stanley Wealth Management Global Investment spring when typical electricity-generating capacity is
Office as of April 8, 2021
underutilized. Critics counter that once money is spent on a
mining machine, it needs to run whether or not the sun is out
or the wind is blowing: If renewable energy isn’t available,
ESG Impact a Cause for Concern miners will turn to conventional sources. The energy
consumption debate is not likely to be resolved soon, and
Bitcoin is not just controversial from an investment point of
could become part of the broader policy debate over bitcoin.
view. Since mining Bitcoin takes a massive amount of
New regulations may restrict energy usage in Bitcoin mining
electricity, there is an environmental issue, too.22 Bitcoin has
operations or force miners to use only renewable power—
been criticized by environmental, social and governance (ESG)
with penalties for power from fossil fuels.
advocates who are focused on energy conservation. Estimates
of annual energy usage to maintain the Bitcoin network (see
Exhibit 25) range between 50 and 300 Terawatt hours (TWh) Risk of Crypto Investments
of electricity. By comparison, China’s Three Gorges Dam, the
world’s largest power station in terms of installed capacity, is Cryptocurrencies are a nascent asset class, with no guarantee
about 100 TWh, according to MS & Co. Research.23 Bitcoin that any particular currency will last. Volatile price
proponents say that most miners use some renewable energy movements, lack of support from central banks and no
sources, notably hydroelectric power.24 physical collateral could ultimately be a detriment.
While there are an abundance of risks, in our view the three
Exhibit 25: Estimates Vary on Bitcoin's biggest risks for Bitcoin and other cryptocurrencies are:
Electricity Consumption
Encryption breaks. Increased processing power and new
techniques such as quantum computing could eventually
crack the encryption. According to Computer World, software
designers hope their encryption will last at least 20 years,25
but given how cumbersome upgrades to the Bitcoin software
can be, they aim for longer. It is likely that the encryption
backing Bitcoin will one day be broken, opening the possibility
that owners’ “wallets” will be hacked. Future developers
could upgrade the encryption, and coin tracking services
might be able to catch hackers as they try to spend their
crypto cash. Regardless of how it may happen, bitcoin would
likely suffer a serious price decline even if encryption only
Source: https://cbeci.org/, Cambridge Bitcoin Electricity Consumption Index as appears to be broken. While the chances are low in any given
of March 4, 2021 year, over 100 years, the risk is likely to emerge.
Flawed code. Bitcoin had two bugs that resulted in
Bitcoin’s design requires large amounts of energy. A key inflation―meaning more coins minted. The first incident was
aspect of Bitcoin mining is “proof of work”—the idea of being in August 2010, which allowed 184 billion unauthorized
rewarded in bitcoin if you manage to solve the complex bitcoin to be minted. This flaw was discovered quickly, purged
algorithm. The proof of work is set up as a competition that from the supply and the code was patched. Another less
requires millions of computers globally to expend electricity severe bug appeared in 2018, allowing malicious miners to

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 16
INVESTING IN CRYPTOCURRENCY

create two transactions with the same transaction ID in the

same block, and thus were able to spend money twice. This Product selection. The number and types of Bitcoin offerings
bug was never exploited. Such events have happened only are limited and products that are available currently may be
twice in 11 years and have had limited impact; nonetheless, less favorable as new structures are approved. 
they expose a significant risk. Other cryptocurrencies, such as Lack of central governance. Bitcoin does not have a governing
Ethereum, have also had transactions that were rolled back. body, which presents challenges when users face issues or
Government action. There is also risk of a government attack theft. If a user loses their encryption key, there is no one that
on Bitcoin and other cryptocurrencies. Because the Bitcoin can help them retrieve their coins, even if they are the
network is global, actions by a single large country or a group rightful owner.
of countries could disrupt the working of the network. This Valuation risk. The lack of time-tested valuation framework
could occur through regulations or an outright attack. A makes fundamental research difficult.
regulatory offensive could take place, possibly banning the
use of Bitcoin or imposing high taxes on Bitcoin transactions. Environmental concerns. Concerns about Bitcoin mining’s
A direct attack might find a sovereign country trying to corner carbon footprint could lead it to be controlled or regulated.
the market on mining power. Such attacks would be costly. Notably, some 39% of bitcoins are mined with renewable or
“stranded” electricity such as a hydroelectric dam or an
In addition to those severe risks, there are other risks that unused windmill. However, limitations on less
could wreak havoc on the network: environmentally friendly energy sources such as coal-fired
Volatility. Bitcoin is among the most volatile of assets. While plants could reduce the security of the network, by limiting
its beta may be low due to its low correlation (and sometimes those who can mine.
negative correlation) with the broader market, its historical Association with illegal activities. Cryptocurrency has known
realized volatility is among the highest of all assets. Although use in illegal activity, including drug dealing, money
Bitcoin’s 60-day annualized volatility has fallen from levels as laundering, human trafficking, sanction evasion and other
high as 251% in late 2013 to 88% currently, it remains forms of illegal commerce as well as a payment network for
significantly elevated compared with the S&P 500 Index ransomware (software that forces users to pay a ransom to
(12%) and the Nasdaq-100 Index (18%). Notably, in 2019, regain access to their computer). Industry compliance firm
Bitcoin’s 60-day annualized volatility spiked from 29% to Chainalysis26 found that illicit transactions accounted for only
101% in less than four months (see Exhibit 26). In our view, 0.34% of total cryptocurrency activity last year. However, this
investors should expect volatility in excess of 100%, even if number could rise if cryptocurrency becomes more widely
recent volatility has been much lower. used.
Liquidity mismatch. Some cryptocurrency product offerings Internet reliability. Cryptocurrency networks are dependent
trade less frequently than the underlying asset. Thus, there is on the internet, and a global or even regional disruption could
no guarantee that a secondary market or buyer will exist even affect the ability to transfer assets.
if the asset continues to trade. As a result, investors may
misprice increases or be unable to make a timely redemption If a coin is deemed a security by the SEC it could reduce the
due to the frequency and timing of a product’s subscriptions liquidity and price for that cryptocurrency. The SEC has
or redemptions that do not match the underlying asset. argued that some cryptocurrencies are securities and may
have been sold or traded in an illegal manner. The law on
Exhibit 26: Crypto Volatility Is at Least securities is vague and susceptible to many interpretations
Three Times That of Stocks and ultimately courts will make case-by-case decisions that
can be appealed. The chair of the SEC testified that Bitcoin
was not a security and suggested that Ethereum was no
longer a security but other cryptocurrencies might be
considered securities and could have restrictions placed on
trading, suppressing their liquidity.
Forking risk. The acceptance of a controversial software
upgrade by a large minority could result in a “fork” in the
network,27 resulting in multiple networks with
cryptocurrencies having different values. If network
participants choose to run incompatible versions of the
software, the Bitcoin network could split two rival networks.
Each network would have its own cryptocurrency. The value
Source: Bloomberg, Morgan Stanley Wealth Management Global Investment
Office as of Feb. 24, 2021 of these two new cryptocurrencies could be smaller or larger

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INVESTING IN CRYPTOCURRENCY

than the original investment, and some of the resulting assets higher capacity alternative.
may be less liquid than the larger assets. Typically, one of the
networks retains most of the users and is the more valuable Risk of 51% attack.29 Bitcoin’s unique software depends on
cryptocurrency, but the uncertainty around which consensus to operate. If a malicious group attempts to disrupt
cryptocurrency is more valuable could add to volatility until a the blockchain, it might be able to reverse transactions, erase
consensus is reached. transactions or double-spend bitcoins. The group would need
to control more than 50% of the mining power to make this
Governance risk. The Bitcoin network is open source, so there gambit effective. However, a large number of miners with
may be no consensus about how to face certain challenges ample computing power around the world could make such
that require code changes. an attack feasible.
Competitive risk. A rival cryptocurrency could gain share of Processing risk. If the rewards for miners are not high enough
adoptions or mining power, leading to a decline in the original to cover their mining cost, there might not be enough miners
cryptocurrency and possibly, a less-secure network. on the network to process transactions in a timely manner or
it might become easier to perform a 51% attack. Closure or
Concentration risk. The 95 largest Bitcoin addresses hold temporary stoppages in large cryptocurrency exchanges due
about 14% of total coins.28 Many of these are financial to fraud, technological failure, hacking or legal rulings could
institutions and cryptocurrency exchanges. If one or more of reduce liquidity and value of cryptocurrencies or make it
these addresses was forced to sell its assets or had their harder to transact.
bitcoin stolen and sold, it could impact the price.
Unforseen risk. Because cryptocurrencies are relatively new,
Cryptocurrencies face significant barriers to scaling to a larger there may be unforeseen risks in the future that are not
base of users. Blockchains have limited capacity per block. If evident now. ■
the capacity is reached, transaction fees are typically used to
allocate scarce capacity. Heavy usage could result in high fees,
slow transactions and lead to users exit the network for a

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INVESTING IN CRYPTOCURRENCY

Frequently Asked Questions However, there are important differences between gold and
Bitcoin: Gold, as an asset and currency, has existed for
Why are people investing in cryptocurrency? We see millennia. Bitcoin started trading in 2009.
advocates gravitate toward three main investment theses:
Who regulates cryptocurrencies? Cryptocurrencies are
Bitcoin is digital gold, a place to hide from currency
regulated by many entities. Business that deal in
debasement; cryptocurrencies are a new asset class that
cryptocurrencies must follow anti-money laundering laws and
institutional investors are increasingly using in their
“know your clients” laws enforced by the US Treasury
portfolios; cryptocurrencies are uncorrelated, albeit volatile
Department. Gains in cryptocurrency are taxed as property,
assets that can work in a diversified portfolio.
according to the IRS. Some cryptocurrencies—but not Bitcoin
How do you value cryptocurrency? While there is no agreed- —are considered securities by the SEC. Bitcoin derivatives
upon way to value Bitcoin and other cryptocurrencies, we such as futures are regulated by the Commodity Future
review some methods that are in use. Relative value, the Trading Commission. States have their own laws and
mainstay of equities, is the most developed framework. We regulations regarding cryptocurrencies.
consider Bitcoin versus gold and Bitcoin versus the value of
How could the Bitcoin as “digital gold” thesis prove to be
the money supply of smaller countries. As eyeballs became
flawed? While M2 money supply is growing fast today, that
an “official” metric for internet companies in the 1990s,
could change quickly. As pandemic-driven needs recede, the
another area we review is Bitcoin versus transactions and
federal budget deficit should improve. Note that gold has not
users, two ways to measure usage. Lastly we look at
performed well recently; it peaked in August 2020, and is
replacement cost.
down 18% since. If budget deficits shrink in the years ahead
How are cryptocurrencies created? For the largest and the Fed tightens monetary policy, this thesis could
cryptocurrencies, “miners” must apply prodigious amounts of quickly lose adherents.
computing power with state-of-the-art microchips—and the
How could the ‘’increasing adoption” argument prove to be
electricity to run these computers—to solve complex
flawed? Institutional adoption could reverse sharply. In 2018,
algorithms. Once coins are mined, the blockchain tracks
banks were opening trading desks and gearing up to handle
ownership and transactions. With Bitcoin, the underlying code
the first Bitcoin futures, but the negative price action led
rewards miners with newly minted coins that they can sell to
many to scrap their plans. Regulatory scrutiny also put
pay for their operating costs, but only 21 million coins will
pressure on parts of the market. A certain level of
ever be minted.
institutional adoption might already be anticipated in the
Why do Bitcoin headlines seem to come back every few current bitcoin price. If the pace of institutional adoption
years? In 2020, Bitcoin had its third “halving”—an automatic slows or stops, prices might need to decline or stagnate
reduction of the supply of newly minted coins that happens because adoption is not happening as fast as some investors
every four years. In the past, these halving cycles created have assumed.
temporary shortages, positive price action, parabolic advances
How could the MPT argument prove to be flawed? Some
and ultimately, at least two catastrophic declines. The cycle is
assets famously have low correlations until a crisis. We’ve
important for understanding why Bitcoin and other
recently seen what happens when bonds and stocks start
cryptocurrencies could continue to have low correlations to
trading in the same direction. Correlations could rise as more
other asset classes. It’s also a warning sign because by some
institutions adopt cryptocurrency. Events such as the halving
measures the cycle seems to have peaked.
and regulatory uncertainty have likely contributed to low
Has an asset ever come from out of nowhere like this? Yes correlations. As the halving becomes better understood, it
and no. There are some similarities to the way gold went might become priced in, thereby dampening Bitcoin’s unique
from being illegal in the early 1970s to an asset that was cycle. And as the regulatory picture becomes clearer,
considered important to institutional portfolios by the late regulatory developments may have less impact on Bitcoin.
1980s. Gold, specifically coins, bars and certificates, only Thus, cryptocurrencies might lose the diversification benefits
became legal for US citizens to own in the early 1970s. In they have demonstrated over the past seven years. Finally,
1974, the introduction of gold bullion futures marked the end the analyzed period included strong appreciation in Bitcoin’s
of the first leg of the bull market in gold, but the second leg, value. A more muted or even negative return might have led
which started a few years later, was ultimately bigger. us to a different conclusion.

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 19
INVESTING IN CRYPTOCURRENCY

1 https://coinshares.com/research/bitcoins-role-in-an-investment-portfolio
2 https://static.bitwiseinvestments.com/Research/Bitwise-The-Case-For-Crypto-In-An-Institutional-Portfolio.pdf
3 https://medium.com/galaxy-digital-research/a-modern-portfolio-theory-case-for-bitcoin-c6d6ba609efa
4 https://news.bitcoin.com/bitcoin-history-part-10-the-184-billion-btc-bug/
5 https://bitcoin.org/bitcoin.pdf
6 https://www.coindesk.com/bitcoin-pizza-10-years-laszlo-hanyecz
7 https://news.law.fordham.edu/jcfl/2018/02/21/silk-road-the-dark-side-of-cryptocurrency/
8 https://money.cnn.com/2013/03/28/investing/bitcoin-cyprus/index.html
9 https://www.irs.gov/irb/2014-16_IRB
10 https://money.cnn.com/2014/07/18/technology/bitcoin-license
11 https://www.theguardian.com/technology/2017/sep/05/cryptocurrency-boom-stalls-as-regulators-focus-on-icos
12 https://www.nytimes.com/2017/03/10/business/dealbook/winkelvoss-brothers-bid-to-create-a-bitcoin-etf-is-rejected.html
13 https://www.reuters.com/article/us-bitcoin-futures-contracts/cboe-cme-to-launch-bitcoin-futures-contracts-idUSKBN1E10KC
14 https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_edn1
15 https://cointelegraph.com/news/fidelity-investments-fully-rolls-out-crypto-custody-service-exec-says
16 https://www.researchgate.net/publication/317601872_Bitcoin_price_and_its_marginal_cost_of_production_supporting_evidence/citation/download
17 https://energentmedia.com/bitcoin-mining-indicators-point-to-potential-market-turnaround/#page-content
18 https://www.gutenberg.org/files/833/833-h/833-h.htm
19 https://www.federalreservehistory.org/essays/roosevelts-gold-program
20 https://www.nytimes.com/1974/12/29/archives/speculative-debut-of-gold-futures-gold-futures-contracts-at-four.html
21 https://www.jstor.org/stable/4479205?seq=1
22 https://cbeci.org/cbeci/methodology
23 https://ny.matrix.ms.com/eqr/article/webapp/rf/renditionpdf/PublishedContent3/2021/02/09/ArticlePages/ARRUSSO20210209202731.dwp
24 https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-cryptoasset-benchmarking-study
25 https://www.computerworld.com/article/2550008/the-clock-is-ticking-for-encryption.html
26 https://blog.chainanalysis.com/reports/2021-crypto-crime-report-intro-ransomware-scams-darknet-markets
27 https://www.coindesk.com/ethereum-executes-blockchain-hard-fork-return-dao-investor-funds
28 https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html
29 https://dci.mit.edu/51-attacks

Please refer to important information, disclosures and qualifications at the end of this material. Morgan Stanley Wealth Management 20
INVESTING IN CRYPTOCURRENCY

Disclosure Section
Important Information
Buying, selling, and transacting in Bitcoin or other digital assets, and related funds and products, is highly speculative and may result in a loss of
the entire investment. Risks and considerations include but are not limited to:
Bitcoin and other digital assets have only been in existence for a short period of time and historical trading prices for Bitcoin and other
digital assets have been highly volatile. The price of Bitcoin and other digital assets could decline rapidly, and investors could lose their
entire investment.
Certain digital asset funds and products, including Bitcoin funds and products, allow investors to invest on a more frequent basis than
investors may withdraw from the fund or product, and interests in such funds or products are generally not freely transferrable.  This
means that, particularly given the volatility of digital assets, including Bitcoin, an investor will have to bear any losses with respect to its
investment for an extended period of time and will not be able to react to changes in the price of the digital asset once invested (for
example, by seeking to withdraw) as quickly as when making the decision to invest.  Such digital asset funds and products, including
Bitcoin funds and products, are intended only for persons who are able to bear the economic risk of investment and who do not need
liquidity with respect to their investments.
Given the volatility in the price of Bitcoin and other digital assets, the net asset value of a fund or product that invests in such assets at
the time an investor’s subscription for interests in the fund or product is accepted may be significantly below or above the net asset
value of the product or fund at the time the investor submitted subscription materials. 
Certain digital assets, apart from Bitcoin, are not intended to function as currencies but are intended to have other use cases.  These
other digital assets may be subject to some or all of the risks and considerations set forth herein, as well as additional risks applicable
to such other digital assets.  Buyers, sellers and users of such other digital assets should thoroughly familiarize themselves with such
risks and considerations before transacting in such other digital assets.
The value of Bitcoin and other digital assets may be negatively impacted by future legal and regulatory developments, including but not
limited to increased regulation of Bitcoin or such other digital assets.  Any such developments may make Bitcoin or such other digital
assets less valuable, impose additional burdens and expenses on a fund or product investing in such assets or impact the ability of such
a fund or product to continue to operate, which may materially decrease the value of an investment therein.
Due to the new and evolving nature of digital currencies and the absence of comprehensive guidance, many significant aspects of the
tax treatment of digital assets including Bitcoin are uncertain.  Prospective investors should consult their own tax advisors concerning
the tax consequences to them of the purchase, ownership and disposition of Bitcoin and other digital assets, directly or indirectly
through a fund or product, under U.S. federal income tax law, as well as the tax law of any relevant state, local or other jurisdiction.
Over the past several years, certain Bitcoin exchanges have experienced failures or interruptions in service due to fraud, security
breaches, operational problems or business failure.  Such events in the future could impact any fund’s or product’s ability to transact in
Bitcoin if the fund or product relies on an impacted exchange and may also materially decrease the price of Bitcoin, thereby impacting
the value of your investment, regardless of whether the fund or product relies on such an impacted exchange.
Although any digital asset product, including a Bitcoin-related product, and its service providers have in place significant safeguards
against loss, theft, destruction and inaccessibility, there is nonetheless a risk that some or all of a product’s digital asset, including
Bitcoin, could be permanently lost, stolen, destroyed or inaccessible by virtue of, among other things, the loss or theft of the “private
keys” necessary to access a product’s digital asset, including Bitcoin.
Investors in funds or products investing or transacting in Bitcoin and/or other digital assets may not benefit to the same extent (or at
all) from “airdrops” with respect to, or “forks” in, the Bitcoin (or other relevant digital asset’s) blockchain, compared to investors who
hold Bitcoin (or such other relevant digital asset) directly instead of through a fund or product.  Additionally, a “fork” in the Bitcoin
blockchain could materially decrease the price of Bitcoin.
Digital assets such as Bitcoin or other digital asset product is/are not legal tender, and is not backed by any government, corporation or
other identified body, other than with respect to certain digital currencies that certain governments are or may be developing now or in
the future (of which Bitcoin is not one). No law requires companies or individuals to accept digital currency as a form of payment
(except, potentially, with respect to digital currencies developed by certain governments where such acceptance may be mandated).
Instead, other than as described in the preceding sentences, Bitcoin’s and other digital asset products’ use is limited to businesses and
individuals that are willing to accept them. If no one were to accept digital currencies, Bitcoin and other virtual currency products
would very likely become worthless.
Platforms that buy and sell Bitcoin or other digital assets can be hacked, and some have failed. In addition, like the platforms
themselves, digital wallets can be hacked, and are subject to theft and fraud. As a result, like other investors have, you can lose some
or all of your holdings of digital assets, including Bitcoin.
Unlike US banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to
digital assets, such as Bitcoin, held in digital wallets by their providers or by regulators.
Due to the anonymity Bitcoin and other digital assets offer, it has known use in illegal activity, including drug dealing, money laundering,
human trafficking, sanction evasion and other forms of illegal commerce. Abuses could impact legitimate consumers and speculators;
for instance, law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off entirely
the ability to use or trade Bitcoin or other digital asset products.
Bitcoin and other digital assets may not have an established track record of credibility and trust. Further, any performance data relating
to Bitcoin, Bitcoin-related products or other digital asset products may not be verifiable as pricing models are not uniform.
Investors should be aware of the potentially increased risks of transacting in digital assets, including Bitcoin, relating to the risks and
considerations, including fraud, theft, and lack of legitimacy, and other aspects and qualities of digital assets, before transacting in such
assets. 
The exchange rate of Bitcoin or other virtual currency products versus the USD historically has been very volatile and the exchange rate
could drastically decline. For example, the exchange rate of Bitcoin versus the USD has in the past dropped more than 50% in a single
day. Bitcoin may be affected by such volatility as well.
Digital asset exchanges have limited operating and performance histories and are not regulated with the same controls or customer
protections available to more traditional exchanges transacting equity, debt, and other assets and securities. There is no assurance that
a person/exchange who currently accepts a digital asset as payment will continue to do so in the future.
The regulatory framework of digital assets is evolving, and in some cases uncertain, and digital assets themselves may not be governed
and protected by applicable securities regulators and securities laws, including, but not limited to, Securities Investor Protection
Corporation coverage, or other regulatory regimes.  

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INVESTING IN CRYPTOCURRENCY

Morgan Stanley Smith Barney LLC or its affiliates (collectively, “Morgan Stanley”) may currently, or in the future, offer or invest in
digital asset products, services or platforms.  The proprietary interests of Morgan Stanley may conflict with your interests.
The foregoing list of considerations and risks are not and do not purport to be a complete enumeration or explanation of the risks
involved in an investment in the any product or fund investing or trading in Bitcoin and/or other digital assets.  
Index Definitions

For index definitions referenced in this report please visit the following: https://www.morganstanley.com/wealth-investmentsolutions/wmir-
definitions
Glossary

Correlation This is a statistical measure of how two securities move in relation to each other. This measure is often converted into what is
known as correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation coefficient of +1) implies that as one
security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation
means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the
correlation is 0, the movements of the securities are said to have no correlation; they are completely random. A correlation greater than 0.8 is
generally described as strong, whereas a correlation less than 0.5 is generally described as weak. 
M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while
near money refers to savings deposits, money market securities, mutual funds and other time deposits.

Volatility This is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using
the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the
security.

Risk Considerations
Hypothetical Performance

General: Hypothetical performance should not be considered a guarantee of future performance or a guarantee of achieving overall financial
objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Hypothetical performance results have inherent limitations. The performance shown here is simulated performance not investment results from
an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results.

Despite the limitations of hypothetical performance, these hypothetical performance results may allow clients and Financial Advisors to obtain
a sense of the risk / return trade-off of different asset allocation constructs.

Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time
periods.
This analysis does not purport to recommend or implement an investment strategy.  Financial forecasts, rates of return, risk, inflation, and other
assumptions may be used as the basis for illustrations in this analysis.  They should not be considered a guarantee of future performance or a
guarantee of achieving overall financial objectives.  No analysis has the ability to accurately predict the future, eliminate risk or guarantee
investment results. As investment returns, inflation, taxes, and other economic conditions vary from the assumptions used in this analysis, your
actual results will vary (perhaps significantly) from those presented in this analysis.
The assumed return rates in this analysis are not reflective of any specific investment and do not include any fees or expenses that may be
incurred by investing in specific products.  The actual returns of a specific investment may be more or less than the returns used in this
analysis.  The return assumptions are based on hypothetical rates of return of securities indices, which serve as proxies for the asset classes.
Moreover, different forecasts may choose different indices as a proxy for the same asset class, thus influencing the return of the asset class. 

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic
and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and
domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied
economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing.
These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are
magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less
established markets and economies.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited
to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic
events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi)
pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to
temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government
intervention.

Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long
term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If
sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not
make interest or dividend payments. Therefore, precious metals may not be appropriate for investors who require current income. Precious
metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection

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INVESTING IN CRYPTOCURRENCY

Corporation (“SIPC”) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial
difficulties, or if customers’ assets are missing. SIPC insurance does not apply to precious metals or other commodities.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Companies paying dividends can reduce or cut payouts at any time.

An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on
an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments,
changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and
considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic
and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments
and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax
considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are
marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create
taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and
expenses, please consult a copy of the ETF’s prospectus.  Investing in sectors may be more volatile than diversifying across many industries.
The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may
be worth more or less than the original cost.  ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not
individually redeemable from an ETF.

Please consider the investment objectives, risks, charges and expenses of the fund(s) carefully before investing. The prospectus contains this
and other information about the fund(s). To obtain a prospectus, contact your financial advisor. Please read the prospectus carefully before
investing.
Derivatives and Leverage. Derivatives are financial contracts whose value depends on the value of underlying assets, reference rates or indices. 
The use of derivatives involves risks that are in addition to, and potentially greater than, the risks associated with investing directly in securities
and other more traditional assets.  These include imperfect correlation between the value of the derivative and the underlying asset, risks of
default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the underlying asset,
and risks that the transactions may not be liquid.  Certain derivative transactions may give rise to a form of leverage, which can magnify the
potential for gain and/or the risk of loss and could thus have a disproportionate impact on the performance of the fund. Leverage associated
with derivative transactions may cause a fund to liquidate portfolio positions to satisfy its obligations when it may not be advantageous to do
so, or may cause a fund to be more volatile than if it had not been leveraged.  Commonly used derivative instruments and techniques include:
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying instrument or
commodity at a specific price at a specific future time. Futures contracts may be offered on agricultural commodities,  energy commodities such
as crude oil and natural gas, as well as on a vast array of financial instruments, including currencies, government securities, and stock indices. In
addition to the derivatives risks discussed above, the prices of futures can be highly volatile.  They are affected by many factors, including
changes in overall market movements, speculation, real or perceived inflationary trends, index volatility, changes in interest rates or currency
exchange rates and political events.  Using futures can lower total return, and the potential loss from futures can exceed a fund’s initial
investment in such contracts.

Options. Options are contracts giving the holder the right to buy or sell a specific amount of the underlying instrument or futures contract on
the underlying instrument at an agreed-upon price. Like futures, the prices of options can be highly volatile and they are impacted by many of
the same factors.  The use of options can also lower total returns.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk,
significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market
volatility than securities of larger, more-established companies.
Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn
their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of
these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth
expectations.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
The returns on a portfolio consisting primarily of environmental, social, and governance-aware investments (ESG) may be lower or higher than
a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some
investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such
criteria. 
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and
companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include
commodity pricing risk, supply and demand risk, depletion risk and exploration risk.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy. 
Investors should consult with their tax advisor before implementing such a strategy.

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The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent
the performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan
Stanley Smith Barney LLC retains the right to change representative indices at any time.
Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future
performance.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various
factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and
competitive factors.  Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or
instruments mentioned in this material.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its
own independent investigation of the securities, instruments or transactions, and received all information it required to make its own
investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument.  That
information would contain material information not contained herein and to which prospective participants are referred. This material is based
on public information as of the specified date, and may be stale thereafter.  We have no obligation to tell you when information herein may
change.  We make no representation or warranty with respect to the accuracy or completeness of this material.  Morgan Stanley Wealth
Management has no obligation to provide updated information on the securities/instruments mentioned herein.

The securities/instruments discussed in this material may not be appropriate for all investors.  The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives.  Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and
income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates,
securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of
future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any
assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly
affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or
calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect
actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or
performance results will not materially differ from those estimated herein. 
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This
information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth
Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975
of the Internal Revenue Code of 1986 as amended in providing this material except as otherwise provided in writing by Morgan Stanley and/or
as described at www.morganstanley.com/disclosures/dol.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should
always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential
tax or other implications that may result from acting on a particular recommendation.
This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Wealth
Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).

Morgan Stanley Wealth Management is not incorporated under the People's Republic of China ("PRC") law and the material in relation to this
report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an
offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such
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If your financial adviser is based in Australia, Switzerland or the United Kingdom, then please be aware that this report is being distributed by
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Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of
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and do not constitute, advice within the meaning of the Municipal Advisor Rule.
This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.

Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data
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INVESTING IN CRYPTOCURRENCY

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney
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