It’s hard to turn on your TV or read the paper without some hype about becoming a millionaire off of Bitcoin investments. Usually it ends with a scare tactic, call-to-action like, “If you don’t act now, you’ll be left behind!” For many, the next couple of questions are, “What is Bitcoin?” and “How safe is it?”
Bitcoin is a “new” type of cryptocurrency – or more simply put, a form of digital money. In 2009, Bitcoin was created by Satoshi Nakamoto as the first decentralized cryptocurrency. All forms of prior digital currency were centralized, through an authority or middle man such as a banking institution. Bitcoin’s decentralized model uses miners or record-keepers who transfer coin and record transactions in a public distribution ledger.
How Bitcoin works
Currency exchanges exist online, all over the world, where Bitcoin can be purchased in one’s native currency. Your Bitcoin balance is digital and accessible online through any technology such as your home computer or phone. Theoretically, you can use your Bitcoin to purchase anything, like you would with regular cash, but your Bitcoin is not subject to cash limitations such as dollar limit of purchase, currency exchange, international borders, transfer limits and fees, etc. It is touted by Bitcoin users that more everyday vendors such as restaurants and movie theatres are accepting Bitcoin payment around the world.
Bitcoin in a nutshell
– Payment is transferred person to person online, rather than through an institution, such as a bank. The peer-to-peer structure theoretically removes fees that a bank would charge for facilitating the transfer, currency exchange, etc.
– No pre-requisites or limits
– Your account cannot be frozen
– The upside potential for growth and acceptance of Bitcoin could yield a hefty return for the initial investors.
– There is currently little to no regulatory oversight over the cryptocurrency industry, nor protections in place for the investors
– The primary current uses of Bitcoin are rumored to relate to illegal drugs and illicit weaponry
– The value of Bitcoin is arbitrary in an unregulated market. Therefore, the risk of a bubble or sudden drop in value is high.
Bitcoin excitement circulates around the unknown potential of the new currency. Some Initial Coin Offerings (ICOs) have even hired celebrities like Floyd Mayweather and Paris Hilton to promote their projects and endorse virtual money – a move highly criticized by the Securities & Exchange Commission[i].
Perhaps unfair, but some have compared the Bitcoin buzz to the likes of the Dutch Tulip Mania of the 17th Century or the Dotcom Bubble of 2000. Bitcoin (BTC-USD) is trading near 12,700, up approximately 1,300% in 2017[ii], compared to the Dow Jones Industrial which was up a stingy 21%[iii] during the same period. In 1999, tech stocks with negative earnings were going up in value, on what was coined as “the new norm” because net earnings were deemed less relevant than internet traffic and future potential. The normal rules about prudent investing were thrown out the window. In hindsight, the tech phase was not different, but a bubble that burst. The Bitcoin craze is showing signs of the same rapid growth, but with no regulation at all.
The consensus of many investment professionals is that buying Bitcoin now would be late in the game (buying high), and the highly speculative investment could end in financial hardship to the average person.
Digital currency is still in its infancy. The idea of a currency medium that transcends international boundaries and is tracked and exchanged online is transformative. However, it is too early to know who the winners and losers will be in the cryptocurrency horse race. Going back to the Dotcom timeframe, many of our current household names like Facebook and Twitter, didn’t even exist until after the crash. However, they were birthed from the innovative foundations (and subsequent deaths) of trailblazers like Classmates.com, Friendster and MySpace.
Before you make a large financial decision about a speculative investment, consult your Financial Advisor to ensure you are investing in a manner that matches your risk tolerance and not compromising your overall retirement planning. When you have a network of professionals working together to provide you sound recommendations, you are more likely to create a plan that provides you and your family peace of mind.