Bitcoin is soaring, but be careful
Jill on Money
U.S. stocks are now in the second longest bull market on record (the longest was 19822000), but there seems to be a missing element to the current stampede: investor euphoria.
Remember the late 1990s, when everyone was talking about stocks? It certainly doesn’t feel that way today. In fact, investors who call into my podcast and radio show seem to be more concerned about the downside than the upside.
Perhaps that’s a tribute to how much damage the financial crisis, bear market and the worst recession since the Great Depression inflicted on us. For some, the sting of those losses will persist for years to come. But if you are looking for that emotional high, it’s time to talk about bitcoin, the cryptocurrency that has stolen the stock market’s thunder, in terms of euphoria.
I started covering bitcoin almost five years ago, when it traded above $1,000 for the first time. At the time, it was a wonky, weird pseudocurrency used to pay for drugs on the dark web. Now that bitcoin has soared above $10,000 and has made it into the mainstream conversation, it’s time for a quick cheat sheet.
What is bitcoin? It is a peer-to-peer digital currency that was launched in 2008 by an anonymous group of software developers. The currency was generated through a complicated open computer program. Users mined bitcoin by solving mathematical problems and were issued bitcoin in exchange.
How did people get their hands on bitcoin? At first, anyone with a computer could download and run the software. Today, mining bitcoin (and the other bitcoin-like alternatives) requires powerful computers. Until recently, the way that most people acquired bitcoin was via payment for goods or services, by purchasing it through a variety of bitcoin exchanges or by exchanging it with someone directly.
That’s set to change. After the SEC rejected a bitcoin ETF earlier this year, the Chicago Mercantile Exchange soon will start trading bitcoin futures, enabling investors to bet on the coin’s future without physically owning it.
Who oversees bitcoin? There is no central bank or government that backs bitcoin — it is completely independent. This was hailed as a positive feature, especially in the wake of the financial crisis, when distrust of financial institutions soared. The concept of a nonbank-related way to conduct commerce was seen by many early adopters as a true advancement.
From a consumer perspective, this is a problem because cryptocurrencies are unregulated and, therefore, prone to fraud.
Besides the mania, what are the practical applications of digital currencies? The technology that powers bitcoin is called blockchain, which allows a network of computers to agree at regular intervals on the true state of different types of shared data, like transaction records.
This so-called distributed ledger is like a single, secure set of books shared by many. That’s why the technology is appealing to the financial services industry, which understands the significance of a system that allows for the exchange of value directly, without a middleman.
Should I jump on the bitcoin bandwagon? Bitcoin is up about 900 percent this year and has soared an astounding 8,000 percent over the past five years. If you’re the type of person who likes to gamble, can take extreme price fluctuations and can afford to lose what you invest, go for it.
Although some have argued that bitcoin should be treated like any other asset class, it has not yet matured enough to be treated like a stock or bond. Until there is more regulatory oversight and consumer protections, stick to your diversified portfolio.
Jill Schlesinger, CFP, is a CBS News business analyst. She welcomes comments and questions at askjill@moneywatch.com.