Bitcoin’s dizzying ride
As I write this, Bitcoin has breached $50,000. That may just be a number but consider Bitcoin’s recent ascent: Just two years ago, a single bitcoin fetched $3,600, and at the beginning of this year, the value had increased tenfold, to more than $36,000, and it is now trading at $50,000. The dizzying ride of Bitcoin began for me back in 2013, when I went on television to discuss the fact that it had risen above $1,000, from $13 earlier that year.
As a primer, Bitcoin was created in 2008 — and launched in 2009 — by an anonymous group of software developers (or maybe one, who went by the alias “Satoshi Nakamoto”) who believed it would become a useful currency that was outside the purview of large institutions and central banks.
The technology that powers Bitcoin (and other similar crypto currencies) 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. The idea is similar to an old-fashioned library card in the back of a book, where in one convenient place, everyone can see who took out a particular book, explains Dan Roberts, a Bitcoin expert and editor in chief of Decrypt.
In the early years, regulators were worried that Bitcoin could be used for money laundering and other criminal enterprises, as well as be subject to huge price swings. Those warnings were born out, but in the dozen years after its launch, Bitcoin has found its footing and acceptance by many of the early doubters. Late last year, the Commodity Futures Trading Commission (CFTC) released updated guidance on digital assets, over which it will act as the primary regulator.
“Conceptually, however, a digital asset can be understood as: Anything that can be stored and transmitted electronically, and has associated ownership or use rights,” CFTC noted. The agency cited digital asset benefits, like increased transaction speed, efficiency and certainty. But the agency underscores persistent risks, like market manipulation and lack of transparency, not to mention the peril of lost passwords that may prevent you from accessing your precious digital vault.
In late 2017, I was asked whether or not to jump on the Bitcoin bandwagon. At the time, my response was: “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.” Four years later, I stick with that advice, though with a little more nuance.
As Roberts explained, “amid the cryptocurrency market surge of the past six months, the consensus narrative is that unlike in 2017, when Bitcoin mania was driven by retail investors and hype, this cycle is about institutional investment.” In the current boom, traditional investment firms and payment networks have warmed up to digital assets — not to mention Tesla, which bought $1.5 billion worth of bitcoin in January, amounting to 10% of its cash reserves. That institutional support means that digital assets have likely turned the corner and have gone more mainstream.
Digital assets like bitcoins should be placed in a similar category to gold, another bright, shiny asset whose value is difficult to ascertain. Purchasing bitcoins seems more like a trade against market/global unrest than the more common investing decisions that can be quantified by corporate earnings, cash flows and interest rates. As billionaire investor Mark Cuban tweeted on Jan. 11: If you are brave enough to jump into crypto, “pretend you’ve already lost your money.” He also said to limit your allocation to 10% of your total invested assets, which I would amend to 5%.