Bitcoin. The talk is all about bitcoin
We have been fielding a number questions on Bitcoin lately so we wanted to provide our thoughts on this digital currency, otherwise known as cryptocurrency. Bitcoin was created back in 2009 to allow online transactions directly between two parties, cutting out financial institutions in the process. It was created using Blockchain technology, a network of computers linked together that approve, verify and record each transaction that happens on an exchange. Bitcoins can be used to buy merchandise anonymously, and international payments can be made cheaply and easily, as they are not tied to a specific country or subject to regulations. Therefore, there are no transaction costs such as wire fees, credit card fees, etc.
Bitcoins can be transferred between parties using a mobile application or computer, and are typically stored in a digital wallet that is either in a “cloud” or hard drive. These act as a virtual bank account although unlike real bank accounts, they are not FDIC insured. The use of clouds and/or computers exposes holders of bitcoin to hacking and viruses that could potentially wipe out their investment. In fact, nearly 120,000 bitcoins were stolen during the summer of 2016 when a major bitcoin exchange was hacked. This was worth $65 million at the time, but in today’s value that would result in over $2.2 billion being stolen by hackers.
Given the sharp rise in the value of Bitcoin experienced this year, we are not surprised that the level of investor interest has increased exponentially. However, we remain skeptical of where the price goes from here, since the value of Bitcoin recently surpassed the Dutch Tulip Bubble from the 1600’s as the largest asset bubble of all time. This does not mean the price cannot continue to climb higher, but there are some considerations for investors as they contemplate investing in such a volatile currency:
1. It is incredibly hard to put a value on Bitcoin, as it really can’t be measured, no intrinsic value. Similar to price movements in gold, momentum and sentiment are the biggest drivers to price movement instead of an underlying asset that creates value over time.
2. The price volatility of cryptocurrencies makes it difficult for retailers to accept it based on pricing goods and managing exchange rate values of a currency that can fluctuate 2025 percent in a single day. In fact, the price fell over 40 percent over the last two weeks after hitting a peak level near 20,000.
3. The last 4 major U.S. market bubbles happened when asset classes appreciated 1,000 percent over a 10-year period, Bitcoin was up 1,700 percent YTD through Dec. 15 and is up nearly 1,500 percent even after the recent selloff
4. The market is highly unregulated and open to potential hacking, with the potential to lose your entire investment.
5 The expanding use of Blockchain technology has allowed for the rise of other digital currencies, such as Ether, litecoin or Bitcoin cash. There are hundreds, if not thousands of other forms of digital currencies, which may lead to render Bitcoin as obsolete as the technology evolves.
The market is still evolving as well, now that investors can trade futures tied to the price of Bitcoin. This will allow institutional managers, such as pensions and hedge funds, to place directional bets on the digital currency. This may enhance the price volatility through the use of leverage, especially if more institutions position for the eventual bursting of the bubble by shorting the
currency to drive the price down. It may not be a coincidence that the price volatility has picked up substantially since the futures began trading this month. Those in favor of investing directly in Bitcoin or other digital currencies should proceed with caution and treat this as highly speculative, with the potential to lose their entire investment.
Frank Fazio III, is a portfolio strategist at Bouchey Financial Group, with offices in Saratoga Springs and Troy. E-mail investment and financial planning questions to planningpaysoff@bouchey.com or read their blog each week at www.stevenbouchey.com. Information contained in this column should not be considered as the receipt of personalized financial advice and please consult with your financial advisor.