What’s the Deal With Bitcoin?

In Articles, Investment Management, Weekly Articles by Adam Cufr

I’m not going to suggest that being unaware of Bitcoin’s recent craze points to one’s under-rock living situation…but it’s close. The digital cryptocurrency’s meteoric rise in ‘value’ has lead many people to wonder, “Did I miss out on millions?” While the answer is likely a yes, it may be wise to learn a bit more about Bitcoin before calling it the next Apple or Microsoft.

First, what is Bitcoin? Wikipedia defines it this way: “Bitcoin, created in 2009, was the first decentralized cryptocurrency. A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.” 

Got that?

In short, it’s a form of digital money. It’s free from the normal regulation of currencies like a dollar or a Euro, because no single entity controls it like the Federal Reserve Bank System controls our money. With cryptocurrency, computers all over the world work together to help determine and confirm its value using something called a blockchain.

Because Bitcoin (and other cryptocurrencies like it) are effectively off the grid that dollars exist on, it’s free to be exchanged not only between owners of the currency but also with businesses who choose to accept it as a means of payment for goods and services. As long as enough people agree on Bitcoin’s value as an asset, then it has value. In this way, it’s no different than paper dollars that are only worth what we agree they’re worth. Bitcoin’s unique assignment of value using the blockchain may represent a huge leap into a money-less economy.

Lately, the buzz has become one of value. There are countless stories of early Bitcoin investors who have become incredibly wealthy through its rise in price. As these stories circulate, the inevitable question becomes, “Should I be investing in Bitcoin?”

And this is precisely why I’ve been hesitant to write this article for so long. It’s not clear who should be buying Bitcoin and who shouldn’t. Here are some common reasons for and against Bitcoin ownership:

  • Bitcoin is a very untested experiment, with a number of notable – and huge – thefts having occurred. Hackers have managed to steal many, many millions of Bitcoin, even recently. In fact, a December 8th Money Magazine headline read, “The $70 Million Bitcoin Hack Was the 4th Largest Breach in Cryptocurrency History.” This tells us the technology isn’t bulletproof yet.
  • The meteoric rise in Bitcoin’s value of 1,000% just this year also saw a 20% drop in its value in just ten hours on December 7th! I know we try to coach people through market volatility, but that’s on another level. If you’re going to invest in Bitcoin, be prepared for an emotional and possibly financial rollercoaster.
  • Why are you wanting to invest in Bitcoin? Asking this question out loud leads to an interesting conclusion. “Um, because I want to get rich?” Fair enough, but consider that enough people doing the same is a defining characteristic of a bubble or even a mania. Once enough normal people (as opposed to early Bitcoin adopters) start pouring into a little understood, untested investment, the moment is ripe for a crash. After all, the people who got in early only get to enjoy their newfound wealth if they cash out of their investment. Unless they’re able to find ways to spend hundreds of millions of dollars at businesses that accept Bitcoin, they’ll have to convert their wealth back to dollars to actually use it!

Now, let’s be real here. If you have some fun money available and are fine risking it in Bitcoin, that’s your prerogative. It’s very possible that an investment today can still result in huge gains as more and more people pour into this exciting new world. If you can stand to lose your money, then you might enjoy the excitement of a modern gold rush!

In the end, it’s been determined that the technology behind Bitcoin, the blockchain, is a very viable technology that could reshape our world’s economy. In fact, a number of major traditional financial institutions have begun the work of implementing these tools in their businesses. It’s also possible that the first name brand cryptocurrency may open the door for a lot of new competitors that may build an even better mousetrap (think AOL, then Google).

If you’d like to learn more, I suggest you do some research. Just about every news outlet has issued a story on Bitcoin, so there are plenty of how-to guides out there. Either way, I think we can agree that the world has changed and we’re all witness to something new and potentially exciting. How you choose to engage in this new world is up to you. Because this is an unregulated market, I’m not interested in or able to endorse that you participate in Bitcoin; I’m just doing my best to alert you of its existence and to try to shed some light on what a lot of people are talking about.

All the best,

Adam Cufr Signature

Adam Cufr, RICP®