What's The Buzz With Bitcoin?

William Shakespeare once wrote, “To ฿, or not to ฿, that is the question.” I don’t know that Shakespeare is best remembered as a fortune-teller but fast forward to today and his legendary line has certainly risen to relevance. With all the news surrounding the recent boom of Bitcoin, naturally we have been receiving a lot of questions about it. Here is our take on some of the most frequent questions regarding Bitcoin:

What is Bitcoin?

Bitcoin is a cryptocurrency, a digital asset that can be exchanged for other currencies, products, and/or services. Bitcoin is issued by no single administrator or central bank. For example, the US Federal Reserve issues the US Dollar while new Bitcoins are offered through the process of “mining” where “miners” collect and record new Bitcoin transactions into a group of transactions and link them electronically to previous blocks of transactions. The mining process not only naturally controls the supply of Bitcoins, but it is vastly complicated and requires extreme computer power and knowledge.

How do I buy a Bitcoin?

Since most of us do not have the computer know-how to take on the mining process, we must turn to the open market and buy Bitcoin at its current market price. To convert money into Bitcoin, there are apps such as Coinbase that will open your personal “Bitcoin Wallet.” The process is relatively simple:

1) Sign up for Coinbase

2) Connect your bank account

3) Buy and sell Bitcoin

Is Bitcoin a good investment?

By looking at Bitcoin’s approximate 2,000% return in 2017, Bitcoin seems like a great investment but what the number doesn’t show is the huge swings in value that have occurred since its debut back in 2010. Daily fluctuations in the price of Bitcoin have been as high as 20%. This magnitude of volatility is enough to make the average investor’s heart stop. Pair this volatility with the fact Bitcoin’s value is purely demand driven, there is no telling where the Bitcoin market will go next. It could bust as quickly as it boomed with zero warning.

Should I be considering Bitcoin in my portfolio?

Our duty as financial planners is to limit our clients’ exposure to risk. This type of speculative investing does not align with any of our current investment strategies. and investors should proceed with extreme caution when considering an investment in Bitcoin.

In that case, Bitcoin sounds like the stock market. What gives?

One may argue the stock market is also a gamble but the key difference is that the stock market has both current and historical data as well as mandatory reporting requirements for all publicly traded companies. Bitcoin has none of these things. Stocks are valued based on expected future earnings of the issuing company. Bitcoin’s valuation is far more arbitrary and is based purely on demand. There is currently no underlying economic data or earnings forecast justifying the market price of Bitcoin.

It is difficult to determine the future of Bitcoin with the information available to us today. Since we advocate investing for the long term and mitigating risk and volatility wherever possible, we believe investing in Bitcoin could be too speculative and risky for long term success.

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Securities offered through Securities America, Inc., member FINRA/SIPC, Betsy Merritt & Tyler Aubrey Representatives. Advisory services offered through Securities America Advisors, Inc. New Break Financial and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice. It is important to coordinate with your tax or legal advisor regarding your specific situation. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns. Alternative investments provide investors with exposure to markets and investment strategies that cannot be accessed through traditional fixed income and equity markets (such as real estate, commodity or natural resources). Investing in these investments is speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investments.