We once read an article about what to say when your parents ask you about Bitcoin and it makes sense that even though we’ve been hearing about Bitcoin for years, the concept may not be understood by everybody. The article explains, “Well, it’s like money in that it has value and you can use it to buy goods and services. It’s also like a stock because the value fluctuates based on supply and demand. Unlike stock, there are no dividends, just whatever the bitcoin is worth on a given day.”
A common question that follows the explanation usually seeks to uncover where you find Bitcoins. Bitcoins are virtual and can be accessed from your computer, which acts as a “wallet.” A global system is used to update everyone’s holdings and a sophisticated computer system is used to help track the money. The money is not backed by any government and isn’t regulated like other currency.
Bitcoin has experienced a roller-coaster like change in pricing, from losing 27% over a few days during a sell-off, doubling in value over a month, and soaring to a value of over $9,000 per Bitcoin in November 2017.
Although we continue to stay updated on the latest information and changes in their viability, we do not currently invest in these currencies for the following reasons:
1. Volatility & Lack of Liquidity
Bitcoin is extremely volatile mainly due to its low liquidity and lack of regulation. Bitcoin trades “over the counter” and is not as liquid as other positions, making it very difficult to trade. Many entities that hold OTC positions charge a significant premium for trades associated with them because it’s a manual process to trade them. In recent months, liquidity has greatly improved due to the spread of news regarding performance. However, volatility should not be underestimated.
2. Lack of History and Potential Competition
Bitcoin currency now has cryptocurrency rivals, among them, a similar option called Ethereum. This is a digital currency AND a technology. The technology is a backbone to blockchain, which can be defined as “a ledger of records arranged in data batches called blocks that use cryptographic validation to link themselves together.” Investing in Ethereum has the same drawbacks as any of the other cryptocurrencies.
3. Lack of Regulation
In order to directly invest in Bitcoin you need to use a service such as Coinbase or any of the other competing companies. Once purchased, you then should store your Bitcoins via cold storage (basically on a device not connected to the internet). Blockchain, which we mentioned above, allows for the currency to be regulated by a series of computers rather than a single regulatory entity.
With Bitcoin and cryptocurrencies being such a hot news story at the moment, we understand many people have an increased interest in this topic, so please let us know if there are additional questions that we can answer for you.
References:
https://arstechnica.com/information-technology/2016/11/what-is-blockchain/
http://www.coindesk.com/price/
http://www.cnbc.com/2017/05/22/bitcoin-price-hits-fresh-record-high-above-2100.html
http://mashable.com/2017/11/22/how-to-explain-bitcoins-to-your-parents/#8NbNWTY1omqx
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published on November 28, 2017 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.
