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