Over the past month or so, it’s been impossible to read the business news without seeing a story about the rise of Bitcoin and other forms of cryptocurrency (Litecoin, Ethereum, Ripple, Zcash and Dash are some others). Bloomberg reports that bitcoin is now bigger than Buffett, Boeing and New Zealand! The ongoing media frenzy is sparking a lot of curiosity, and some investors have already decided to hop on the cryptocurrency train. Should you?
What is Cryptocurrency, Anyway?
In short, cryptocurrency is an electronic form of money. The “crypto” part stems from cryptography, a security feature that makes this form of currency difficult to counterfeit. As this article from Investopedia points out, a selling point for cryptocurrency is its lack of a central authority, which makes it (in theory) immune to interference by government or regulators. While that may seem like a positive attribute, there’s also a flip side: Cryptocurrency’s lack of a central authority also makes it useful for those interested in circumventing the laws regarding money laundering and tax evasion.
Bitcoin was the first iteration of cryptocurrency, and its creation nearly 10 years ago remains a source of mystery. According to Wikipedia, an inventor using the name Satoshi Nakamoto claims credit for creating Bitcoin. In 2016, an Australian entrepreneur named Craig Wright claimed to be Nakamoto, but some have doubted Wright’s proof.
How Does Cryptocurrency Work?
No “folding money” here: Cryptocurrency is nothing more than a computer code. But, like traditional, or fiat currency (money that a government has declared to be legal tender), cryptocurrency isn’t tied to a commodity like gold or silver. Because it has no central bank or regulator, cryptocurrency relies on a distributed public ledger system, called the Blockchain. In fact, some financial services firms are even more excited about blockchain technology than they are about bitcoin, because they believe it could streamline and make expensive banking processes more secure. Globally, a number of banks have been researching blockchain, but few have actually created their own systems for it.
Why all the Buzz?
In my opinion, a lot of the buzz around bitcoin, blockchain and cryptocurrency in general has more to do with its future potential than its quality as an investment right now. Bitcoin and similar cryptocurrencies may be appealing in the short term to people who favor a peer-to-peer exchange over a system that requires government oversight, but risks abound, including a growing number of bitcoin scams. In addition, some experts are comparing the bitcoin craze to the “Dutch Tulip Craze” of the 1600s, in which prices for tulip bulbs escalated in a bubble that eventually burst, leaving investors with bulbs that no longer held any value.
Should you invest?
Those who invest in bitcoin now should understand the inherent risks involved in what they’re buying and make decisions based on their financial goals, the balance and diversity of their other investments, and – most important – based on the evidence. Anything else is just speculation. If you do decide to buy bitcoin or another cryptocurrency, we recommend treating it the same way as you would a trip to Vegas – as entertainment. A sensible person wouldn’t bet the farm on a game of poker, and neither should you.
Investors must understand what they are buying before they do so. When they don’t, it can lead to big trouble when the first bout of panic hits this market. At M.J. Smith & Associates, we remain steadfast in our belief that the most rational way to approach investing is to build broadly and globally diversified portfolios with high quality investments in cash, bonds, and stocks. If you’re interested in working with an independent, fiduciary advisor, or would like a second opinion on your portfolio, we’re here to help. Please contact us to schedule a complimentary, no-obligation meeting or portfolio review, and get the new year off to a great start!
This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts. Investing involves risk investors may incur a profit or loss regardless of the strategy or strategies employed. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.