By Mickey Welcher
Bitcoin is the most exciting and talked about investment in the market today. People are always asking me what I think about Bitcoin: What exactly it is and should they invest. These are great questions, because Bitcoin and other “cryptocurrencies” are all the rage on Wall Street.
But I will give my disclaimer right here. I do not own any Bitcoin or buy any for my clients at this time.
What Exactly Is Bitcoin?
Bitcoin is the most popular of the cryptocurrencies and was the first digital currency that works without a central bank. It is a peer-to-peer network with transactions taking place between users and recorded in a publicly distributed ledger called a blockchain. When you own bitcoin, it is stored in a digital wallet, which is a type of virtual bank account that allows users to pay for goods by sending bitcoins, or to receive bitcoins to spend later.
Why Is Bitcoin’s Price So Volatile?
This is one of the hardest questions to answer, because a normal currency should not have the volatility that Bitcoin has each day. Traditional currencies are issued and backed by governments. Unless a country is in dire financial straits, its currency does not fluctuate that much in a given day. Bitcoin has no backing and there is a fixed amount that can and will be created over time. There is a lot of speculation as to the future of cryptocurrencies. This causes wild price fluctuations each trading day, and we will probably continue to see this moving forward.
Isn’t Peer-to-Peer Better Than Government Control?
This is the biggest issue that makes Bitcoin hard to take seriously as an actual currency. Let’s say you sell your car for $10,000 today. The buyer gives you cash, then you can go to the bank anytime, deposit that money and you have $10,000. Using Bitcoin as an example, let’s say that when you sell your car one coin is worth $10,000. You sell your car, take the coin, but get busy and don’t have time to cash the coin for an hour or so. When you finally do cash it, you may find that the coin is now worth only $9,300. That is not something any seller wants when they make a transaction. This does not happen with the U.S. dollar or most major currencies, unless a country is having an economic breakdown.
How Do I Invest in Bitcoin?
The easiest way to invest is to buy the actual Bitcoin or other cryptocurrencies is through a firm that specializes in them. There are a few out there and more opening each day. You can set up a digital wallet and buy coins directly. As of last weekend, investors can buy and sell Bitcoin futures on regulated exchanges, which was another reason for the big price increase of the last few weeks. This was seen as another sign of legitimizing Bitcoin as an investment. There are a few exchange traded funds that are in the pipeline that will give investors different options to invest in this sector.
What Are the Risks in Bitcoin?
Every day you hear different opinions from Wall Street experts on the future of Bitcoin and the other cryptocurrencies. The fact there is no government backing the currency does make it hard to believe in the long-term future of Bitcoin, but things can change. Also, we have seen hacking at a few exchanges, and the recent theft of over $60 million in Bitcoin from investors with no certainty that anyone will get their money back. Since there is no government backing, there is no bank insurance for the money. This and the daily price volatility make Bitcoin hard to believe in over the long term.
Is it Too Late to Invest in Bitcoin?
This is another question I frequently get asked and I have a hard time answering. My background comes from the trading side, and when you see a stock or investment explode like Bitcoin, it always comes back to earth. Of course, these are different times and no one knows what to expect from these currencies. If you are looking for a quick trade, this is where it becomes gambling at these levels right now. Maybe if Bitcoin settles down for a bit and finds a base, then you can make an educated guess and make a trade. There have been so many large-percentage moves lately, that if you buy and it drops quickly, it is hard to know if the price is a pullback or an actual selloff.
The one thing I have told friends is that if they do want to own Bitcoin, take a very small percentage of their portfolio (1 to 4 percent) and buy it and forget it. These are higher net worth investors who can afford to drop the money if they are wrong and are willing to have this investment as part of their diversified portfolio.
Bitcoin is going to continue to be a very interesting investment in 2018 and will have many up and down days. Be careful if you want to try and trade it, because at some point, some investors and are going to get caught holding it during a very big drop.