There is no shortage of news stories about Bitcoin in the media, but what exactly is Bitcoin? What should you know about it and how do we, as financial planners, think about it?
Few major financial topics have brought about the level of confusion, misinformation, and the hope of striking it rich than Bitcoin. For something so ubiquitous across the financial media you are more likely to know someone seven feet tall than someone who can explain what Bitcoin actually is. In this article our goal is to give a basic understanding of Bitcoin and share our perspective on why it isn’t part of our investing and financial planning philosophy.
Bitcoin (ticker: BTC) is the most prominent example of a “cryptocurrency” trading in the market today. Cryptocurrencies are “digital currencies” that are not regulated and therefore not backed by the full faith and credit of any government, unlike the US Dollar, the Japanese Yen, etc. Curious how many different cryptocurrencies are out there? Thousands. Aside from the hype and hope of investing for a gain, cryptocurrencies have found favor in the market, despite their drawbacks, for a few reasons. The primary reasons are that Bitcoin isn’t tied to a central bank, transactions are secure due to “blockchain” technology, and dealings are private.
Bitcoin was created in 2009 and languished in the world of technologists and computer geeks for several years. An early Bitcoin story from 2010 involves what was likely the first use of the digital currency to make a purchase – two Papa John’s pizzas. Bitcoin continued a slow rise in value, with the value of one bitcoin first hitting $100 in 2013 and $1,000 in 2017. During this time BTC’s price moved mainly as a function of increased awareness and speculation, not because of widespread use and acceptance as currency. Volatility, to put it lightly, is a hallmark of BTC, with price swings of 10% or more in a single day not at all uncommon. As of April of this year the price of a single Bitcoin has hovered around $55,000. The bitcoins used to buy those pizzas would now be worth over $500,000,000.
Putting aside the extreme volatility you may still have several questions about this intangible computer money.
If I can’t use it to buy things is it really a currency? At this point, no, and no one really knows if it (or any other cryptocurrency for that matter) ever will be. Some retailers are beginning to accept it as payment but it is far too early to tell if mass adoption will take place.
Is it an investment? We don’t think it is because it isn’t tied to anything tangible like corporate profits and can’t be physically held like gold. Bitcoin fits squarely into the category of speculation.
What gives it its value? Like with actual currency it is based on faith in a system and the technology that powers it all, called blockchain technology. However, this system is currently small, under- or unregulated, and can be difficult to navigate if you aren’t technologically savvy.
For these myriad reasons we regard Bitcoin and the rest of the cryptocurrency universe with extreme caution. Due to the lack of regulation, uncertainty around taxation, and our compliance obligations we cannot directly hold any cryptocurrency for clients, nor can we recommend ETF and mutual fund products related to cryptocurrency. At Johnson Bixby we have an Investment Committee constantly assessing our portfolios and the ever-changing landscape of the markets, including assets like Bitcoin, but the ultimate focus is on how those portfolios are constructed to help each client meet their own goals without taking unnecessary risk. Right now, cryptocurrency does not meet our criteria.
In the meantime, be thankful you’re not in this situation.