Bitcoin Fever Call it "bitcoin fever" or, as one financial writer put it, "FOMO"—fear of missing out. As investors head into a new year, bitcoin is generating tons of excitement and curiosity. Some folks want a piece of the action, while others, like billionaire investor Warren Buffett, refuse to touch bitcoin, although he admitted in an interview that it's a "very effective way of transmitting money."[1] Buffett has his reasons for warning against bitcoin, one being that it's "not a value-producing asset," in his opinion.[2] Nevertheless, bitcoin has been on a serious roll. According to the website CoinMarketCap.com, prices have gone from roughly USD $100 per bitcoin in mid-2013 to over $13,400 on January 11. As recently as December of last year, prices topped $19,000. It's this level of volatility that has financial experts comparing bitcoin to the dot.com and housing bubbles of recent memory. Not surprisingly, for every person who believes in the potential of bitcoin (and there are many), there are others who won't touch it with a 10-foot pole. Some experts, including Nobel Prize-winning economist Joseph E. Stiglitz, go even further and want bitcoin banned outright. "It doesn't serve any socially useful function," Stiglitz told Bloomberg Television last November.[3] What Is Bitcoin? There are a lot of misconceptions about bitcoin, with many people interested in making a quick profit without knowing what they're investing in. As one financial planner told Medscape off the record, "I bet if you ask 10 investors in bitcoin to define it for you, you'll get 10 different answers." (Because bitcoin prices remain highly volatile, the firm this planner works for has instructed its advisors not to discuss the cryptocurrency with their clients.) The first thing you need to know about bitcoin is that it isn't a physical "coin" that's going to jingle in your pocket as you walk down the street. Those coins don't exist. Bitcoin is a virtual currency known as a "cryptocurrency" that's traded entirely online, without the benefit to investors of any sort of regulation from the US Securities and Exchange Commission (SEC) or foreign banking authorities. Bitcoin advocates are quick to point out, however, that all transactions are logged into an electronic public ledger, which helps ensure their authenticity and—theoretically, at least, with so many people watching—prevent fraud. In addition, the number of bitcoins in circulation will eventually be capped, which means that there will be a finite supply. That "scarcity," if you will, may affect prices in the future, but right now bitcoin's momentum is being driven largely by hype. Bitcoin, which has been criticized as a vehicle for money laundering and other illicit transactions, received a measure of legitimacy when two Chicago-based exchanges launched bitcoin futures, which are being monitored by the US Commodity Futures Trading Commission. Without getting into too much detail, futures are essentially a way to speculate on which way an asset's price is likely to move. That said, bitcoin and other cryptocurrency exchanges are largely unregulated, and investing in futures—any sort of futures—requires a certain amount of knowledge and sophistication that's generally beyond that of the typical individual investor. Bitcoin Is Gaining More Respect Some online brokerages, including TD Ameritrade and E*Trade, are putting a toe in the water by allowing certain customers to trade bitcoin futures, but with a number of restrictions. Still, that's a sign that bitcoin and other cryptocurrencies may be going mainstream. Likewise, there's even a free bitcoin app called Bitcoin Tradr that runs on a Microsoft Windows platform and allows users to buy and sell bitcoin. Another sign that bitcoin is gaining more respect: Some large companies, including Overstock.com and DISH Network, are allowing customers to use bitcoin to pay for goods and services. (Although the US government permits transactions in bitcoin, it's not considered "legal tender.") There's talk, too, that many smaller merchants may start accepting bitcoin, mostly so they can avoid paying credit card transaction fees. Before we discuss whether bitcoin is worth investing in, it's important not to confuse it with its underlying technology, known as blockchain—a global, publically accessible, digital ledger of economic transactions that's transparent and continually updated. One writer calls it a "living, breathing chronicle of all peer-to-peer transactions."[4] Although bitcoin is purchased through an exchange like Coinbase or Kraken, blockchain technology facilitates and records all transactions, after which the buyer receives a code, or "digital key," to his or her bitcoin. Blockchain Will Affect Most Businesses Blockchain is expected to benefit multinational industries that do a large amount of manual data processing, or that currently rely on offline or outdated modes of working. For companies that import a lot of goods, for example, the digital ledger would contain everything from the signed contract to shipping receipts to documentation for customs and insurance. According to international accounting firm Ernst & Young, "Advanced financial applications are in development now, and global systems that could revolutionize traditional finance operations will be implemented in the coming year."[5] The firm says it's a matter of when—not if—blockchain will affect most businesses. And as the Association of Chartered Certified Accountants, with nearly 200,000 members worldwide, stated in April 2017, blockchain "presents new areas for analysis and consideration, and the sooner professional accountants increase their awareness, the better prepared they will be to engage with it."[6] For corporate accountants, digital ledgers would help them compile, check, and reconcile their transaction data, while lessening their risk for errors. Individual Investors Beware For individual investors hoping to link owning bitcoin to an investment in blockchain technology, it doesn't quite work that way. "It's important to understand that investing in bitcoin does not give you upside potential in blockchain adaptation to other assets," said Sheila Bair, former director of the Federal Deposit Insurance Corporation, in a recent article she wrote for Yahoo Finance.[7] "They are two different things." With this in mind, investors should be very careful about seeking to buy shares of unknown companies that are purportedly investing in blockchain technology. Often, they aren't. Or, if they are, blockchain is a very small part of their overall business, and/or the company hasn't yet shown any revenue from blockchain technology. Golden Opportunity or Fool's Gold? The buzz around bitcoin has spurred the SEC to caution investors to ask lots of questions and "demand clear answers" before investing in bitcoin or any other type of cryptocurrency, such as Litecoin, Ethereum, Ripple, and Zcash, to name just a few. (Yahoo Finance currently tracks 110 cryptocurrencies.) SEC Chairman Jay Clayton stated in December 2017, "Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds."[8] Given that clear warning, what do financial planners have to say about investing in cryptocurrencies like bitcoin? Are they okay with it, as long as their clients understand the risks? Karen C. Altfest, PhD, a principal with Altfest Personal Wealth Management in New York City, doesn't see buying bitcoin as an acceptable part of a long-term investment strategy. As such, her firm strongly advises its clients against investing in bitcoin or other cryptocurrencies. "Bitcoin investing is too volatile, too speculative, and the very people who want to consider this don't know what's involved. Furthermore, it's difficult to assess a value or what it should sell for." As Matthew Kelley, president of Gold Medal Waters, a Colorado-based financial advisory firm, points out, "People need to understand that bitcoin is a speculative play in a potential asset class that doesn't have an expected return, as a business would." There's also a security issue, Altfest says. Digital keys can be lost—through a computer crash, for example—putting the investor's money at serious risk. Moreover, she explains, "the timestamps don't always ensure that the purchase was made or that a coin was redeemed in the order it suggests, and could be a doorway to fraud. In this system, there's no authority like a bank to appeal to when a dispute arises." Blockchain May Be the Real Opportunity Nevertheless, Altfest and some of her financial industry colleagues are comfortable with investing in bitcoin in certain limited situations. "If someone has significant wealth—meaning more than they need to retire comfortably—then I don't have a problem with them investing in bitcoin," says Albert J. Zdenek, Jr., CEO and president of Traust Sollus Wealth Management, which has offices in Princeton, New Jersey, and New York City. "But I wouldn't advise pulling any money from my retirement accounts to do this." Altfest agrees but makes an additional stipulation: "There's no harm in investing in bitcoin if you're truly prepared for a possible loss. The hard part here is setting limits and keeping to them. Often, if you're winning, you want to invest more, and if you're losing, you want to regain what you lost. So sometimes it's hard to maintain boundaries." Unless you're a patient, experienced investor with some extra money that you're comfortable putting at great risk, it's best to stay away from bitcoin. But that doesn't mean you can't still capitalize, even if it's not right away. "Blockchain is the real opportunity," says Zdenek, who is an accountant and a financial planner. "I don't know which of the many cryptocurrencies will survive, but blockchain is here to stay. So the ongoing opportunity for investors is to find the start-up businesses that will make use of blockchain. For example, I expect to see new companies that will supply this technology to the financial industry, changing drastically how stock transactions are performed and recorded." Blockchain Has Potential but Is in Its Early Stages Matt Kelley agrees. "The underlying technology is fascinating," he says, "and we think it has the potential to impact and change the world in which we all live. It's the first time that humans have found a way to register and own digital assets. That said, we're still in the very early stages of the process, so it will be interesting to see how governments and people adapt." Zdenek believes that blockchain may one day extend to medicine as well, as a way to store information that insurance companies could use to approve payments. But that sort of innovation may be years away, say financial advisors. In the meantime, they recommend much safer places to put your money than in cryptocurrencies like bitcoin. "Cryptocurrencies have a value derived only from the belief that someone will be willing to pay more in the future for something with no tangible value or cash flows," says Kathy Stepp, CPA, CFP, a founder of Stepp & Rothwell, a financial planning and investment advisory firm in the Kansas City area. "It was the same thing we saw during the dot.com bubble." "The harm here," she explains, "is that doctors could very likely lose all—or nearly all—of their money. That's why I don't recommend speculative ‘investments' purely for sport." Source
