Bitcoin-The Basics, The Mania and The Risk!

First and foremost, it is important to understand, we do NOT recommend cryptocurrencies. We are providing this blog post for informational purposes only.

Bitcoin-the one subject everyone has been talking about recently. Whether you have heard the term in the news or discussed it at Christmas dinner, it has been all the craze the last few months. And for good reason. Bitcoin is up over 1,400% this year alone! So, what is Bitcoin? Is it something to buy and if so, what are the risks.

To begin, Bitcoin is the most popular cryptocurrency today. A cryptocurrency is a digital currency that is “mined” with computers. To clarify, individuals use certain technology, along with computer hardware and power, to solve a difficult puzzle. Once the puzzle is cracked, a new bitcoin is released. There is a total of 21 million Bitcoins to be mined and brought to the market.

However, you can acquire Bitcoin without mining it. Many online companies allow the purchase and sale of Bitcoin. This has resulted in an explosion of popularity in cryptocurrency. One of the most popular sites available to purchase cryptocurrency is called Coinbase.  This allure has created several other cryptocurrencies. Along with Bitcoin, there is Bitcoin Cash, Ethereum and Litecoin. You must establish a digital wallet, and once this is done it can be linked to your bank account.  Then you can buy whole or fractions of any of the cryptocurrencies.  Of course, there is a fee for the transaction.

Risks of Investing in Bitcoin

Just like investing in any other securities, there are risks. Investing in cryptocurrencies has far greater risk in our opinion.  Listed below are a couple risks specific to Bitcoin.  

·       Security Risk- Since Bitcoin is stored or carried in a digital wallet, it is not secure. Bitcoin is purely digital and not physical.  A digital wallet can be hacked, and all the Bitcoin can be removed.  According to Bloomberg, South Korea cryptocurrency dealer Youbit recently filed for bankruptcy after hackers stole roughly 17% of their total assets.

·       Replacement Risk-  Although there is a limited supply (21 million coins), there is also no natural demand for Bitcoin.  However, there is demand for Dollars and Euros, which people need to buy everyday necessities.

Also, since these currencies are digital, there is little to prevent someone from creating a new currency.  According to CNBC, there are over 1,000 digital currencies on the market today. The market for new cryptocurrencies is limitless.  If a new and better digital currency enters the market, it could crush the current price of Bitcoin. Until Bitcoin is accepted for payment of common purchases, no natural demand will exist, and it can easily be replaced.

·       No Underlying Asset- Unlike investing in a company, Bitcoin does not have physical assets supporting the price.  Say you invested in Ford, or any other company, and they went bankrupt.  As a shareholder, you have recourse.  You would be entitled to try and recoup some of your losses by being a shareholder.  Bitcoin on the other hand has nothing backing the price of your investment.  You could potentially lose everything invested in it.

Strategy to Sell Bitcoin

Lastly, if you own Bitcoin, we wanted to address the question of when to sell. Since the price of Bitcoin has only begun to fluctuate greatly this year, it is safe to assume trading Bitcoin is primarily untested and new. Can you apply the fundamentals and analytics to trading Bitcoin like you would if you were investing in a stock?

Consider the scenario of owning an individual stock. You buy it at $10 per share and it sky-rockets to $100 dollars. You have one of three paths to take, sell, hold on or buy more.  Listed below are two possible, unfortunate, outcomes from your decision.

1.     Hold and the stock drops to $5 dollars a share

2.     Sell and the stock goes to $200 dollars a share

Ask yourself how you would feel if either of these scenarios happened. This could be a similar scenario for someone who owns Bitcoin since it is so volatile and unproven. According to Bloomberg, roughly 1000 people own 40% of all available Bitcoin. This means, they could easily upset the market if they desired. Hence, making trading in Bitcoin unpredictable and explosive.

Trading Bitcoin, depends on your risk tolerance and financial situation. However, we always say don’t be a fool by buying high and expecting another fool to buy higher.

So What?

Overall, individuals have become more aware of cryptocurrencies within the last few months. At Griffin Financial Advisors, we believe it’s important to educate our clients on both traditional and unconventional investment topics.  Identifying the considerable risks behind this highly speculative investment is indispensable knowledge for investors. Although we do not recommend cryptocurrencies, it is important to be informed about them.  Now, at least, you can join the conversation the next time they are discussed!

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.