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May 21, 2021 - What is Bitcoin, and What Does It Mean for You?

May 21, 2021 - What is Bitcoin, and What Does It Mean for You?

May 21, 2021
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One inquiry our office often receives surrounds the use of Bitcoin as an investible asset. Investors are often curious as to what Bitcoin is, what is it used for, and whether it is a suitable investment for their portfolio. Bitcoin has been all over the news recently as its prices have soared from a mere $13 per coin in 2013, to a staggering $60,000 per coin in April 2021, before dropping to about $30,000 on May 19, 2021. These fluctuations have been accompanied by a wide range of emotion.

We will begin by exploring what a Bitcoin actually is. Then we'll discuss why investors see potential value, and most importantly, what Bitcoin means for you as an investor.

What is Bitcoin?

Bitcoin is a digital currency. Unlike the US Dollar, British Pound, Swiss Franc, etc., Bitcoin is a "decentralized currency," which means it is not backed by any government or bank. Bitcoin operates off "peer-to-peer" technology: instead of the banks processing Bitcoin transactions, individuals process them. You may have heard the terms "blockchain" or "Bitcoin miners." Blockchain is basically a transparent collection of Bitcoin transactions. Bitcoin miners are the people solving complex algorithms in order to maintain the blockchain and discover new blocks added to the chain. As they do this, they are verifying the transactions across the network and are incentivized by the reward of more bitcoin. Bitcoins are released at a fixed, declining rate, meaning there is a predetermined number of Bitcoins that will be available in the market.

If that sounds complicated, it's because it is.

What makes Bitcoin attractive?

Now let’s talk about why some are attracted to Bitcoin.

As a form of payment, many see Bitcoin as a faster, lower-fee, more-global solution to cross-country transactions. It can be a universal currency. Additionally, it is fairly secure. When you exchange Bitcoin, you are not sharing any personal information like bank account numbers.

From an investment perspective, Bitcoin can act as an alternative store of value. Instead of storing dollar value in a commodity like gold, it can be stored in Bitcoin. Additionally, many who seek investment in Bitcoin enjoy the extreme volatility and speculation that it provides.

Is Bitcoin a good investment?

Bitcoin could change the world. Who knows? In 10 or 20 years, maybe we'll all be using Bitcoin to purchase food from the grocery store, pay our mortgages, or travel across the world. But make no mistake: Bitcoin is still driven by the law of supply demand. This means that having Bitcoin as an investment is really no different than owning Tesla shares. It isn’t government-backed and is only worth what people are willing to pay for it.

As an investment, Bitcoin will go through both bull and bear markets. In just two years we've seen Bitcoin hit $20,000, fall by 80% to $3,500, soar all the way up to $60,000, then fall back to $30,000. Talk about volatility!

The chart below was provided to us by our partners at Canterbury Investment Management. It shows the price history of Bitcoin on a log scale. You can see that its value has fluctuated dramatically. Just like every other liquid security, its value is based on the law of supply and demand. Green zones represent lower-risk "bull" markets, red zones are higher-risk "bear" markets, and yellow zones are transitional. Keep in mind that just because Bitcoin enters a bull market, it still has a VERY high degree of volatility and fluctuation. A bullish environment for Bitcoin just means it has less volatility than it normally would, but still far exceeds the volatility levels of most market securities.

When it comes to investing in Bitcoin, investment vehicles (such as ETFs) will become more readily available in time. We need to treat Bitcoin just like every other investment in our portfolio: by taking an objective, technical approach, and not one based on our own personal outlook of the potential future. Right now, Bitcoin remains very volatile, with a high degree of risk and fluctuation.

If you would like to visit with us about Bitcoin, or your portfolio in general, please feel welcome to contact us to schedule an appointment. We're here to help!