Making Bitcoin Work For You, Or Not

Over the last few months, I’ve received many questions about bitcoin, the cryptocurrency that’s getting all the fanfare these days. If you haven’t been following the bitcoin news, not to worry – it’s not too late. New innovations in financial markets don’t come along too often, and I think it’s good to be aware of this one. My husband has been trading the currency over the last few months, and it has forced me to follow it pretty closely. As a reminder, your exposure to different investment vehicles will grow as you surround yourself with people who can share and talk about their investment journeys. Make sure you keep these conversations going because you’ll always learn a lot, both on the positive and negative side.

Before I dive into a few of my own takeaways, let me first give a brief overview of bitcoin. In a nutshell, here’s all you need to know:

What is bitcoin? A digital currency that trades in coins, or as some people say, “tokens.” Right now, one bitcoin is worth over $5,000. Bitcoin does not trade in shares or units, but coins.

When was bitcoin started? Almost 9 years ago, in 2008. Satoshi Nakamoto is the name given to the inventor. There is still a lot of speculation on the real identity of the founder. Bitcoin's surge this year, relative to previous years, is the reason why everyone's talking about it now.

How does it work? The WSJ says it best….“When a bitcoin owner transfers a token to another person, he or she posts the transaction to the blockchain, a simple account book floating on the internet, signing it with a unique string of numbers and letters. Bitcoin “miners” verify the transaction by running those numbers through formulas on high-powered computers, work for which they are paid mostly in newly minted bitcoin. For the users, fees are relatively low and transactions are—in theory—fraud-proof.”

How do you trade bitcoin? On an exchange (Coinbase), through options, an ETF, or other indirectly by investing in the other companies that are involved in bitcoin’s technology. See more details here.

Now that you know what it is, here’s my take:

  • The currency is only as good as the faith people put in it. The economist in me is now showing out. Currency only has value because those exchanging it believe that it does. The faith in our good ole’ US dollars works the same way. And, trading bitcoin works like any other market – the price of the asset being traded is a direct result of the supply and demand for the asset.
  • The currency is highly volatile. The currency has moved between $4,500 and $5,000 in a matter of weeks. Whether its China deciding to shutdown local bitcoin exchanges, or JPMorgan CEO Jamie Dimon calling the currency stupid and “a fraud,” bitcoin’s volatile price movements indicate that it still trades in a relatively nascent market, wherein there are not too many players. As a result, bitcoin’s price is highly sensitive to news and whenever any major holder decides to buy or sell more shares.
  • People will make (and lose) money. Whenever there is new fintech innovation, know that someone (or institution) will make money. The fact that bitcoin has moved over 1000% in this year alone points to the reality that some are gaining, and others are losing, money. Now, large institutional investors have yet to embrace bitcoin en masse. That said, the WSJ has also reported that Goldman Sachs is considering opening a bitcoin-trading operation. When large institutions start to invest in new investing strategies, it’s worth paying attention to, for no other reason than to know that it will eventually touch the everyday person in some way. Oh my – I said it! Early stage companies are also using bitcoin to raise money for their companies, skirting the traditional regulations.  And, others are waiting for a biotin ETF to become mainstream – keep your eyes open.

So, I know you’re asking – Charisse, well, what should I do? At the very least, I recommend paying attention to how bitcoin evolves. I proud myself in being a long-term investor, and you (or your advisor in working with you) must decide if bitcoin is for you.

Have a great week!