by Barry Brindise, Financial Planning Director, Brightwater Advisory
If you have been watching the news recently, you have heard the words, “Bitcoin”, “Blockchain”, and “Crypto Currency”. As a result, we wanted to share the following information with our clients to help answer questions you may have about these investment vehicles and their growing popularity.
What is crypto currency?
Most “Crypto currencies” rely upon a technology called blockchain. Blockchain is a decentralized technology that utilizes multiple networks to manage and record digital currency transactions. In order to participate in Crypto transactions like Bitcoin transfers, participating networks must “prove” their right to participate in the transaction by executing highly complex computations and in so doing, demonstrate what is believed to be a highly secure network.
There are over 10,000 crypto currencies in the digital marketplace and Bitcoin is the largest with a total value of close to $800 billion in value. “Etherium” is another crypto currency and is the second largest with $340 billion in total value. By comparison, the value of all gold existing globally is estimated to be over $8 trillion and like Bitcoin, gold is considered a “store of value” and also viewed by many as an inflation hedge.
Why are Bitcoin and other “crypto’s” so controversial?
First of all, you can’t walk into a traditional corner store and use, for example, bitcoin to purchase a loaf of bread. You also can’t use Bitcoin to pay your taxes. Part of the debate revolves around whether Bitcoin is a “currency” or an “asset.” In the U.S., Bitcoin has many critics like Treasury Secretary Janet Yellen and as mentioned, you can’t pay your taxes with Bitcoin, so it is arguably not fully formed as a currency. As an asset class, many respected business leaders and investment gurus continue to refer to crypto as a “farce” and “worthless.” In addition, on September 24, China reinforced that it was outlawing crypto currencies including Bitcoin.
If Crypto-currencies are so risky and controversial, then why has the value of Bitcoin continued to rise?
Investors like the idea of an alternative currency to those issued by central banks. These “fiat” currencies can see their value erode as a result of fiscal policy and inflation. In addition, as described above, the blockchain technology is believed to be more secure than traditional payment systems. From an investment perspective, crypto currencies have thus far demonstrated a tendency to be less correlated with stocks and bonds and therefore viewed by some as a portfolio diversification tool. Finally, given its recent significant increase in value, momentum investors have piled into these assets in the hope of further appreciation.
Are crypto currencies a good investment for you?
Investing in these currencies is becoming more widely available. There are a number of online trading platforms like Coinbase or eToro where physical digital coins can be purchased and held. Charles Schwab does not currently enable direct purchases of currencies like Bitcoin, but Schwab does permit trading of certain crypto investment vehicles including trusts (GrayScale Bitcoin Trust, GBTC) and ETF’s (ProShares Bitcoin Strategy ETF, BITO). Note, the ProShares ETF does not hold physical Bitcoin but instead trades regulated Bitcoin futures contracts in a manner intended to closely track the Bitcoin spot price.
We believe our primary custodian partner, Charles Schwab & Co., sums up the opportunity in a balanced way as follows:
“Whether cryptocurrencies are right for you depends on your goals and risk tolerance. While some traders have made money on the dramatic swings in the price of Bitcoin or other cryptocurrencies, others have found out the hard way that what goes up can most definitely come down. Thus, investors in this speculative asset should never venture more than they can afford to lose.”
If you have any questions, please contact Barry Brindise or David Maddux, CIO at Brightwater Advisory, (813) 251-6310.
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