By:  Kirk Licata, CFP®

Bitcoin and other cryptocurrencies have officially become popular topics of conversation on Main Street, but will these currencies have a place on Wall Street?

In the last few months, clients, family, and friends have increasingly been asking for my thoughts on Bitcoin.  Bitcoin is a digital currency that was created in 2009, and transactions using Bitcoin are made between persons or institutions without financial intermediaries.  The result is no transaction fees between merchants and consumers anywhere in the world.  An attractive feature to some is that transactions can also be made anonymously.  The number of merchants that accept Bitcoin is few and far between but many investors appreciate the ingenuity of this idea and have purchased Bitcoin, speculating that it will go up in value.

In 2017 alone, the value of one Bitcoin has surged over 1000% as I write this on November 29th.  For some, the investment has been the bonanza of a lifetime.  A $100 investment in Bitcoin at the start of the year could now potentially be exchanged for $1,000.  I use the word “potentially” because trading cryptocurrencies such as Bitcoin occurs in an online Wild West where sheriffs are virtually nonexistent.  In order to convert your cryptocurrency to dollars or vice versa, you must utilize an online exchange.  Since 2011, over 980,000 Bitcoins have been stolen in hacks of these exchanges.  At today’s value, that is over $9 billion worth of theft with little to no recourse being offered to consumers.

Just this month, the chairman of Interactive Brokers, the largest electronic brokerage firm in the US, took out a full-page advertisement in the Wall Street Journal pleading for more regulatory oversight of cryptocurrencies. He also warns investors that the cryptocurrency investment category is so volatile that futures contracts available to the general public could create devastating losses.

A digital currency with no transaction fees that is usable in any location in the world is likely to be a part of our future.  However, the purchase of a Bitcoin is not an investment in a company that pioneered digital currency. Bitcoin is designed to be a currency, not an investment.  A viable currency needs to be stable in order to support the economy in which it is designed to be used.  Just imagine purchasing a car on Monday and realizing you could have purchased the same car on Friday for 30% less.

Bitcoin owners, meanwhile, are likely experiencing some of the same feelings as a Dutch farmer in the early 1600s during the great Tulip Mania, when the tulip bulb he held in his hand could suddenly be sold for a nice house.  For many, a long-term investment in tulips at the height of that mania did not yield a pleasant result.  After a severe crash, their prized tulip bulb could only be traded for the price of a common onion.


Disclosure:  Past performance is no guarantee of future results.