What can you do for me, Bitcoin?

//What can you do for me, Bitcoin?

What can you do for me, Bitcoin?

Not much, we would argue. History is full of fringe investments that occasionally make the news following a rapid, and oftentimes inexplicable and indefensible, price increase. Bitcoin is only the latest, leaving even casual investors asking “what is it, and should I be buying some?”

Bitcoin is an unregulated cryptocurrency created in 2009. A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets.

Among the first digital currencies produced, Bitcoin has also become the most well-known. Earlier this year, Abeer ElBahrawy at City University in London, along with some colleagues, examined the cryptocurrency market and found it to be significantly more complex and mature than most had thought. Even if you thought it was already complex. Click here if you want to read for yourself.

There have been approximately 1,500 cryptocurrencies introduced since 2009. Many have died since and around 600 are actively traded today. The market value of cryptocurrencies is growing and is estimated at around $300 billion, depending on how Bitcoin trades from day to day, compared to the $60 trillion of money in the world. Bitcoin remains the biggest cryptocurrency, but its lead has been eroded by technological improvements of other competitors. That is one problem with trying to back the right digital currency, there is no barrier to entry for competition. All it takes is a computer and some skill to make an improvement. If that doesn’t work, try again.

The idea of Bitcoin as a digital currency, the original intent, is suffering two primary problems: its value is too unstable and transaction processing is too slow. Bitcoin’s value routinely changes daily by 1-3%, which when seen over the course of a month or a year, can be substantial. By comparison, the exchange rate between the U.S. dollar and the euro has an average daily change of less than 1% and a monthly change of less than 3%. And Bitcoin can go down hard too. After hitting a high of $1,150 in November 2013, it dropped to $500 by mid-December and didn’t recover for four years. It dropped again this last summer by 36% before resuming its climb. People don’t want investments or debts denominated in a currency whose price swings are that dramatic.

Transaction speed is another drawback. To protect the security of the blockchain technology that makes digital currency so secure, processing is very slow. As a result, there are limits on the number of daily transactions which can cause even simple transactions to take days. Its very security negates its value in everyday use.

With these drawbacks, very few owners of Bitcoin use them as currency. Rather, they are using them to speculate that the price of a non-income producing asset will continue to rise. They may also hold them to shield transactions from others, another attribute of digital currency that is outside the reach of any national economy or regulator, for now.

Digital currency may eventually gain traction in ways that match its original vision, allowing it to cement its usage. For now, Bitcoin is not a currency, but simply an asset. And a rather unreliable one at that that produces no income. If you insist on buying digital currency, do so with money you can afford to lose, and know that its value could disappear as easily as the bits and bytes that support its creation.

Please click here to view our disclosures.

2020-06-11T15:34:45-05:00 December 5th, 2017|Investment Management|0 Comments