Making Sense of Bitcoin
It was as recent as late 2017 when bitcoin last enjoyed a meteoric rise with its price approaching $20,000 per coin in December. Following that peak, bitcoin has endured a series of ebbs and flows, bottoming in January 2019 at $3,450 per coin, but its price is once again rising. Since March 2020, bitcoin is up more than 500% and, at the time of this writing, bitcoin has a market cap of $900 billion with a price of around $48,500 per coin.
What does this stunning appreciation over the past year mean for you and your investments? Is bitcoin the next big thing, or is it just a passing investing fad? Or something else?
What is Bitcoin?
Launched in 2009, bitcoin was the first of a new kind of asset called cryptocurrency, a decentralized form of digital money that eliminates the need for traditional intermediaries like banks and governments to make financial transactions. There are no bills to print or coins to mint.
Bitcoin is a peer-to-peer network with a public ledger – blockchain – that anyone can access. Each transaction is a “block” that is “chained” to the code, creating a permanent record of each transaction. Blockchain technology is the foundation for thousands of different cryptocurrencies.
Unlike traditional currencies that trade in the open market and can be created by a country’s treasury, bitcoin has a pre-determined number of coins – only 21 million bitcoins can ever be created (or mined in bitcoin jargon) with just over 18.5 million produced so far. Ultimately, the value of a bitcoin is determined by what people will pay for it.
How to Buy Bitcoin?
There are an increasing number of digital currency exchanges such as Coinbase, Gemini and River Financial where you can buy, sell, and store bitcoins. Additionally, brokers such as Fidelity, SoFi Wealth, and Robinhood offer investors cryptocurrency trading options. Getting started is about as easy as setting up a PayPal, Square (via its Cash app) or Venmo account. Once your account is funded, you can then exchange traditional currency for bitcoin. In addition, investors can also access bitcoin via an investment fund called the Grayscale Bitcoin Trust, a simple, liquid security that provides exposure to bitcoin (that, as appropriate, we use and recommend for clients due to its simplicity – note that there are fund expenses paid for this liquidity and safe storage).
Investing in cryptocurrencies is speculative and, although there are plenty of stories of investors making millions, bitcoin’s market place remains volatile. However, while it is important to note that bitcoin is gaining greater acceptance and market support, investors should be sure to research and understand bitcoin as it is not appropriate for all investors.
For those investors that are comfortable with the risk posed by owning a speculative investment, here are some recommendations to consider. We encourage you to make sure you are investing an amount you won’t miss if bitcoin takes another volatile turn. Generally, we recommend no more than 5% of a portfolio be allocated to bitcoin, and the portfolio should be rebalanced at least annually, depending on how the market develops. Younger investors – between ages 18-34 – may already have familiarity with bitcoin and also possess a longer investment horizon, thereby increasing their risk tolerance for speculative investments like this.
The COVID-19 pandemic will be one of the biggest shocks that the global economy has ever experienced. With global interest rates for government debt near zero, the fixed income asset class has lost some of its yield potential. As such, investors may want to diversify and are likely looking towards alternative investments.
However, the traditional alternative options are also in flux. Real estate is being disrupted by the growing work-from-home movement, and by the demands of social distancing, which will likely reshape commercial store fronts, restaurants, hotels, theaters, and many other retail venues. Still, the low interest rate environment should benefit the real estate sector over time.
Gold has been reaching all-time highs given its status as a hedge against the debasement of fiat currencies and inflation. Additionally, many investors see bitcoin as another hedge and similar store of value trade, similar to gold. Because only 21 million bitcoin will ever be created, it has a finite supply and therefore is a digitally scarce asset. Bitcoin may ultimately prove to be a better store of value than gold as the metal is expensive to buy, store, and transport, and gold is not usable as day-to-day currency.
As the security concerns of hacking and theft have largely disappeared and the ability to use bitcoin has become more accessible, its value as a secure investment is being re-analyzed in the current investment climate. In fact, several large, publicly traded corporations (led by MicroStrategy’s initial $425 million allocation last fall which was followed by other large corporate purchases by Mass Mutual, Square, PayPal, Tesla, etc.) have all allocated significant portions of their corporate treasury holdings into bitcoin given the low returns investors are currently receiving from traditional fixed income options. As mentioned earlier, PayPal recently announced its 350 million account holders could buy, sell and hold bitcoin and other crypto currency assets on its network. This is another major sign of acceptance for bitcoin in the institutional world. Of course, there are no sure things in investing and headwinds for bitcoin are to be expected (such as potential regulation or taxation), but its use base is expanding swiftly.
In the world of cryptocurrency, things move and change rapidly. Though we believe we are still in the early innings, bitcoin appears to be here to stay, and presents an interesting opportunity for investors. The rules will continue to change, and new regulations will likely be put in place. To avoid any surprises, it’s best to stay informed and up to date. Beaumont is here to help you stay informed, compliant, and on top of your wealth management goals.
This material is provided for informational purposes only. It does not constitute a solicitation or offer for the purchase or sale of securities nor does it constitute investment advice. Investments mentioned may or may not be held in any or all client accounts. There are forward or backward-looking statements regarding intents or beliefs regarding current or past expectations. The views expressed are also subject to change based on market and other conditions.
Past performance is no indication of future results. As with all investments, there are associated inherent risks, including loss of principal. Concentrated investments and their performance can be more volatile than those of less concentrated investment options and the market as a whole.
The information presented in this report is based on data obtained from third party sources. Although believed to be accurate, no representation or warranty is made as to its accuracy or completeness.
Bitcoin is not appropriate for all investors. Not all cryptocurrency investments invest solely in bitcoin and, unless you invest directly in bitcoin, there will likely be a premium charged or other fees. Be sure to fully understand bitcoin, to ensure it is an appropriate investment for you, as well as understand any additional fees that would be incurred.