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Are You Curious to Learn More About Bitcoin?
By Fairport Wealth
Investing in Bitcoin
Legend has it that in May of 2010, a Florida man used 10,000 Bitcoin to pay for a $25 pizza (making each Bitcoin worth a fraction of a penny in the transaction).1 Had he foregone the pizza and held onto the Bitcoin instead, he could have cashed it in for more than $400 million at the peak price this January.
What is Bitcoin?
Bitcoin is a type of cryptocurrency that exists only as a digital asset. Ownership records are stored in a decentralized database (uncontrolled by any single institution like a central bank) and accessible to all as open source software. The fact that everyone has access to the ledger makes it impossible for any one person to alter it to their own benefit.2
What are the advantages of Bitcoin?
Bitcoin has several advantages over traditional currencies including the ease with which it can be transferred and the fact that it cannot be destroyed, lost, or counterfeited. Like dollars, euros and yen, the value of Bitcoin comes from the perception of the people who use it and the institutions that back it. The more businesses and individuals that accept it as a means of payment, the greater value Bitcoin will have.
Many early investors (including the person who sold the $25 pizza) have been well rewarded as the currency’s value relative to the dollar has risen dramatically in the last few years.
The Unknowns and Downsides
The acceptance and use of Bitcoin appear to be growing. However, there are still many unknowns concerning the ultimate viability of these novel means of exchange, which has resulted in highly speculative markets for investors.
To begin with, Bitcoin prices have been extremely volatile since 2017 as market analysts have struggled to establish a sound basis for valuation going forward. Some have suggested that it might be an attractive hedge against inflation as U.S. government spending spikes, although it’s important to remember that extreme price swings can result in significant losses to principal.
In addition, if you own Bitcoin, do not forget your password – because after ten guesses you may be locked out and unable to cash in on your wealth. It has also developed a shady reputation. Since accounts can be opened anonymously and are not regulated, Bitcoin has become attractive to hackers, organized crime and other criminals.3
For these reasons, we do not currently include Bitcoin or other cryptocurrencies in our investment portfolios. Your Luma Wealth Advisor would be happy to speak with you about our rationale and discuss other time-tested investment strategies to help you achieve your financial goals. To learn more about staying financially fit, please join us for one of our upcoming webinars – click here to register!
1The History of Bitcoin, U.S. News & World Report, September 1, 2020, https://money.usnews.com/investing/articles/the-history-of-bitcoin
2 Downside of Bitcoin: A Ledger That Can’t Be Corrected, Richard Lamb, The New York Times, Sept 9, 2016, https://www.nytimes.com/2016/09/10/business/dealbook/downside-of-virtual-currencies-a-ledger-that-cant-be-corrected.html
3Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes, The New York Times, Jan 14, 2021, https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html
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