What Crypto Currency & Bitcoin Looks Like To This Non-Expert
Written by Firethorn Wealth Partners
March 19, 2021
This month we wanted to write on a hot topic that has recently been dominating the headlines and “water cooler” talk around the Firethorn office. Not sure if you are thinking it, but we are NOT talking about Oprah’s Harry and Meghan interview. We are talking crypto. We want to give you our take on what Bitcoin and other crypto currencies look like to this non-expert! This can be a heated topic. So, please remember much of what you read below is our opinion with some helpful facts thrown in.
First, you need to ask yourself what is Bitcoin? This answer tends to vary based on why someone is looking to invest. To some it is digital cash (or digital gold), to some it is a seat at the blackjack table, while to others it is a commodity or “hedge” against what seems to be an endless supply of new money being injected into our economy. Many of the same talking points and views that investors have for gold are echoed for Bitcoin. The most concrete definition we know is that Bitcoin is a digital currency maintained on a public ledger called blockchain for all to see. It is designed to allow people to exchange value. Anyone can view the transactions in the blockchain ledger helping to keep the ecosystem honest. Bitcoin was created by “Satoshi Nakamoto” in 2009, but no one has heard from “him” since 2010 nor has anyone verified Satoshia’s actual existence. Bitcoin is nothing more than digits in a computer program, and it has absolutely no intrinsic value. What determines the price of Bitcoin is purely what the next person is willing to pay for it. It does not produce anything of tangible value.
Second, you need to understand why these digital currencies (there are many, but Bitcoin is the most well-known) were originally created. According to Ray Dalio (founder) of Bridgewater Associates which is the world’s largest hedge fund, “Bitcoin is one hell of an invention!”
- It cannot be devalued by a central bank printing new money
- The total supply is limited
- It is easily portable and exchangeable on a global basis
- It has the potential to provide diversification although to date there is no evidence of this
- It is currently unregulated by any central government
As mentioned earlier there is a limited amount of supply of Bitcoin that will ever be created (21 million). There is a high demand for the currency both from Institutional buyers like Tesla, PayPal, and Square to name a few, but also to retail investors. The prices of Bitcoin and other crypto currencies have had a meteoric move upwards, so much so that recently the new social media hashtag #tothemoon has been trending! What Bitcoin does have is an unlimited supply of volatility on both the upside and the down side.
We mentioned earlier some of the reasons investors find Bitcoin an attractive alternative storage of wealth. We now need to peek at the other side of the coin to identify some of the reasons Bitcoin may not be as attractive to everyone. An investor holding Bitcoin will need to think about the following scenarios.
- It is a digitally held currency and at a time when cyber/hacking offense is much better than our current defense. Even though no one has been hacked yet, it is something you cannot ignore.
- A long-term investment horizon is essential since the supply is limited, but the demand over time is not yet known.
- We have yet to arrive at the belief that Bitcoin can be used as a hedge for inflation. The historical price swings of the currency are too violent to serve as a reliable hedge on anything other than being a source of uncorrelated returns compared to stocks and bonds.
- The government could prohibit or regulate its use. Fear of government manipulation of fiat currency was one of the very reasons it was created in the first place. Jerome Powell of the Federal Reserve has mentioned the use of a digital currency pegged to the US Dollar.
- There are many other smaller, digital currencies that have been created that could take away some of the luster that Bitcoin currently has or even emerge as the winner in the long run.
As we leave you with a lot to ponder, we would say that most asset prices such as stocks, bonds, and real estate have been lifted by the current low interest rate environment we have seen over the last 12 years, and Bitcoin is no different. There is not enough evidence to see how Bitcoin will react to a more normalized interest rate world and if it will ultimately be a true diversifier or hedge as some claim. At this point, Bitcoin looks like a very long- term investment with an unknown future. One would need to be comfortable putting money in an investment that may experience swings of 80% or more up or down.