The likes of tech companies Amazon, Apple, Google, Facebook, etc. are some of the hottest investments out there right now. But pick up any financial publication and you will find stories about a new “tech sensation” called digital or cryptocurrencies. The first digital currency was created and released as open sourced software in 2009, and is known as Bitcoin.
Supposedly, Bitcoin was established as a way to foster the exchange of goods without using paper money. So instead of paying for that used car you saw advertised in cash, you would just traded the value of the car in Bitcoins. The coins would flow out of your “wallet” and into the seller’s “wallet.” The advantage is the ease of the transaction. You don’t need to go to the bank and withdraw a big stash of cash or obtain a money order or cashier’s check. Your digital wallet is secured by the blockchain that proponents say is virtually unhackable. This makes it very difficult to counterfeit and for governments or other entities to manipulate it.
Is Bitcoin Really a Currency?
There has already been a federal court ruling in the state of Texas that says that cryptocurrency can be used as money, and is a currency or form of money. In fact, the Securities and Exchange Commission now has jurisdiction over any securities fraud involving cryptocurrencies. Just in the state of Maryland, there are over 40 ATM’s or coin exchanges that provide conversion to and from Bitcoins and dollars.
Is Bitcoin Investable?
Depends on who you ask. Some investors (speculators) see the huge run-up in the value of Bitcoin to over $6,000 per coin as proof that digital currencies are here to stay. In fact, from the founding of Bitcoin, there are now over 1,000 cryptocurrencies in existence. Demand for the currencies seems to be high. There are many new marketplaces for “mining” the currencies, and even ETF’s are being created so that people can buy digital currency related investments in their portfolios.
Is Digital Currency Dangerous?
Others see the trend in digital currencies as dangerous. Many see the extreme volatility in the price of a coin as the biggest problem. For consummating financial transactions, you need to know the value of the product you are buying. However, the change in exchange rate of currency can add or subtract to the overall cost. That’s why companies who do a lot of trade in foreign markets sometimes utilize currency hedges. Knowing how many Bitcoins are needed to cover a transaction can be tricky if time transpires between the decision to buy and the payment being transacted, if the price of the coin jumps up or down.
Also, because so many people do not understand what a digital currency is and how it may work, the risk of fraud is great. Last month, Jamie Dimon, CEO of JP Morgan, called Bitcoin a fraud and compared it to the 17th century tulip bulb mania. Others have echoed his sentiments. The whole concept of digital money requires a certain degree of trust to rely on an “electronic wallet” backed up by a “blockchain,” terms that many people have only recently heard.
If you have any questions about digital currencies, feel free to ask us. Any investment should be made based on your understanding of the investment itself, your personal goals, and your tolerance for risk. We’ll be happy to discuss your situation with you.
Written by Thomas M. Geier, CPA, CFP®, PFS.
My aim is to offer clarity to your finances. I specialize in helping individuals and families determine what is most important in their financial lives, identify short and long-term goals, and make great choices for achieving comfort, security, and peace of mind.
I graduated from Loyola University in Baltimore, Maryland, and have been a Vice President of our investment management affiliate, Geier Asset Management, Inc, since its founding in 1999. I have over 25 years' experience in financial planning and investment management and am licensed as a Certified Financial Planner® professional, a CPA, and Personal Financial Specialist. I am member of the Personal Financial Planning section of the American Institute of CPS's and Florida Chapter of the Financial Planning Association.