Should You Invest In Bitcoin?

Screen Shot 2017-11-01 at 10.00.33 AM.png

With Bitcoin appreciating over 570% year-to-date, many investors are concerned they have missed the boat with cryptocurrency.  Prompting the question: “should I invest in Bitcoin”.  Eight years into a bull market, investors who have remained in cash since the financial crisis are coming off the sidelines and entering the financial markets; prompting concerns from financial professionals.  This month’s issues of The Samra Report covers: digital currency, the blockchain revolution and the future of cryptocurrency.

Novice investors fail to understand: in the later stages of a bull market, fundamentals typically take a back seat to market sentiment and technical’s.  Regardless of where economic indicators point, only the history books will provide a clear depiction of when the bull market ends.  At Samra Wealth Management, it is our belief the current administration could provide an ideal market environment for the longest bull market in history, if President Trump is able to push through a repatriation bill, allowing for offshore assets to be taxed at a much lower rate.  In the meantime, novice investors are taking on unnecessary risk, in an attempt to catch-up on returns they have missed while sitting in cash.  Unfortunately, most investors, professional and novice, do not have a clear understanding of cryptocurrency; or the technology behind it.  Digital currency is a type of currency that is stored in digital form, unlike fiat currency that is redeemed with the use of coins and notes.  Digital currency operates in the same way as fiat currency, however, it’s medium of exchange is electronic, and it is an intangible asset. Cryptocurrency, a form of digital currency unlike the US dollar is not backed by a central bank and has no regulating authority, cryptocurrency however much like the US dollar has a value because the network of users believes it has a value, similar to the United States dollar.  Cryptocurrency has many advantages over fiat currency, in that they are global currencies, velocity of exchange is almost instant, and it is secured utilizing cryptography: mathemetical code.  However, the downside of cryptocurrency: there is no regulating authority, users can remain anonymous, and malfunctions in hardware could come at great costs.  

Blockchain the revolutionary technology behind most cryptocurrencies, is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.  This disruptive technology is most well-known and associated with Bitcoin, however, Blockchain has the capacity to disrupt almost every industry ranging from cross border transactions, inventory management and voter registration and polling.  At Samra Wealth Management, we do not have an opinion for or against cryptocurrency, or blockchain technology.  However, we do caution that there are over 1200 cryptocurrencies, all looking to replace the worlds fiat currencies totaling 180.  We further caution investors of cryptocurrencies of the risk of “pump & dump”: a fraudulent activity that involves the artificial inflating of a stock price through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.  We do recommend portfolio exposure to firms utilizing blockchain technology, as these firms have the capacity to streamline operations through technology utilization, and lower dependence on human capital. 

At Samra Wealth Management we believe cryptocurrency is the evolutionary next step for fiat currency.  Although Bitcoin may have been first to market, we believe in its current form Bitcoin will not replace fiat currency.  Whereas the US dollar is backed by the full faith and credit of the United States government, Bitcoin is backed by the belief that other members and holders of Bitcoin will continue to use the digital currency.  Since there is no centralized monitoring system, no regulating authority: users of Bitcoin may be placing themselves at risk of benefiting from criminal enterprises unknowingly.  At Samra Wealth Management, we believe the risk of holding Bitcoin outweighs the benefit of the appreciating digital coin.  For early adopters, the risk and reward trade off was significantly less while one Bitcoin was worth a few penny’s, however, with Bitcoin’s current valuation of $6358, we would advise against purchasing Bitcoin for new investors.  For the novice investor who believes they have missed the boat and can still benefit from investing in Bitcoin, they may be right.  This investor should understand they have missed many boats, and statements such as: “investing a few dollars in Bitcoin would have made me a millionaire”, are flawed.  This same rationale could be used for many companies, as a $1000 investment in Microsoft in March 1986 would have accumulated to over $1.2mm today.  However, given investors are irrational, few investors would hold a single position for this duration, and many investors have a tendency to take their gains once stock prices have appreciated to a point where they believe it is unlikely for the stock to continue rising.

 

 

 

 

 

 

References

Aspa, J. (2017). 11 Blockchain Technology Stocks. [online] Investing News Network. Available at: https://investingnews.com/daily/tech-investing/blockchain-investing/blockchain-technology-stocks/ [Accessed 31 Oct. 2017].

Bloomberg.com. (2017). CL1 Commodity Quote - Generic 1st 'CL' Future. [online] Available at: https://www.bloomberg.com/quote/CL1:COM [Accessed 31 Oct. 2017].

Chabot, C. (2017). Goldman Sachs | Talks at GS - Panel: The Evolution of Bitcoin. [online] Goldman Sachs. Available at: http://www.goldmansachs.com/our-thinking/talks-at-gs/evolution-of-bitcoin.html [Accessed 30 Oct. 2017].

Coinmarketcap.com. (2017). Cryptocurrency Market Capitalizations | CoinMarketCap. [online] Available at: https://coinmarketcap.com/all/views/all/ [Accessed 31 Oct. 2017].

DQYDJ. (2017). Any Stock Return Calculator with Dividend Reinvestment - DQYDJ. [online] Available at: https://dqydj.com/stock-return-calculator-dividend-reinvestment-drip/ [Accessed 31 Oct. 2017].

Ey.com. (2017). Blockchain and the future of audit | EY Reporting. [online] Available at: http://www.ey.com/gl/en/services/assurance/ey-reporting-blockchain-and-the-future-of-audit [Accessed 18 Oct. 2017].

Ycharts.com. (2017). NYSE Bitcoin Index Year to Date Price Returns (Daily) (^NYB). [online] Available at: https://ycharts.com/indices/%5ENYB/ytd_return [Accessed 31 Oct. 2017].

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.