Bitcoin – What You Need to Know
Bitcoin is prominently in the news as its value continues to move higher this year. I’ve written this to provide some information for you.
The most important piece of information is that regulation is coming to Bitcoin and the other cryptos. This regulation may impact some of the features that have made Bitcoin attractive.
Bitcoin is a decentralized digital asset. It exists outside of the global financial system. It is without a central bank, without a single administrator and without intermediaries. Transactions occur on the peer-to-peer Bitcoin network. Blockchain technology is the backbone technology.
Bitcoin was invented in 2008. At this point in time Bitcoin can be exchanged for some currencies, goods and services as well as products.
Bitcoin has a fanatic following that has gotten the attention of the media. Media commentary ranges from gushing adoration to disdainful. Right now we’re in one of the adoration stages. Pick any day and the commentators could flip-flop from swoon to rejection.
Bitcoin Fanboys tout it as a gift from the gods and the salvation of humanity. We heard these same claims about the internet in 1995.
Take a deep breath before you drink the Kool-Aid. Bitcoin and other cryptos are in their infancy. Like any newborn, Bitcoin and the crypto space is rapidly developing and changing.
One thing is certain: Regulation is coming. Transmission of monetary policy is one of the primary issues.
There is no way to know what the future holds for Bitcoin and the other cryptos. Cryptos are like breeds of horses. They all work in a similar fashion but. Like horse breeds, each crypto has been designed for a specific purpose.
Due diligence is imperative before venturing down this path.
While Bitcoin has been around since 2008, it’s getting increased attention with COVID. It has rallied this year as investors grapple with these unusual times. Concerns about global debt, currency devaluations, entitlement programs, prepping, store of value and the simple desire to diversity out of the stock market are driving this renewed interest.
What is different this time around is the level of institutional activity in Bitcoin. Global financial institutions including banks, insurance companies and hedge funds are getting into Bitcoin as never before. How long this momentum is maintained is an unknown.
Bitcoin and its domain name "bitcoin.org" was registered 2008 as “ A Peer-to-Peer Electronic Cash System.” The term “Crypto Currency” has more sizzle so the name has stuck.
Bitcoin is noteworthy for many reasons. Three of significance are: 1) It’s potential to revolutionize the financial system. 2) The volatility of its price. 3) Its promise of anonymity.
The first noteworthy aspect of Bitcoin is its revolutionary backbone. Blockchain technology. Volumes have been written on the potential of Bitcoin as a transformative technology. It may prove to be more revolutionary than the introduction of minted coins, paper money, fractional banking or central banks themselves. The creative destruction could be far reaching.
But it’s too early to tell which of the 2,000 cryptos will survive.
Every transformative technology has begun in a crowded field of competitors. The field is eventually winnowed down. Who remembers American Can? Duesneberg? PSA? Compaq? We’ll see the same winnowing as cryptos mature.
Regardless of the winners and losers, Blockchain technology is here to stay. Learn about it.
The second noteworthy aspect of Bitcoin is its volatility. Dramatic spikes up and down are the norm. 20-30% corrections are not uncommon. Know your own risk tolerance and don’t be seduced by fear and greed.
In 2017 Bitcoin rocketed from $998 to $19,783. In 2018 it crashed to $3,747. Down 72% for 2018 and down 81% from its all-time high in 2017.
Bitcoin has since recovered from its 2018 lows and is now trading at new highs. However, the volatility remains.
Can you handle that type of volatility?
If you can, 5% of your investible assets might be appropriate after checking with your advisors … and if you can sleep at night while riding the roller coaster.
A third aspect of Bitcoin is the promise of anonymity for owners of Bitcoin. This feature has been touted as the best thing since sliced bread and the solution to numerous financial and social disparities that affect society.
But investors need to understand that the anonymity feature is a threat to governments around the world Anonymity has far reaching implications for governments. The catchall phrase that you’re likely to hear, is that cryptos create impediments to the transmission of monetary policy. From upending the tax base to impacting the economic data on which so much government policy is based.
In fact, the vaunted anonymity may already be a thing of the past. Using big data, big tech and big surveillance, governments are said to be able to triangulate Bitcoin owners using unrelated data in the ecosphere.
Because of the perceived threat of this new financial technology, governments have been monitoring Bitcoin since its inception. Governments have typically called Bitcoin a digital asset or a payment system. But not a currency.
The terminology may be an indication of how regulation will proceed.
… and regulation is coming. But we don’t know what it will look like yet. Just as social media is getting increased scrutiny, cryptos will eventually be under the microscope. The potential as a disruptive technology is too great to be left completely to chance or the markets.
Governments have been quick to recognize the potential threat to their sovereignty that Bitcoin presents. Governments that cannot control their currency face headwinds with their economic policies. The damage of not being able to control one’s currency has been underscored by those countries that have adopted the Euro. Greece and other EU members have struggled with this issue for years.
As a result of these sovereignty concerns, several countries have moved to control or ban Bitcoin.
23 countries have either an implied or an outright ban on Bitcoin These countries include: Algeria, Bahrain, Bangladesh, Bolivia, China, Colombia the Dominican Republic, Egypt, Indonesia, Iraq, Kuwait, Lesotho, Lithuania, Macau, Morocco, Nepal, Oman, Pakistan, Qatar, Saudi Arabia, Taiwan, Vietnam, and the United Arab Emirates.
There is precedent for the U.S. to likewise ban or limit Bitcoin ownership for American citizens. In 1933 FDR used an Executive Order to limit private ownership of gold. The ban remained in place for 41-years; until 1974.
Could it happen again? It’s impossible to say. We are living in unprecedented times.
Regardless of government activity, global financial institutions are dabbling in Bitcoin. Each approach is unique. There is talk of Bitcoin Exchange Traded Funds (EFTs) that would allow investors access through a more conventional channel. If and when Bitcoin ETFs are marketed, they will be designated as a security under the regulatory oversight of the Securities and Exchange Commission.
Any U.S. government intervention would be a negative for the price of Bitcoin.
Bitcoin can be stored at a Bitcoin Exchange or investors can take possession through a Bitcoin Wallet. One idea being vetted is for governments to prevent access to your Bitcoin Wallet. This could be one technical approach. Legal constraints could be another.
Horror stories about hacks and theft have primarily centered on exchanges. At this point, the consensus seems to be that a Bitcoin Wallet is the way to go. Again, a Bitcoin Wallet could be subject to government intervention. If the technology isn’t available today, it could be soon.
As of January 2020, there were more than 2,000 crypto currencies in existence. Each is uniquely designed. Bitcoin is the most well-known.
Bond King Jeffrey Gundlach, founder of $100 Billion, DoubleLine Capital LP has this to say about Bitcoin, “”I’m not a Bitcoin pro or con person. I’m not in the cult, and I’m not in the anti-Bitcoin cult. I just look at it as a fascinating representation of animal spirits and speculation.”
Jeff doesn’t believe it’s the salvation of humanity or the beginning of a new Age of Aquarius.
If we can help you navigate these issues, or if you need help with your financial planning or investment management, contact us if we can help you in any way: (858) 459-2993; info@higginscapital.com, www.higginscapital.com, LinkedIn, Facebook, Ray Higgins San Diego.
Legal Disclaimer: Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by Higgins Capital Management, Inc. to buy or sell any securities. These materials are provided to you for informational purposes only. The information set forth herein is subject to change without updating or prior notification. Higgins Capital Management, Inc. makes no express or implied warranties concerning these materials. Investors are advised to make an independent review and reach their own conclusions regarding the legal, credit, tax, and accounting aspects of all transactions. Ray Higgins San Diego, Ray Higgins La Jolla, Higgins Capital Management, Inc. can only transact business if it is registered in your state of residence.
#bitcoin #cryptocurrency #blockchain #investing #retirementincome