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Ask the Investor: Should I Invest in Bitcoin?

By: Ryan T. Fulmer
Sunday, December 3, 2017

Question: “Should I invest in Bitcoin?”
 
As rational investors, we are always asking ourselves about the price and value of investments today.  Does the current price present an attractive investment (or value)?
 
Occasionally throughout history asset bubbles occur. The easiest two to remember would be the housing bubble (2000-2009) and the technology bubble (1990-2000), which both resulted in meteoric rises in investments that were irrational and subsequently collapsed.
 
Bubbles are not a new phenomenon.
 
The first bubble is widely considered to be in the 1630’s with Tulips. It started when the Ambassador to the Sultan of Turkey sent tulip bulbs and seeds to Vienna in the mid 1550’s. Tulips were admired in Europe for their intense colors and eventually became a status symbol.
 
Gradually the Dutch started using leverage to purchase tulip bulb futures and instead of using tulips for gardens and enjoyment they started trading these contracts. Around 1636 it was reported that some tulip bulb contracts would trade10 times per day!
 
In 1634 the price of a tulip bulb was around 1Guilders and steadily rose over the next two years to about 4 Guilders then by 1637 the price had skyrocketed to 60 Guilders only to collapse to near zero within a few months.
 
In the last few years digital currencies that utilize cryptography to secure transactions have becoming increasingly popular. The most widely known crypto-currency is Bitcoin, but you may have also heard of Ethereum, Ripple, or Litecoin.
 
Much of Bitcoin’s popularity has followed the meteoric rise of the price per Bitcoin as prices have risen from $0.30 in 2011 to $9,656 which has left speculators to wonder if they should “get in!”
 
So what is so special about Bitcoin?
 
All crypto-currencies utilize blockchain technology, which is a database that lists every transaction and splits them into blocks and then validates the transactions across multiple computers (or miners) in a network.
 
Crypto-currencies do not have a central general ledger operated by one company or Government, but rather by multiple computers within the network.  This system should prevent fraud and currency debasement (or the lowering of the currency by the Government).
 
At this point crypto-currencies have little day-to-day value and are generally being used for illicit transactions and moving assets out of countries such as North Korea, China, and Russia.
 
Is there underlying value in digital currencies?
 
Broadly, we think most of the value will be attributed to blockchain technology and not digital currencies. Blockchain technology allows for de-centralized transactions with less fraud and increased transparency.
 
One emerging area is the “sharing economy” such as Airbnb where counterparty trust is important. It also wouldn’t surprise us to see increased use in remittance transactions (or sending monies to the unbanked in developing countries, such as from America to Mexico).
 
If you are thinking of investing in a crypto-currency, it is important to balance price appreciation and the speculative nature of crypto-currencies.
 
Sources: Goldman Sachs, Business Insider, Wikipedia
 

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