Cryptocurrency: Bitcoin – Investment or pure speculation?

March 10, 2021

Cryptocurrency

Bitcoin – Investment or pure speculation?

To learn more, check out our Youtube video with Trey James, an expert in this field, plus Tim Goodwin, President of Goodwin Investment Advisory as they discuss what cryptocurrency is and why it exists.   

1.   What is it?
2.   Why does crypto exist?
3.   What is a block chain?
4.   How is crypto valued
5.   Cryptocurrency to follow
6.   How to get involved
7.   Resources
8.   Is Bitcoin a good investment?

It can be easy to have FOMO (fear of missing out) when it comes to cryptocurrency and many out there are wondering if this is something they should purchase. It’s still such a new territory like the western frontier of finance and many of us are confused as to what it is exactly.

1. What is it? 

Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. In an article on CNN Business they stated, “Transactions are made with no middle men – meaning, no banks. Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games.”

There’s no physical money attached to a cryptocurrency, so there are no coins or notes, only a digital record of the transaction. … So, if you’re looking to buy Bitcoin or other types of cryptocurrency, you’ll have limited legal protection and a high risk of losing some or all of your capital according to Money Advice Services 

How Many Bitcoins Are There Now in Circulation? According to Buy Bitcoin Worldwide There are at the time of this article 18,595,062.5 bitcoins in existence. This number changes about every 10 minutes when new blocks are mined. Right now, each new block adds 6.25 bitcoins into circulation. They will stop mining at 21 million bitcoin.

2. Why does crypto exist? 

• Cryptocurrency seeks to provide a decentralized system of accounting
•  Coinage Act of 1834 effectively set a fixed gold price of $20.67 per ounce
•  1933, when President Franklin D. Roosevelt required all Americans to turn in gold coins to the Federal Reserve in exchange for paper money. In 1934, the government devalued the dollar to require $35 per ounce of gold.
• 1971: President Richard Nixon took the U.S. off the gold standard
• Today: The Federal Reserve controls the U.S. money supply through monetary policy.
• Cryptocurrencies are decentralized and not controlled by a bank or government.

In summary, why does cryptocurrency exist? It exists because of a lack of faith in the government that issues an individual’s traditional currency. (Example – lack of faith in the Nigerian government causes uncertainty in the Nigerian currency, therefore blockchain creates a more secure, decentralized option)

3. What is block chain?

Cryptocurrency is tied to blockchain technology like the US dollar is tied to our US government and their monetary policy. There is a vulnerability with our current system that cryptocurrency tries to eliminate through crowdsourced verification and creating a block chain that is decentralized and more secure. Block chain is a database or ledger that maintains the constantly growing list of transactions kind of like an excel spreadsheet but better in that it is shared publicly, decentralized, secure, trusted, and automated. So block chain is a decentralized ledger of all transactions across a peer to peer network. Using this technology, participants can confirm transactions without the need for a centralized certifying authority. Check out the diagrams by Romexsoft and the Burnie Group below.

4. How is crypto valued?

• Their value is determined by how much people agree they are worth
• Via trading markets on exchanges
•  In December 2017, Bitcoin reached a price of $20,000 per Bitcoin. So, anyone holding 50 Bitcoins or more became a millionaire. In January 2015, 50 Bitcoins would have cost you just $10,000. 
• Similar to other commodities, demand drives value.  Bitcoin as an alternative to traditional currency is also affected by currency exchange rates. For example, if the U.S. Dollar loses value, one could expect the value of other currencies to increase in relation.   

Bitcoin has seen a recent resurgence and this has been attributed to a number of factors including more buying from large institutional investors. People have called bitcoin the “digital gold,” claiming it is a safe-haven asset and a hedge against inflation. In a recent research note, JPMorgan said bitcoin could hit $146,000 in the long term as it competes with gold as an “alternative” currency. The investment bank’s strategists noted, however, that bitcoin would have to become substantially less volatile to reach this price. Bitcoin is known for wild price swings.

5. Cryptocurrency to follow

• BTC (Bitcoin) – considered digital gold
• LTC (Litecoin) – considered digital silver
  • Goal: store of value; faster than BTC (Bitcoin)

• ETH (Ethereum)
  • Goal: Digital business ecosystem: Smart Contracts
• XRP (Ripple)
  •  Goal: Replace SWIFT

• ADA (Cardano)
  •  Goal: Currency; power to the people 

6. How to get involved 

• Research first!
• Coinbase, pro.Coinbase, binance, Robinhood
• Who takes crypto as a form of payment?
  • Tesla –  recently spent $1.5b to invest in bitcoin
  • Whole Foods, Bed Bath & Beyond
  • Barnes & Noble, Baskin Robbins, Crate & Barrel, Express, GameStop, Lowe’s, Nordstrom, Regal Cinemas and Ulta.
  • Mastercard Will Let Merchants Accept Payments in Crypto This Year; https://www.coindesk.com/ mastercard-accepts-crypto-payments

7. Resources 

• Crypto value: https://bitemycoin.com/guides/what-determines- cryptocurrency-value/
• Dollar value: https://www.fool.com/knowledge-center/who-determines- the-value-of-the-us-dollar.aspx

8. Is it a good investment?  

“Bitcoin is scarce, and therefore holds incredible value.” With only so many tokens to go around (fractions of a token can be bought and sold), the buy thesis suggests that this scarcity makes bitcoin an excellent investment. However, the answer to whether bitcoin is a good investment or not comes down to what you consider an investment. Warren Buffet says, “unless it pays income it’s not an investment.” And Tim Goodwin at Goodwin Investment Advisory tends to agree with him. So, Bitcoin, any crypto, gold, etc. is not an investment but pure speculation. “Bitcoin produces no earnings, it pays no dividends, it pays no interest, so it’s not really an investment in the traditional sense,” said David Oransky, CFP and founder of Laminar Wealth in St. Louis. “Its value is purely dependent on what someone else is going to pay for it in the future. But, it is taxable and is seen as an asset.

Once you’ve done your research and know you want to purchase cryptocurrency, financial advisors say that bitcoin shouldn’t be a major part of your portfolio. Instead, it should be less than 5% of your investable net assets. And thought of more as play money that is not tied to a goal such as retirement. We do not recommend you buy any cryptocurrency unless you can afford the risk of losing your principal.