Crypto-Craziness And The Rise Of BitcoinSubmitted by InFocus Financial Advisors, Inc. on October 30th, 2017
By: Robert S. Jeter II, CFP, CRPC
Anytime an investable asset rapidly appreciates, you can be certain of one thing: people will all of the sudden be attracted to it much like bugs willingly flying into a zapper. I know that analogy seems harsh, but from someone in my profession that is what the rise in so called “crypto-currencies” has felt like. If you are not familiar with the craze, Bitcoin and other crypto-currencies are un-regulated forms of currency. They are digital in nature, so you can’t actually hold it in your hand and they have recently seen an unprecedented surge in price appreciation over the last year or so. Bitcoin and other associated crypto currencies have not only been receiving non-stop coverage from financial media, but it has now seemingly gone more mainstream. Even CNN now shows the price chart of Bitcoin after talking about the Dow Jones industrial average, almost like a typical investment. Not only that, but people I hardly know that are only aware of my profession approach me at the dog-park to ask my opinion and if it might fit in to their portfolio, as if I would serve as some sort of validation or have an explanation for why it would be a good investment. The truth of the matter is I like most people, do not have a clear understanding of how it works and therefore cannot call it anything other than what it appears to be at this moment: craziness.
Let me start by mentioning that we as human beings are rarely rational when it comes to making investment decisions. As a matter of fact, we love to chase performance. We love the idea that there are vehicles to get rich quick. As soon as something appreciates, and the more rapidly the better, it starts to look great as an investment. Bitcoin, for instance, there hasn’t really been a great explanation for the price appreciation. This isn’t an underlying company with unbelievable earnings growth, nor is it a currency being adopted by a major country as the future of payments that may validate such price appreciation. Actually it’s somewhat the opposite, recently China (One of the world’s most populated countries) came out and decided to ban Bitcoin as a medium of exchange. It is also notorious for people to buy and sell things like narcotics and other black market items due to its ability to protect anonymity. There is also no physical asset backing the value of the currency (Think the dollar and gold reserves). Conventional thinking might lead you to ask: well if that’s the case why has it gone up to much?
Here’s what I can tell you: Technological innovation is moving at a blazing pace. It seems every day the technology we bought so recently is already out of date or being replaced by something else. This can give us the impression that because something like Bitcoin is a new technology, and that its price is appreciating so rapidly it might very well be the next big thing. And I’m not here to tell you it is or it isn’t. What I do know is, when people e-mail, call or ask me my opinion at the dog park I will continue to shrug my shoulders. The technology on top of being new, is probably not fully understood by those of us who are not extremely tech savvy. And with that being said, it is hard to make a case to invest in something that you can’t understand. Time and time again history has shown us that investing without a thorough understanding and piling into the next big thing can lead to catastrophic results for your portfolio. Get rich quick schemes always look great from the outside, much like the bug looking at the bright lights of the zapper. In 10 years we may all be paying for our groceries in Bitcoin and much of the value will be validated. Until then, I think we should all probably take a step back and ask does it really have a place in the average investor’s portfolio?
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