By Scott Ford, CEO, Founder & Wealth Advisor of Cornerstone Wealth Management Group
If you watch the news or read the paper, you’ve likely heard of bitcoin recently, as excited investors cheer the increase in value to over $16,800 per coin. But if you’re confused by the terms bitcoin and blockchain, you’re not alone. The currency and its network are not well understood by experts or regular investors.
Bitcoin is the world’s first digital currency that can be exchanged globally and blockchain is the network of computers that keep track of all transactions. Bitcoin and its competitors have been increasing in value in recent years, causing controversy and speculation. Regular investors and experts have made millions investing in bitcoin. But, when all is said and done, bitcoin could be one of the largest bubbles in the history of markets.
What are Bitcoin and Cryptocurrencies?
The word cryptocurrency was created by the combination of the words “encryption” and “currency” and was meant to denote a secure online currency. Bitcoin was introduced in 2009 as the first cryptocurrency, but there are now over a thousand competitors. There is no physical version of a bitcoin; it only exists online as a balance on a publicly distributed ledger called a blockchain.
Is Bitcoin a Real Currency?
Many excited investors point to bitcoin as an alternative currency, but it may not pass many of the tests we use to designate what is and isn’t a currency because:
- It is not widely accepted
- The value is not stable
- It is difficult to safely store and protect
In the future, bitcoin or another cryptocurrency may become legitimate currencies. For now, bitcoin faces many risks.
What are the Risks of Investing in Bitcoin?
All investments have inherent risks. Because Bitcoin faces many risks, both known and unknown, it may be prudent to wait until we know more about its future before investing. The risks associated with bitcoin include:
Regulatory risk or the risk of governments banning or heavily taxing cryptocurrencies. Because bitcoin is not traceable and can be used for money laundering and funding terrorism, governments may try to stop it.
Security risk or the risk of hackers and cyber thieves stealing your cryptocurrency and leaving you without insurance or government backing. In 2014, a bitcoin exchange in Japan was forced to close down after millions of dollars of bitcoins were stolen.
Market Risk or the risk of an investment’s value falling. The price of bitcoin has gone down as much as 80% in a single day and experts expect the volatility to continue.
Why is the Price of Bitcoin Increasing?
There are many people who believe (or hope) that bitcoin will change the global economy and continue to rise in value. Many experts agree that blockchain technologies associated with bitcoin may offer profound changes in the future, similar to the impact of the Internet on our economy.
But for now, the increases in the value of bitcoin are due mainly to the hype. Investments fueled by hype such as the dot-com and real estate bubbles eventually tend to crash.
For long-term investment success, it’s important to have a well-diversified portfolio selected for your investment goals and to avoid chasing returns. With so much hype surrounding cryptocurrencies today, it may be difficult to separate promising investments from passing fads.
Working with an experienced financial advisor can help you benefit from investing in legitimate emerging technologies while avoiding the latest bubbles. If you have questions, you can reach me by phone at (301) 739-8505 or by email at email@example.com.
Scott Ford is CEO, Founder and Wealth Advisor of Cornerstone Wealth Management Group, serving entrepreneurs, business owners, executives, and their families. The firm specializes in business liquidity strategies and SBA financing strategies. It is Scott’s mission to help his clients pursue financial freedom and live a balanced and fulfilled life.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.