November 2, 2017
spec·u·la·tion (spe-kyə-ˈlā-shən) noun – the assumption of unusual business risk in hopes of obtaining commensurate gain (Merriam-Webster Dictionary)
As Bitcoin hits another high, the number of folks interested in digital currencies has been gaining steam. It makes sense, an investment up more than fourfold this year is every investors dream. Surely it must continue because cryptocurrencies are going to change how businesses operate and they will revolutionize global trade, right? Maybe, but maybe not.
Let’s explore further and start by developing a better understanding of what a Bitcoin is.
A Bitcoin is a digital token—it is not the coins you see pictures of and it does not have any physical backing. They can be sent from one user to another, anywhere in the world within its network. However, this system is not run by a single company or person. The system is ran by a decentralized network of computers around the globe that keep track of all Bitcoin transactions.
The benefits of Bitcoin are its low-cost and anonymous payments which are conducted within a peer-to-peer system with no intermediaries. Large international money transfers can sometimes take weeks due to antiquated banking regulations and many diverse banking systems with banks themselves serving as intermediaries. By contrast, millions of dollars of Bitcoin can be easily moved within minutes. While these benefits are great—they also mean it could be used for money laundering or other illegal activities.
Since Bitcoin has become popular, only a few reputable investment vehicles for retail investors have popped up. There are significant market and regulatory risks in trading digital currencies. As digital currencies continue to evolve, they may offer more investment opportunity, but, for now they remain speculative at best.
Speculation and the significant risk of loss are not compatible with the fundamentals of prudent investing for retirement. Anyone considering an investment into Bitcoin should already be on sound financial footing, on track for their retirement goals, have comfortable cash flow and an appropriate amount of emergency savings.
In time, as more opportunities for investment arise and the technology becomes more mature, digital currencies may become a reasonable long-term investment. For now, they remain speculative at best and anyone considering them for an investment should heed the Latin phrase for let the buyer beware: Caveat Emptor.
Vice President - Financial Advisor