Hard to believe that this blog has been around for almost two years and I never wrote anything about Bitcoin and Cryptocurrencies. I will have some more of my own thoughts and comments in tomorrow’s weekly Wednesday post but to set the stage, our online buddy Matt Paulson has agreed to write a guest post on the topic. Matt runs a site called MarketBeat which is pretty neat. It has a lot of free information, including all the interesting stats on earnings history/forecasts, dividend history, SEC filings, etc. for individual stocks. I don’t think I have seen all that information aggregated so nicely anywhere else, see below:
In any case, here’s the guest post on Bitcoin, take it away Matt…
Bio: Matthew Paulson is the founder of MarketBeat, an Inc. 5000 financial media company that empowers retail investors to make better trading decisions by providing real-time financial data and objective market research.
The stock market continues to soar, reaching new highs on a regular basis. Many people attribute this to the brighter macroeconomic outlook, lower taxes and less regulation, so markets find it easier to price future expectations. This has led to record highs for both bitcoin and the stock market. However, individuals need to be careful when making an investment. Although bitcoin may appear to be the wave of the future, we need to understand the benefits and drawbacks of both stocks and cryptocurrencies to ensure they make the decision that is right for their unique needs.
One reason many people look to Bitcoin is that it has consistently yielded a higher return than all currencies across the world and has done so for five of the six previous years. This consistency is outstanding regardless of what investment a person is looking at. Furthermore, this cryptocurrency is now maturing, giving investors more confidence in its existence and viability over the long term.
Another reason people are taking a second look at Bitcoin is the computational network used with the cryptocurrency is very strong and secure. This has been a concern in the past, but those using the network continue to find ways to improve on it. In addition, the wallets services are user-friendly and reliable, and new applications are appearing every day to make the use of Bitcoin easier than ever. [ERN: Of course, exchanges have been hacked before, so while the blockchain is secure, your Bitcoin holdings are only as secure as the IT department at your crypto site or the password you pick! But definitely, experts have told me that the technology is getting safer!]
The scarcity of Bitcoin works in its favor. There is a limited supply of the cryptocurrency, as there will never be more than 21 million bitcoins in existence. Furthermore, demand continues to increase abroad while mining for the cryptocurrency has become more difficult. When combined, these factors help to drive the price up. [ERN: Despite my skepticism of some of the crypto-hype, I’d have to concede that in a lot of countries that are – shall we say – less financially enlightened there are millions (billions?) of people looking to keep their money safe from confiscation, hyperinflation, capital controls, etc.!]
Traditional assets rise and fall in value based on external factors, yet this isn’t the case with Bitcoin. There is no need for reporting at the end of each quarter, no company performance information to share and no public stakeholders to mollify. As a result, there is no distortion of the market. Investors have a better understanding of where their money is going. [ERN: which is also weakness and cause for fluctuations: an asset free of fundamentals can display wild swings!]
One concern of many when it comes to Bitcoin is the volatility of the cryptocurrency. Thankfully, the market has settled down recently, again due to the maturation process. This is due in part to individuals gaining a better understanding of the cryptocurrency and how it works. However, not all agree that Bitcoin is the best investment for the future.
Some experts believe Bitcoin and other cryptocurrencies are prone to fraud and this could lead to a bubble that is even bigger than the one that was seen in the housing market. Jamie Dimon, well known for his position as the CEO of JPMorgan Chase, agrees with this assessment, declaring Bitcoin to be a fraud. He isn’t the only one warning investors to be cautious. Mark Cuban, a billionaire, states that Bitcoin isn’t a bad thing to invest in, but people need to limit it to 10 percent of their portfolio. The rest should be made up of more traditional offerings, such as stocks. Buying stock allows the person to balance their risk level while receiving income from their shares and the possibility of capital growth.
One major benefit many experts cite when they recommend the purchasing of stocks as opposed to Bitcoin and other cryptocurrencies is the regulation of the stock market and other financial investments. Individuals who opt to buy Bitcoin don’t have the same level of protection. In the event cryptocurrencies begin to be regulated, the price may drop significantly in a short time period.
Investors should always diversify but must determine how comfortable they are with losses and allocate their investment dollars accordingly. One should never put all their eggs in one basket, whether the eggs come in the form of stocks, bonds, real estate, cryptocurrencies or another option.
A Third Option: Stocks with Cryptocurrency Exposure
Individuals who are interested in investing in Bitcoin have a third option they should consider; stocks with cryptocurrency exposure. A person can choose to buy one of these stocks and benefit from the growth of the crypto market. Think of companies that make processors designed to mine Bitcoin or other cryptocurrencies. You’ll also find some surprising names like Overstock.com. This company has been around for approximately 20 years and it’s not just in the business of selling comforter sets. It now owns tZero, a subsidiary that serves as a general ledger system for capital markets. So, one can buy stocks and profit from Bitcoin without purchasing the currency directly. [ERN: I like this idea! Very intriguing! Marketwatch had a list of 11 Crypto-related stocks, but I’d like to see a more comprehensive list. That would be something for Matt and his site to work on!]
One benefit of buying stocks in companies associated with Bitcoin is these stocks can often be included in a retirement account. While Bitcoin may be included in some retirement accounts, industry advisors don’t believe this will be the case for long. They are concerned the Internal Revenue Service (IRS) might declare them ineligible for inclusion in a retirement account.
Regardless of which option a person chooses, research is key. A person should never buy a stock without learning more about the company, the stock price history and more. The same is true when investing in bitcoin. Although this is the most well-known of the cryptocurrencies, others are now being offered. It may seem wise to save money by purchasing one of the lesser known options, but this isn’t always the case. This is your money and your future. Remember this always, research all available options and you’ll find you have a diversified portfolio that helps you build wealth and prepare for the future.
[ERN: Thanks for your contribution! Looking forward to everybody’s comments. Stay tuned for more discussion tomorrow!]