Frankly, this was a commentary topic I was hoping to avoid. If you have been reading our commentaries, you understand we want to be fully versed and comfortable on a topic before disseminating our thoughts to our clients and friends. Once educated on the topic, we can form an objective opinion. However, the topic of Bitcoin is becoming too mainstream and speculated on for us to avoid commenting any longer. The good news is I have been reading voraciously on the topic, the bad news is I am not sure I have concluded one way or another. So, hopefully this commentary serves as an educational piece to those unfamiliar with Bitcoin and a unique perspective for those who already are informed on the topic.
I woke up to a headline “Bitcoin nears $10,000” and the first question that popped in my head was “Wasn’t Bitcoin just at $4,000?” The answer to this question is Yes and, more so to the point, the price was just under $1,000 on January 1st of this year. The meteoric rise mainly existed this year although 2016 was quite strong with the price nearly doubling. So, what is leading to the price increasing so quickly?
For those new to the topic, Bitcoin is the most widely followed “cryptocurrency.” A cryptocurrency is a currency that exists only in electronic form and is not controlled by anyone specific, i.e. a government. As well, Bitcoin resides across what is known as “blockchains.” Simplified, “blockchain” technology allows transactions of bitcoins to be published across all ledgers tracking bitcoin transactions. This decentralizes the control of bitcoin and allows for multiple parties to simultaneously maintain the ledger, argued by proponents to prevent hacks and inconsistencies.
The most esoteric part of the Bitcoin phenomenon is the way one can produce or “mine” for bitcoins. Bitcoin miners have invested millions of dollars in computing power to solve very complex problems. Once solved, the miner is awarded bitcoins. The problems become increasingly difficult to solve causing further required investment into computing power to mine the next Bitcoins. Bitcoins have a capped circulation of 21 million units and, to date, there are just under 17 million in existence. With just over 4 million units left to “mine,” the interest in mining remains high. If one needs any proof that Bitcoin mining has become prevalent, in the last few days reports have surfaced that Bitcoin mining has accounted for more power consumption than 159 separate countries, including Ireland and most countries in Africa[i]. One of the other unique aspects of the decentralized currency is that it has become commonly used currency in illegal transactions, specifically hacking and malware attacks. It has yet to be determined what percentage of cryptocurrency transactions are involved in illegal activity and therefore difficult to speculate to what degree, if any, this is behind the price increase.
Critics of Bitcoin are as prevalent as its supporters and advocates. Warren Buffet and Jamie Dimon have come out unrelentingly against Bitcoin with Dimon going so far as calling it a “fraud.”[ii] While supporters such as Sir Richard Branson and Marc Andreesen speak glowingly of the new currency. Andreesen, the inventor of the first widely used Web browser, was quoted in 2014 saying “In 20 years we’ll talk about Bitcoin like we talk about the Internet today.”[iii] This wide range of criticism and support only adds confusion to an already confusing topic. We are most fascinated to see who will end of winning in this debate when we look back in twenty years. We currently have no visions of incorporating Bitcoins into client portfolios and we want to make certain that anyone making personal decisions around investing in Bitcoins considers the risks in doing so. Although the upside in Bitcoin could be there, you must always recognize that there is potential for 100% loss in such an unproven asset. Bitcoin and other cryptocurrencies are commonly being referred to a form of “digital gold” but we want to caution people to make this comparison as gold has been involved in trade since estimated 600 B.C. Bitcoin pricing only goes back to 2010. We do expect volatility to continue as this story plays out and we look forward to a commentary in 20 years to see which side was right.
[i] BusinessInsider.com, “The electricity used to mine bitcoin this year is bigger than the annual usage of 159 countries,” November 26, 2017. Oscar Williams-Grut.
[ii] Time.com, “Bitcoin Bubble? 10 Brilliant Investing Experts Who Want Nothing to Do With the Cryptocurrency,” September 19, 2017. Ian Salisbury.
[iii] WashiongtonPost.com, “Marc Andreessen: In 20 years, we’ll talk about Bitcoin like we talk about the Internet today,” May 21, 2014. Brian Fung.