You’ve probably been hearing a lot about Bitcoin and other cryptocurrencies in the news and financial media. The recent price appreciation of these currencies is attracting a lot of attention from individual and institutional investors. Investors are seriously considering whether to add Bitcoin to the portfolios. Well, as always you should do your homework due diligence and be clear about why it might be worth the risk for you. This is because Bitcoin and other cryptocurrencies are so very volatile. Its price has jumped from $1,000 in 2017 to over $55,000 by this spring with a lot of dramatic up and down swings in between.
Bitcoin is a virtual currency that allows you to pay other parties online over the world wide web without the need of a bank or other financial intermediary. It’s not backed by any bank or government entity. And therein lies the risk for investors. Bitcoin is not legal currency. It’s been reported that it can be used to transact illegal activity as well.
In this era of new innovative technology, it has drawn a lot of investor/traders who are interested in trying to make quick money. I think it’s akin to the “gamers mentality.” The lack of government control and price volatility makes it riskier than traditional asset classes in fact, no agency or institution is baking Bitcoin to guarantee its value. Even so it seems to have sustainability to this point. Tesla and PayPal, so far, are accepting Bitcoin as payment.
There are hundreds, maybe thousands of crypto currencies like Bitcoin in existence, but it is the biggest by market value. It’s estimated to represent about 60% of the market value of all crypto currencies.
As investments, crypto currencies like Bitcoin are very speculative for all of the reasons cited above. It has no inherent intrinsic value and it doesn’t fit into any current asset class like stocks, bonds, gold, or commodities. It doesn’t fit the traditional investment valuation metrics like price to cashflow, book value, price to earnings and others.
So, should you invest in Bitcoin? As I’ve said earlier in this piece, all cryptocurrencies are very speculative and therefore risky. As a general philosophy at EverGreen Capital Management, we invest to minimize risk while seeking growth. That said, I would say if you’re in your 20’s or 30’s, and you’re attracted to these kinds of investments, you can allocate a very small amount of your assets to speculate without risking everything. But be prepared to accept big losses as well as gains. If you’re near or contemplating retirement, you probably can’t afford and don’t want to take risks that could deplete a portion of the capital you’re looking to for your retirement income. Bottom line; do your homework. As with any investment, know why you’re buying and where it fits with your overall goals.
“You’ve worked hard for your money, make it work for you.”