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Bitcoin: Boom or Bubble?

April 4, 2018 by The Trust Company of Tennessee Leave a Comment

Bitcoin has been all over the news lately as the cryptocurrency has continued to skyrocket in value. In 2017, Bitcoin rose almost 1,400 percent (from $900.86 to $13,444.88), and that was after a big drop in December. That meteoric rise caught the attention of the media, and in late 2017 and early 2018, Bitcoin spread to new audiences due to news coverage.

But is Bitcoin too good to be true? Can it sustain this kind of growth long-term?

The answer to question one is that it depends on your risk tolerance. The answer to the second question is “nobody knows.”

For those who don’t know, crypto currencies are a relatively new invention that are quite complex. A simplistic explanation is that computers solve increasingly difficult math problems to “unlock” the currency, which can then be held by the person who unlocked it or sold/transferred to others. You may be asking, why does anybody want this computer currency? Good question. For Bitcoin proponents, there are a number of pros to crypto currencies. Since they’re non-fiat currencies, their inherent value isn’t tied to a specific country’s economic health or gold reserves. Crypto also can allow people in countries with less economic stability to purchase things they can’t otherwise because an online retailer or third party might be more willing to accept payments in Bitcoin than, say, Bangladeshi Taka. There are other pros, but these are just a few.

Of course, there are also cons. Just like being a non-fiat currency is a pro, it can also be a con. Bitcoin’s value is completely propped up the belief in its value. Another aspect that worries some is that, despite being a currency, it’s not actually being used that way. Yes, there are people using it to make actual purchases, but a lot of people are using it as an investment vehicle. If most Bitcoin is being hoarded as an investment, then eventually we’ll reach a point where the bottom will fall out as those people cash in on their investment. Bitcoin is also extremely volatile. That drop in December mentioned in the opening paragraph? That resulted in a drop in price of almost 27 percent over the course of one week. While the graph on Bitcoin shows a mostly upward path, there have been big drops in the past.

If we get down to the core question, is Bitcoin (and other crypto currencies) a boom or a bubble? The question is actually both. There’s no denying that it has made an impressive run, and people who have owned Bitcoin for any length of time are probably extremely happy with their investment. However, if people continue to view it as an investment instead of a currency, or a government decides to take action against it, then the drop could be fast and precipitous.

Our Opinion

In their present form, cryptocurrencies like bitcoin are not a fiduciary asset class. The elevated volatility, lack of merchant acceptance, uncertainty in future regulation, creation of better cryptocurrencies and explicit ties to illicit activities collectively skew the risk-return dynamic of BTC unfavorably for investors. A herd mentality has made many early adapters to the platform rich but, as a fiduciary, it would be nearly impossible to convey this as a good fit for a client’s portfolio.

As a new phenomenon, cryptocurrencies have caught the attention of many investors. As new investment options appear sporadically, there are often more questions than answers. As it stands today, we do not believe this is a viable asset class for investors in their portfolio. However, as more questions have answers we will continue to review these investments options continuously over time, as we do with all asset classes, for their potential inclusion in a portfolio.

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