What is Bitcoin?

 Something clients are often curious with, especially being a young advisor, is my thoughts on (or what is?) Bitcoin.

Let’s start with the basics. Cryptocurrency and Bitcoin are one-in-the-same, but not mutually exclusive, whereas Bitcoin is a cryptocurrency, but a cryptocurrency doesn’t necessarily have to be Bitcoin. In fact, there were over six-thousand cryptocurrencies when President Biden was sworn in today, and there was likely a few created while he gave his speech.

Bitcoin was created in January 2009 via a whitepaper by Satoshi Nakamoto, a pen name for a still unknown person, although several people have claimed to be Satoshi. The idea was for a cheaper online payment mechanism and a decentralized authority, which is unlike government issued currencies. There are no physical bitcoins, only balances that are kept on a public ledger, and everyone has access to these records. Bitcoin (and most other cryptocurrencies) are not backed by any government, and chart on popularity, and unlike fiat currency, bitcoin is created, distributed, traded, and stored.

If you’ve paid much attention to conversations surrounding these crypto-assets, you’ve probably heard the term blockchain. Blockchain is the technology that allows for the existence of crypto and digital assets and was created with the invention of Bitcoin. Blockchain is extremely complex, but for practical purposes, let’s think of blockchain as a collection of blocks. Each block contains a group of transactions, and because groups of computers running the blockchain have the same order and information on the blocks and can transparently see when new assets are created within the blockchain, the system theoretically can’t be broken. While blockchain was created at the same time as Bitcoin, it has other applications. Because blockchain is considered “unhackable”, it could potentially be the future of all secure data storage, from banking, to voting, personal data and currency.

Should I buy cryptocurrency?

While cryptocurrency may go up in value, generally these assets are thought of as speculation rather than investments. Because they were designed the same way as physical currency, they generate no cash flow, so to profit on your investment, someone must pay more for said currency than you did. While Bitcoin grabs headlines for extreme price jumps, it is for this reason that it is unlikely it will ever be the future currency of the world. Currency must have stability, and Bitcoin is far from stable. There is also already a USD coin that is tied directly to the U.S. Dollar, which fluctuates accordingly, and despite what you may read on social media, a cashless society, especially a crypto only society, seems far-fetched for the time being. Speculation on Bitcoin or any other crypto currency should be done with money you can afford to lose, similar to gambling.

There are without doubt less volatile and risky positions to hold, and your advisor should never recommend you hold something as volatile as cryptocurrency, just as they wouldn’t recommend you spend too much time at the blackjack table. So if you just have an itch to own a crytoasset, do your research, and only speculate with money you can afford to lose.

-Colin Feller, President