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BITCOIN: TRICK OR TRADE?

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At the financial conferences I recently attended in both Bermuda and Chicago, the talk of the town amongst the professional investment community was not the raging bull market, the tax plan, or even the latest person accused of groping someone thirty years ago.

It was bitcoin.

Everywhere I turned I heard words like “mining” and “blockchain”, “ledgers” and “timestamping” being whispered like code words among bitcoin frat brothers who knew the secret handshake. Serious financial pros, attending seminars and round table discussions on risk management and asset allocation and compliance and GDP were busting a gut to talk about possibly the biggest thing since the introduction of the internet. They couldn’t wait to get the formal program over so they could loosen their ties and hit the lounge to argue the merits and potential of what some are saying could one day replace the dollar.

For those of you who don’t know what I’m talking about, let me give you a two-minute overview of bitcoin, which is pretty much the extent of my knowledge. Bitcoin is a digital currency that’s not tied to a bank or government. Created just a decade ago, it allows users to buy goods and services without involving banks or credit card companies. Transactions allow anonymity, which made it immediately popular with people who wanted to keep their financial dealings secret and their identities private, like thieves, drug dealers, and money launderers. In recent years it’s become a little more main stream, especially among millennials as something cool and hip. But in the past two or three years it’s popularity has reached a whole new crowd- speculators.

And with the speculators has come an explosion in value. At current levels bitcoin has a market cap of over $150 billion, which makes it larger than General Electric, Boeing, Disney, and just about all of the companies in the S&P 500.

With that kind of strength bitcoin is probably here to stay. But that kind of valuation will also get the attention of the government and the regulators looking for ways to put their thumb on it and, of course, extract money from it. We’ve begun hearing rumors U.S. regulators are starting to circle the cryptocurrency den, biding time before they swoop in for the kill.

Currently there are just 21 million bitcoins in circulation, so their value can fluctuate wildly, and that’s putting it mildly. Speculators who haven’t bought a pack of gum with their bitcoins are day trading in and out of them, driving prices up over ten times in just the past year alone, and easily up and down ten percent in a day, or an hour. Just since I began writing this article I’ve watched the price drop six percent in forty-five minutes. But don’t blink, it could be back up that much or more before I head to lunch.

There are passionate opinions on both sides of the bitcoin. Listening to people argue about it is like watching a rerun of a Donald and Hillary debate. Democrat vs Republican; Coke vs Pepsi; Ford vs GM; and now the dollar vs bitcoin. Jamie Dimon, CEO of JPMorgan, calls bitcoin a fraud. But it’s not stopping his company from   quietly using the underlying technology as a potential way for his bank to accurately track trading and assets. But Bill Gates likes it. So does Richard Branson and the Winklevoss twins from Facebook fame. They may know a winner when they see it. More and more notables are saying nice things about it. But in the end everyone’s opinion is just that- opinion.

It’s easy for anyone who feels the urge to get in the bitcoin game. Just type in “bitcoin” in the search bar and get your credit card out and within five minutes you can be the proud owner of your very own bitcoins. You will quickly notice rival crypto-currencies are emerging from the shadows to take on bitcoin, so it’s not the only game in town, but it is the first to market and definitely the Kleenex or the Xerox of the industry thus far.

(Two paragraphs and eleven minutes later and bitcoin is down another 2.4%.)

One guy I met at the Bermuda conference said he invested $12,000 two years ago and has been adding to it regularly, and his investment is now worth over $1.8 million. Listening to him was like listening to an Amway pitch. This same guy who just an hour earlier was putting the entire audience to sleep lecturing about the virtues of derivatives was out in the hallway spitting on me from excitement as he preached from his holy book of bitcoin, arms flailing, sweat pouring off his forehead like he just returned from the bitcoin mothership.

I must admit the whole thing sounds pretty intriguing. And no doubt some who have already drunk from the cryptocurrency Kool-Aid are laughing all the way to the digital bank, or wallet, or whatever they call it. But what does it all mean, and what should you do about it? Should you seriously consider risking some of your hard-earned money playing the bitcoin slot machine?

Is it a Trick or a Trade?

After listening to arguments both ways, I would say to those of you who have some play money, can live with the possibility of losing it all, and just can’t live another day without it, then by all means, pull the lever. Just please, please, please, make sure it’s really your play money and not any part of your nest egg. For me, I risk enough as it is, so though I find it entertaining to watch, and I would desperately love to know the secret handshake, I think I’ll take a pass.

But now look, bitcoin has gone up 1.7% in just the past eight minutes. Hmmm….



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