The Investment Scientist

Bitcoin $10,000: My Two Cents

Posted on: November 29, 2017

bitcoin.jpgThe Origin
Bitcoin was invented by a Japanese man named Satoshi Nakamoto. Or was it? He has been in radio silence since 2011, and nobody has seen him or has been able to verify his existence. To say the least, the origin of Bitcoin is shrouded in mystery.

The Technology
The underlying technology of Bitcoin is called Blockchain. It is legitimate and it is being adopted by companies as diverse as Alibaba and Walmart. The technology ensures high security and prevents counterfeiting. However, the technology is in the public domain, meaning that anybody can create an alternative to Bitcoin. In fact, there are more than 1300 “cryptocurrencies” out there as I write this.

The Early Adopters
The early adopters of Bitcoin were  anarchists who hate governments and who think fiat monies issued by governments are just means for control and wealth expropriation. They like the fact the Bitcoin is not issued by any governments and is not managed by any “trusted” third party.

The Next Adopters
Money launderers and criminals were  the next adopters of Bitcoin because  it is anonymous and untraceable.

Silk Road was a contraband marketplace that used Bitcoin as its currency. It was shut down by the US government. This year the Chinese government shut down a Bitcoin exchange that facilitated capital flight because it bypassed the government’s capital control.

The Setbacks
The biggest Bitcoin exchange in Japan also went bankrupt because it was hacked and $300mm worth of Bitcoin was stolen. Despite the vaunted security of Bitcoin, the many exchanges whereby ordinary folks like us  can buy Bitcoin are the weak link.

Is Bitcoin a Currency?
The most important function of a currency is to serve as a medium of exchange. In this regard, Bitcoin fails miserably. There are only a few places in the world that accept Bitcoin as payment. On top of that, the underlying technology may not be able to support millions upon millions of transactions.

Another important function of a currency is to serve as a storage of value. In this regard, Bitcoin has done marvelously thus far. Despite multiple setbacks, its value keeps going up.

Is Bitcoin an Asset?
Warren Buffett says it is not because it does not produce any dividends and interest.

The Supporters
The Japanese government recognized Bitcoin as a legal tender in April, 2017. The Chicago Mercantile Exchange will start trading Bitcoin futures in December. All of these lend legitimacy to Bitcoin as a currency despite the fact that it is not yet fulfilling that function.

The Distractors
There are too many too count.

The Future (my guess)
Bitcoin will become something like Gold. It’s not quite a currency, but does serve as a storage of value. Though it is also possible that it will fizzle out, get supplanted by other cryptocurrencies or be banned by governments.

Should You Buy Bitcoin?
Only if you can treat it like buying a lottery ticket. : It could go up 10 times or more in value, or it could go down to zero. And even then, use your fun money, not your retirement money!

(When I sat down to write this article, Bitcoin just passed $10,000. When I finished the article, it had already passed $11,000. By the time my proofreader corrected my grammatical mistakes, it had dropped back to $9,600. That prompted me to add this paragraph, by the time I finished this paragraph, it went back up to $9,950. )

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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