by Tracy Ann Miller, CFP
Todays' world shattering news that Bitcoin (one of many Cryptocurrencies) has broken two highs within a single day and posted over a 900 percent return since the start of 2017, has many people asking:
1) What is it?
2) Should I invest in it?
3) What are the risks?
Bitcoin is a cryptocurrency – defined by Wikipedia, "a cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets". Bitcoin, created in 2009, was the first decentralized cryptocurrency. Stay tuned for more posts on why it’s important to understand what a cryptocurrency is.
Bitcoin may be an investment but at this point, I have to say if it is, this investment fits squarely into the speculative piece of the investment allocation pie. My advice is to limit the amount of your total investable retirement capital to anything speculative including cryptocurrencies. That means no more than a 5% allocation on the conservative side to 15% if you are more aggressive. Keep in mind you need to add all of the money you have in speculative investments to make sure you are not adding too much. Earlier in 2017, I opened a cryptocurrency account and purchased a small amount of Bitcoin. Honestly I did it for the research aspect of it and I am tempted right now to get out and take the profit. It has been quite an experience, so for this reason I do recommend that people open a cryptocurrency account for the experience. Do you own any physical gold or silver? If so, you had to buy it in a completely different way than you buy other investments and there is no way to truly understand what that is like until you do it yourself. Invest in the learning experience.
The risk in buying Bitcoin at this stage is that the current price indicates that the value has gone too far too fast. Take at look at the 2017 price chart!
When that happens, statistically you are more likely to see a drop in price than for the price to continue moving higher. That being said, I have yet to see this big of a bull market in anything in my 30 years in finance. Clearly new ground and worth paying attention to. New technologies present tremendous upside potential because they are new, unknown, unproven. When you invest in 'unproven' you should get a higher return. The other side of the coin? New technologies also present tremendous risks, even complete failure. The phrase caveat emptor (let the buyer beware) clearly applies at this point.