THE BITCOIN CRAZE

By John Guarino in Trusted Advice

Although Bitcoin has been in existence since 2009, it was originally touted amongst a relatively small group of passionate believers while remaining largely unknown to the general public. Over time, public enthusiasm surrounding Bitcoin and other cryptocurrencies has surged and the price has risen exponentially, attracting many amateur "investors" and speculators. Millennials in particular seem to be fascinated by Bitcoin and other perceived beneficiaries of blockchain technology. As a result, the price of a Bitcoin has skyrocketed by over 3,000% in the past two years. During this period, there have been six occasions when the price has corrected by at least 25%. In one particularly volatile day recently the intra-day price plunged by 50% before recovering to close down 10%.

In this blog post, we will attempt to explain Bitcoin, cryptocurrencies and blockchain and provide some perspectives on this phenomenon. To start with, the following definitions may be useful for some readers in order to better understand and follow this discourse:

Bitcoin – the most widely recognized and largest cryptocurrency by market capitalization.
Blockchain – is a term widely used to describe a new suite of technologies that use a digital ledger distributed on a network of computers. On a blockchain, transactions are recorded chronologically and the ledger is simultaneously updated with every participant in the network. Blockchain technology could represent transactions and data of many types and could someday be used for currency, medical information, intellectual property, identity, or property titles and other uses.
Cryptocurrency – a digital or virtual currency that has no central issuing or regulating authority. Over 1,000 individual cryptocurrencies exist today all using blockchain technology. They all rely on cryptography to prevent counterfeiting and fraud.
Cryptography – a method of storing and transmitting data in a particular form so that only those to whom it was intended can read and process it.

Bitcoin and other cryptocurrencies must be bought and sold through an exchange. The most popular cryptocurrency exchanges in use today include Coinbase, Kraken, and CEX,IO. To learn more about cryptocurrency exchanges click on The Ultimate Guide by BlockGeeks.

What has triggered the fascination with Bitcoin? Some of the popularity can be attributed to the following perceived advantages:

Lack of restrictions – Bitcoin payments can be sent or received anywhere in the world at any time without approvals, transfer limits or third-party delays. There are no bank holidays or any current regulatory burdens.
Privacy – Anyone with internet access can transact using Bitcoin without providing any ID or documentation. The risk of identity theft is non-existent since no personal information is provided.
Merchant risk reduction – Bitcoin transactions cannot be reversed and carry no personal identification therefore merchants are protected from potential losses due to fraud.
Low Fees – transaction fees using Bitcoin are relatively low. In addition, converting Bitcoin to fiat currency such as dollars or euros is generally lower than credit card processing fees.

There are certain pitfalls, uncertainties and risks associated with the use of Bitcoin:

Volatility – until the wild and rapid price volatility subsides it is impossible for Bitcoin to be used in a widespread manner for business transactions or the purchase of goods and services.
Ethical concerns – the downside to the anonymity of Bitcoin and other digital currencies is they are ideal for black market transactions.
Regulation – the IRS has announced that digital currency gains are now subject to capital gains taxes. Other regulations are being evaluated by certain countries.
Competition – there is always the possibility that central banks may decide to create a sanctioned special purpose digital currency which can be controlled and regulated.
Lack of Scale – cryptocurrency exchanges currently have difficulty handling demand which causes scalability and liquidity issues.
Cybersecurity and Fraud - there is some fear that digital currency assets can be stolen by hackers.  Just last week South Korea's government announced tougher measures to crack down on cryptocurrency trading in the country and warned that digital currencies could be "vulnerable to the damage from investment fraud or hacking attacks on the exchanges."  In addition, the potential exists for scams involving the creation of phony digital assets.

In the US, the Financial Industry Regulatory Authority (FINRA) recently warned investors of cryptocurrency-related stock scams.  The FINRA said individuals should be "cautious when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities without the business fundamentals and transparent financial reporting to backup such claims."

Our view at the present is that cryptocurrencies cannot be considered a legitimate currency or an investment. Throughout history, there are many examples of new ideas or innovations that produced wild speculation leading to dangerous bubbles. Any asset's price that goes parabolic the way Bitcoin's price has carries extreme risk. Whether the speculation is in tulip bulbs, internet stocks, real estate, sub-prime mortgages or cryptocurrencies, the experience is usually the same - eventual losses. Cryptocurrency advocates are convinced that the price of Bitcoin will continue to climb exponentially. No one can know for certain that Bitcoin or other digital currencies are a "bubble" waiting to burst. Unless you have a voracious appetite for risk and the ability to lose a substantial portion of your investment, the current cryptocurrency craze is best left to speculators and gamblers. 

Our thoughts on Blockchain are that it has the potential to be a truly transformative technology for certain functions and there are likely widespread applications where it may be used. We will be alert for any direct or any indirect beneficiaries who offer or apply this technology within their businesses which may offer compelling investment opportunities. Similarly we do believe there may come a day when Bitcoin and/or other cryptocurrencies may have widespread application as a global digital currency. For that to happen it would necessitate the support and oversight of global monetary authorities. In that environment unregulated cryptocurrencies or tokens might still exist for application specific purposes but it is hard to say whether they would still evoke the same speculative trading fervor taking place today.