As fee-only-Certified Financial Planners, clients often ask us our opinion about various investments. It seems like we get this question every time there is a new investment fad or a new IPO offering. Because we are investment fiduciaries, we always try to provide advice that puts our clients’ best interests first.
The problem with new things is that there often isn’t enough credible information to offer a recommendation with 100% certainty. This is especially true with cryptocurrencies, such as bitcoins.
Are we the only ones who get an uneasy feeling at just the name of this new form of exchange? That is what bitcoin is. It is a new unit of exchange. This one however is established between “peers” independent of any government using extremely complex mathematical calculations. Is there anyone else who turns on their computer and relies on the binary flow of ones and zeros who has experienced frustration when something doesn’t work? Or our personal “favorite,” when you lose 45 minutes’ worth of work that just disappears? Now imagine $473 million in bitcoins being “lost” on the Mt. Gox bitcoin exchange in 2014 forcing that exchange to declare bankruptcy. Where did investors’ bitcoins go? Just ask the ones and zeros.
The convenience and productivity gains we have seen with computer and internet technologies are nothing short of astounding. Now that smartphones are embedded in modern cultural norms throughout the planet, it is doubtful that we will reverse the trend. In fact, we are likely to see it accelerate. One issue always remains and that is reliability. The spinning circle that we affectionately refer to as “the doughnut” still appears while using internet applications. This is merely annoying when clicking through news stories. When it comes during financial transactions, well that can be completely unnerving for people.
In an ever-increasing way, understanding how technology works feels more daunting. The technology cryptocurrencies rely on is called “blockchain.” Here is a reasonably straightforward explanation on YouTube: Blockchain Explained. It’s great that IBM is helping Walmart wring out food chain efficiencies and that diamonds can be more readily tracked with blockchain technologies. However, a technology described as “a decentralized and distributed ledger, authenticated by mass collaboration, powered by collective self-interests” is not where we’re ready to trust more than just a token amount of money.
In 2013, payment processors Bitstamp and Mt. Gox experienced some processing delays due to insufficient capacity. The result was that the value of a bitcoin dropped from $266 to $76 before recovering to $160. This huge price dip and partial recovery occurred over roughly 6 hours. That’s right, only six hours. To be fair, the technology was relatively new and 2013 is an ice age ago in the world of technology. Still, that’s far too large a fluctuation for everyone I know, for any amount above what might be called “curiosity money.” It’s not how they have refined and strengthened the technology since that time, but rather what they can’t see, anticipate or prevent that has us cautious and concerned.
Enter the Hackers
Great energy, ingenuity and inventiveness are used by today’s bandits of the internet. Whether it is fueled by a competitive fervor or mostly by greed the result is the same. Even systems with strong precautions like those Equifax employed can be hacked. In different ways hackers have made off with various cryptocurrencies over these early years and the original owners of those currencies can’t petition the FDIC to make good on their loses. So where would you like the majority of your money to be deposited?
Why use a cryptocurrency?
As financial advisors, our duty is to protect our clients, sometimes from themselves. If you want to invest in bitcoins or other cryptocurrencies, we encourage you to ask yourself why. Is it because you want privacy in certain transactions? Are you worried about the US dollar, inflation, or some cataclysmic event affecting our economy? If so, let’s discuss this. Safer, more traditional financial alternatives are available. A cryptocurrency can’t work in power outages or be used when other people don’t understand them or accept them as currency. Perhaps stockpiling food, water, cash, and other commodities might be a better hedge.
Cryptocurrencies are likely here to stay. How they will evolve over time is anyone’s guess. For the adventuresome with a little “curiosity money” and who can afford to take some losses, you may wish to research an exchange and learn through experience.
For most of us though, it is best that we observe for a while and let others work out the bugs a bit more. As the saying goes, it’s the pioneers and not the settlers that get shot with the arrows.