What Is Bitcoin?
By now, everyone should have heard of Bitcoin at some point in the last few years. If you can recall, it was a hot topic of conversation among friends and families during its parabolic rise from Thanksgiving to Christmas during 2017 when it hit its all-time high of $20,000 before taking a beating. Since then, it has been a volatile up-down wave from $3K to $12K, back to $5K, and currently sits around $11K-12K. Several things should be taken into consideration when investing in Bitcoin and cryptocurrencies. This article discusses those considerations and provides options for investing in Bitcoin and cryptocurrencies.
If you are unaware of what Bitcoin is or forgot as it has been a while since Bitcoin has been in the news, Bitcoin is simply a digital currency. The idea of a digital currency shouldn’t be all that foreign to you. With Apple Pay, credit cards, and the rise in e-commerce, money in its physical form is becoming something of the past. When you buy something with Apple Pay or a credit card, you are purchasing in US Dollars, or a foreign currency if international. As with all money and exchanging of goods and services, you need to have someone willing to accept the payment. While Bitcoin is popular on the dark web as it can be challenging to trace Bitcoin transactions, Bitcoin is still in the infancy stage of gaining traction as a widely accepted form of currency, and there are a few reasons why.
Why Bitcoin Is Risky:
- The price is too volatile. Most currencies such as the US Dollar, Euro or Japanese Yen move maybe .2% on a typical day to 1%+ on an abnormal day or day with fiscal policy updates. Bitcoin, on the other hand, can move several percent in a day for no reason at all, and as we saw, the first weekend in August it moved 10% down in a matter of 30 minutes. Imagine buying a product with Bitcoin for $100 and realizing you could’ve bought it for 10% cheaper if you had just waited another day. Welcome to the world of purchasing goods and services with a volatile digital currency!
- Bitcoin is not accepted by many places you usually do business with daily. You more than likely cannot go to your local grocery store and purchase food using Bitcoin.
- Purchasing Bitcoin is not simple for some people. Your employer does not pay you in Bitcoin, and it is not as simple as going to the bank or exchanging cash with your friend for Bitcoin. You need to have a digital wallet and one that can accept and send Bitcoin as payments. There is a learning curve, and people are still discovering how Bitcoin can be a form of payment. Early adopters are testing the waters, and Bitcoin is far from being widely accepted and easily used.
- Bitcoins have disappeared. There needs to be a lot of protection in place on a website or your computer holding your digital Bitcoin wallet. A hack could wipe away Bitcoin, as we have seen in the news several times over the last couple of years. Unlike credit cards and bank accounts, recovery of Bitcoin is much more difficult and nearly impossible. If the exchange you are in gets hacked or your computer gets hacked, and someone moves money out of your Bitcoin wallet, you may never get your Bitcoin back. There is even the story of someone having Bitcoin from the early days stored on his hard drive, which he accidentally threw in the garbage. The Bitcoin from the hard drive tossed in the trash is now worth millions today but is lost in a landfill.
- It is unknown how governments will respond to Bitcoin and digital currencies in general. A government could technically ban Bitcoin as a form of payment and/or shutdown Bitcoin websites. There could always be a workaround to access the sites, but how will businesses respond to government regulations? If a Venezuela-type inflation period occurred, how will the people react to Bitcoin and government regulations? There are a lot of uncertainties and scenarios here.
Undoubtedly, Bitcoin is a high risk, high reward investment. However, as with all new eras and companies, there could be a tremendous upside.
Why Is Bitcoin an Attractive Investment?
- Bitcoin has come a long way over the years. Bitcoin was unknown by the mass public in 2010. Fast forward to today, and just about everyone has heard of Bitcoin. Several well-known companies are now accepting Bitcoin payments (the below list may surprise you). If security and popularity around Bitcoin wallets grow, more and more companies may be willing to take it:
- Virgin Galactic
- Norwegian Air
- BurgerKing (In Venezuela and Germany)
- KFC (test in Canada for a limited time for the “Bitcoin Bucket”)
- Miami Dolphins (when purchasing tickets for teams 50/50 raffle)
- Dallas Mavericks (Mark Cuban’s organization accepts Bitcoin for both game and merchandise sales through the team’s website)These companies were found at www.99bitcoins.com, www.buybitcoinworldwide.com, and www.wrcbtv.com.
- Bitcoin has grown into wallets that are much more easily accessible. When Bitcoin first launched, there was no Robinhood, Coinbase, Kraken, or Gemini exchange. You mined Bitcoin, and it went into a digital wallet. None of your friends had a Bitcoin wallet, and the concept of a Bitcoin wallet without an exchange still boggles my mind. Thankfully, things are much easier now for the general public. Few people still do not know where to begin with mining Bitcoin; however, it is relatively easy to purchase Bitcoin on Robinhood, Coinbase, or Kraken in the US. You can also use Coinbase to send and receive Bitcoin payments from other people and for goods and services.
There is still a tremendous area for improvement for point of sales goods and services in a physical brick and mortar store and even e-commerce. There are companies out there with credit cards tied to cryptocurrencies. Until banks or the more well-known credit card companies such as Visa, Mastercard, AMEX, or Discover begin taking Bitcoin payments, progress will remain slow. If Bitcoin becomes more widely accepted and banks and credit cards start accepting Bitcoin payments, this will undoubtedly be great news and drive Bitcoin’s price up.
- Thirdly, let’s look into some Technical Analysis of prices when it comes to stocks and cryptocurrencies. Technical Analysis is the study of price movements, the psychology behind past movements, and the prediction of future movements of a stock or cryptocurrency. Looking at the history of Bitcoin’s price action, we have some clearly defined tops (where buyers became exhausted) and bottoms (where buyers come in or sellers became exhausted).
Starting from the beginning, we see a gradual build-up in popularity (mostly due to its use on the dark web and funding sports betting/poker accounts) and then following more public awareness and the beginning of bigger, well-known companies adopting Bitcoin in 2017. The price eventually dramatically rose from sub $1K to $5K and eventually led to a parabolic run during the holidays of 2017 to $20K as FOMO (fear of missing out) kicked in.$20K was the top and where buyers became exhausted. As Bitcoin dropped, there were no buyers to support the number of sellers as people began taking profits from investing earlier. The price of Bitcoin snowballed downward as Bitcoin purchasers were now selling to break even or suffer a loss. This fall continued until Bitcoin found a temporary bottom (some people willing to support the price and buy back in or sellers becoming exhausted) as Bitcoin hovered around $6K from July of 2018 until November of 2018. Sellers eventually came out in force, driving it back down to $3K, where it found a new bottom for a while. Bitcoin rallied back to $12K in June 2019, followed by a drop to $7K, then the COVID-19 pandemic happened. Bitcoin initially dropped along with the mass sell-off in stocks and metals. It has since rebounded to the point where it is now, near the highs of June of 2019.That was a lot to take in, what’s next? Where do we stand now? Let’s look at the psychological side going forward. Most of the people who bought during the parabolic run likely exited during the mass sell-off in 2018. Those that kept their Bitcoin may have gotten out in the 2019 run-up. Some people accumulated Bitcoin when it was at $6K or on the drop to $3K, and in the volatile movement since. The question is, are they looking to get out now, or are they holding on for the ride? We may see a big rush of buyers once Bitcoin passes the highs of 2019 as people will be talking about Bitcoin rising to new heights. You’ll begin hearing Bitcoin more often in the news at this point, and FOMO could set in again.
- The FED stated in June of 2020 that they were looking to keep interest rates near 0% until at least 2022. These interest rates, along with the continuation of unemployment benefits and rounds of stimulus checks, means the FED is printing a lot of money! Depending on how the FED handles interest rates going forward, Bitcoin could potentially be a way to combat inflation.
- Unlike the USD, which the FED can print an unlimited amount of, Bitcoin is capped at 21,000,000 units (even less considering some Bitcoins are lost forever in tossed hard drives). There will never be more than 21,000,000 created. To date, there are around 18,500,000 Bitcoins in circulation. Over time, the amount of Bitcoin released daily declines due to “halving.” This decline means supply-wise and demand-wise, if there is more demand than supply, then, in theory, Bitcoin value should go up over time. Investopedia explains halving best:• Bitcoin was halved on May 11, 2020, at around 4 pm EST.
• A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half.
• This event also cuts Bitcoin’s inflation rate and the rate at which new Bitcoins enter circulation in half.
• Previous halvings have correlated with intense boom and bust cycles that have ended at higher prices than before the event.
- Bitcoin has the potential to be viewed as an alternative to hedging against inflation. While gold is currently the standard to hedge against inflation rates, Bitcoin is starting to be viewed as an alternative option. We just saw the publicly-traded company MicroStrategy Inc. (MTSR) buy 25,000 Bitcoins worth nearly $250 million as a hedge against inflation. If more companies begin buying Bitcoin as a means to hedge against inflation, Bitcoin could surge in value given its limited supply.
In a way, it makes sense. In a country such as Venezuela with hyperinflation, what good would gold do? Gold will hold its value as the currency’s value decreases, but it is unfeasible to exchange gold for goods as you can’t shave off grams or calculate ounces before that purchase. You would need to sell the gold for physical currency before purchasing goods or services. Bitcoin, on the other hand, is much easier to exchange, or has the potential to be. It can all be done from your phone, online, or potentially with credit cards one day. If hyperinflation were to occur, the theory with Bitcoin is that you would not have to worry about the value of your currency decreasing. It would be tied directly to the value of Bitcoin, which should remain the same or increase in value. If you were in Venezuela, would you rather own gold or Bitcoin? Again, the vendor at which you are buying the goods and services needs to accept Bitcoin for this to work.
- Lastly, at Midland, we saw a massive surge in interest in 2017 with people investing in Bitcoin and cryptocurrencies in their IRA accounts. After the bubble burst, Bitcoin and cryptocurrencies became nearly dead as an investment topic with clients from spring 2018 until early 2020. In the last couple of months, interest in cryptocurrencies and Bitcoin has been on the rise again. That investment interest has not reached the level of the run-up in 2018, but that could be because we have not reached the FOMO stage yet.
You can track the interest in Bitcoin via google searches yourself by using Google Trends. Again, FOMO has not kicked in yet, but if you check weekly, you may be able to see a gradual increase in people searching Bitcoin on Google.
Is Bitcoin Making A Comeback?
No one truly knows if Bitcoin is making a comeback. As with the tulip mania and penny stock pumps, you don’t have to be the first person to invest in something; you just don’t want to be one of the last.
Bitcoin may be the biggest Ponzi scheme the world has ever seen. It may be more heavily regulated by governments and disallowed. It could be worth one million dollars in ten to twenty years and the first worldwide currency. There is no way to be sure. No one knew when Steve Jobs was working at Apple that the company would grow into the most valuable company in the world, valued at nearly two trillion dollars. The growth of Apple evolved slowly over time, not overnight. Likewise, no one was able to predict Enron going bankrupt due to the uncovering of it being a massive accounting fraud years in the making.
Simply put, there is a huge risk/reward for investing in Bitcoin. Based on what you know right now, I’m going to conclude by asking you, is investing in Bitcoin worth it?
Bitcoin Investing Options:
If you think Bitcoin’s making a comeback, here are some ways you can get involved. As discussed above, Bitcoin can be very risky, especially if you own Bitcoin outright. Here are some ways you can invest in Bitcoin:
Bitcoin can be traded on the futures exchange with most futures companies. Futures trading is a contractual agreement between a buyer and seller on a specific price for a commodity such as Bitcoin at a specified future date. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. For this reason, futures trading, especially in IRAs, is often speculative, and the contract is sold before expiration. Still, futures trading can also be used for hedging against the market or industry. Most futures traders have no intention of taking delivery (personal ownership) of an underlying commodity and are simply in the market to take advantage of price swings. Trading Bitcoin via futures is more for short to medium-term investment horizons.
You can set up a cryptocurrency account with several exchanges. Some of the more popular exchanges to buy Bitcoin in the US are Robinhood, Coinbase, Kraken, and Gemini. The cryptocurrency exchanges will allow you to invest in many cryptocurrencies, not just Bitcoin. Here you can buy cryptocurrencies for the short or long term and sit on them for years.
There are very few Bitcoin stocks in existence. Some of these stocks are directly correlated to Bitcoin, others are involved with mining Bitcoin, and one looks to have a Bitcoin/cryptocurrency exchange. GBTC is a trust that trades nearly identical to Bitcoin, whereas stocks such as RIOT and MARA are more speculative penny stock investments. Other companies not directly involved in owning or mining Bitcoin include, OSTK (with their digital securities platform tZero and its cryptocurrency app) and companies such as AMD and NVDA that produce computer chips used to power Bitcoin mining. With any stock, you can buy for the short or long term and sit on them for years.
Private Placements or Hedge Funds
There are a few Bitcoin and cryptocurrency hedge funds in existence. Rather than worry about trading, you could have someone else do it for you and pool your money with other investors’. This type of investment is only available to accredited investors and is for mid to long-term investing as liquidation is not as easy. You cannot sell when you want, and you are restricted to pulling funds out during specific windows. Timing will vary by investment but is usually quarterly.
Be sure to consult with your financial advisors to determine if cryptocurrency is right for your investment portfolio.
Midland specializes in alternative assets such as real estate, LLCs, hedge funds, crowdfunding, private lending, and more. If you are interested in investing in Bitcoin with your retirement funds, please contact us at (239) 333-1032 or visit www.midlandtrust.com. We are here to help!
MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.