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All About Bitcoin

BY GUY FIORITA

Feb. 2018

Last December, “Select a Victim,” a 2013 painting by American artist Mark Flood, was sold to an anonymous Canadian buyer for 12.3 BTC ­— or bitcoin, which, at the time, was equivalent to $100,000. The sale marked the first art piece to be purchased with bitcoin in the U.S., and another step in the market’s acceptance of this cryptocurrency.

Bitcoin is a form of digital currency that is created and held electronically. Unlike dollars, bitcoin isn’t printed. Software developer Satoshi Nakamoto first proposed bitcoin one decade ago, in 2008. The idea was to produce a currency that would be free from any central authority and could be transferred instantly, with very low transaction fees.

All noble reasons, but the real popularity and reason behind the growth of cryptocurrencies like bitcoin is largely due to their anonymity. Users are able to send payments without revealing the identity of the sender or receiver. The only time your identity is known is when converting to a standard currency. In other words, if you want to exchange cryptocurrencies for dollars, you have to reveal who you are. 

Today there are a number of cryptocurrencies on the market, but bitcoin is king — and will likely become even more widely accepted. Detractors, however, point mainly to the currency’s volatility. And the truth is, its value has moved around a lot. In December 2011, the value of one bitcoin was just $2. Today it is more than $17,500, and continues to fluctuate. “There’s a joke about bitcoin that goes, ‘A boy asked his bitcoin-investing dad for one bitcoin for his birthday. The dad replied, ‘What? $15,554? Son, $14,354 is a lot of money! What do you need $16,782 for anyway?’  It’s amazing how much it jumps around,” says Aaron Kowal, managing director of Kowal Investment Group, LLC.

This volatility is the main reason why local investors recommend that their clients steer clear of bitcoin. “At present, we are not involved in bitcoin,” says Kowal. “Our broker dealer has deemed it and other cryptocurrencies to be too volatile, so we are not permitted to invest in them. Not that I would, anyways. They’re super volatile, and it’s incredibly hard to even know what goes into the creating and distributing of bitcoin. Our clients mainly want to know what bitcoin is because they hear it in the news so much, but it’s a tough concept for many to understand. It’s an incredibly volatile ‘investment,’ and if one decides to invest in it, they should be willing to accept a total loss.”

Although proponents hope that cryptocurrencies will eventually be used for the buying and selling of everyday things, Kowal is unsure of how they will evolve in the coming years. “As blockchain technology continues to grow, we may see more currencies or more trading done in dollars, using similar technology,” he explains. “I can’t predict how it will evolve in the next five to 10 years, but I do think that institutions will adopt some of this style of transaction, which is very good because of increased security and speed.”

Derek Felske of Annex Wealth Management says that, for now, bitcoin has not impacted his business, and he feels it is still too early to determine exactly what role it will play. He does say, however, that his clients should keep the following points in mind:

— Bitcoin is not a stable store of value. It’s too volatile to be accepted as a traditional currency.

— There is a risk that the platforms on which bitcoin trades — or the block chain itself — could be hacked, resulting in theft.

— Supply is said to be limited to 21 million bitcoin, but is that really true? Price has rallied on the belief that demand will surge and supply will be limited, but as institutions get involved, will that remain true?

— Bitcoin has no intrinsic value or fundamental valuation metrics.

— Bitcoin is unregulated. The platforms on which it and other cryptocurrencies trade are also unregulated — some of which have been hacked

— Bitcoin can be purchased on unregulated exchanges (e.g., coinbase) and could, in the U.S. Securities and Exchange Commission’s view, be subject to fraud.

— Bitcoin could be subject to a coordinated government clampdown at any time.

— Bitcoin provides limited social value, and the lack of surveillance undermines existing regulatory apparatus, leaving it open to suspicious account activity, movement of capital, money laundering, secret terrorist funding, etc.

This story ran in the Feb. 2018 issue of: