Will Bitcoin bite the dust?

 As the Bitcoin craze has grown into a frenzy, I’ve shied away from writing about it. That’s primarily because I struggle to make sense of it. I’d like to think that’s because it doesn’t make sense. However, a lot of smart people believe in it, and it’s made a lot of people rich over the last year (at the time I’m writing this, it’s up nearly 1,000% this year). 

Despite its growth, Bitcoin still has many doubters. Jamie Dimon, JP Morgan’s star CEO, recently called Bitcoin a “fraud.” I wouldn’t use that word. I believe in the idea of electronic currencies and think the concept is here to stay. But the rapidly rising price of Bitcoin is based on a pretty weak foundation. 

A big problem with Bitcoin is how complex it is. It’s relatively easy to wrap your head around a stock. If a business grows, the stock tends to grow. But with bitcoin, it’s not that easy. How do you determine the proper value of a Bitcoin? It doesn’t produce any income, and it holds little inherent value. It’s a lot like gold in that way. However, unlike gold, which has been traded for centuries, Bitcoin has no historical precedent to study. For those reasons, anyone who thinks they know the proper value of a Bitcoin is too confident to be trusted. 

In addition, many of the most difficult issues around Bitcoin are highly technical. I’m not sure you can understand all the risks without being a high-level computer programmer. There are issues with the amount of energy Bitcoin transactions take; there are issues with the sheer computing power needed, and there are issues with the risk of hackers. I’d like to go into more detail, but you wouldn’t understand (and neither do I). 

Another worry I have is that a newer, better electronic currency could come out tomorrow and make Bitcoin obsolete. The most vital aspect of Bitcoin isn’t Bitcoin itself, it’s the infrastructure of Bitcoin, which is called Blockchain. There’s not much to stop another electronic currency from using Blockchain in an even better way. In that way, Bitcoin could become a modern version of MySpace. 

Another risk for Bitcoin is government regulation. Because of the confidential nature of Bitcoin, it has been a haven for crime and money laundering. The first time a major terrorist attack is funded through Bitcoin, you could see a government crackdown. Bitcoin also weakens the control governments have over currencies. Perhaps that’s a good thing, but policymakers aren’t usually eager to give up control. The Nobel Prize winning economist Joseph Stiglitz recently said Bitcoin should be “outlawed.” Those words should send a chill up the spine of Bitcoin investors. 

There has never been anything quite like Bitcoin. Clearly, I wish I would have invested all my client’s money into it years ago. That regret has kept me up at night. But Bitcoin is not an investment, it’s speculation. If you’ve been fortunate enough to ride the rising Bitcoin tide, this might be a good time to get out of the water. 

Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at brad@blackburnfinancial.net