I am sure by now you have heard of it – Bitcoin – but what is it actually, and how does it affect me?
First, to understand what Bitcoin is, you need to think about what it means to make a transaction in everyday life. When you make transactions, records of those transactions are kept in the form of a ledger; money coming in and money going out. Third-party private companies usually maintain the ledgers. The cash you use to make transactions is protected and backed by the government with numerous security features to prevent duplication and fraud. What this process does not allow, is for you to make digital transactions and not be dependent on a third-party to help facilitate, verify, and protect you.
This is where Bitcoin comes in.
Bitcoin is a type of digital currency (cryptocurrency) that is independent of any government or authority and was developed to decentralize the ledger system. Bitcoin and its ledger are instead maintained by a public ecosystem known as the blockchain. When you make a transaction with Bitcoin, that record is kept and verified across a network of public computers that all run Bitcoin’s code to store the transaction. If the systems do not agree, the transaction is void. This system has been shown to prevent fraudulent transactions, store monetary value, and eliminate the possibility of duplicating digital currency.
While digital currency was created to conduct transactions and store value, it has been predominately purchased as a speculative investment. The reason – there is not much you can do with it right now. You can transfer coins to other individuals in the form of payment, but you cannot walk into the grocery store and pay with Bitcoin.
So what’s all the Bitcoin buzz about?
Most people are buying Bitcoin in an attempt to participate in its recent price appreciation. As a result of its speculative nature, the cryptocurrency has seen two 70%+ selloffs in just the last five years. Both of which were preceded by a similar market sentiment or euphoria we are experiencing now. While we do not know what the future holds for Bitcoin, there is an old adage that says, “history does not repeat itself, but it certainly rhymes.” Investors should proceed with caution.
As Bitcoin increases in popularity, its success will ultimately depend on its acceptance from private companies, literally, and governments’ allowance across the world. After all, what good is money (currency) if you cannot purchase anything with it? While the concept has proven valid from an execution standpoint, Bitcoin’s place in time as being accepted worldwide as an official currency is still to come. Only time will tell.
To learn about the conversations we’re having with our clients when it comes to cryptocurrency, please contact Mat Britt, CMT, Director of Client Analytics, at mathew.britt@kaydanwealth.com.
Disclosures: Past performance does not indicate future results. The information contained in this article does not purport to be a complete description of the subject nor does it guarantee that the material is accurate or complete. Any information in this article is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should consult your financial advisor before making any investment decisions.
