Cryptocurrency, and Bitcoin, in particular, have been a hot topic of conversation in the world of finance. Since we get a lot of questions on the topic, we thought we should address them in this week’s podcast.
It’s important to understand what a cryptocurrency is – and is not – before you consider buying one. As this handout from Vanguard explains, a cryptocurrency is a digital means to facilitate peer-to-peer transactions. They are based on blockchain technology, which is a complex, multi-computer network.
Are cryptocurrencies truly a currency?
Not really, or at least not yet. A currency is usually thought of as a universally accepted medium of exchange, with a reasonably stable price. Cryptocurrencies are not universally accepted at this point. Their price volatility means it is difficult to predict from one day to the next what you would be able to buy with one. Currencies are usually tied to the authority of a central government. The US dollar is backed by “the full faith and credit of the US government,” but cryptocurrencies, at this point, are not backed by any authority.
Are cryptocurrencies an investment?
Despite Bitcoin’s astounding rise in price over the last few years, it is difficult to call them an investment. To be considered an investment, we would seek some underlying value that should provide an expected return.
For example, a stock is based on a company’s expected earnings. The value of the stock fluctuates based on the risks to those expectations. A cryptocurrency has no inherent value on which to base growth expectations. They may go up, but at this point, they are not an investment, but speculation.
We don’t recommend speculating unless you are doing it for fun and with no expectation of reward.
The financial advisors at Shotwell Rutter Baer work with many clients to maximize their investments and benefit plans.
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