I Bought Some Bitcoin

I Bought Some Bitcoin

If I’m going to discuss this topic further I needed to experience the ride myself, so I put in $750. More on that later. My first article on Bitcoin received more feedback than just about anything I’ve ever written. There were some people just simply commenting, and many who had additional questions. This is a subject that has captured the attention of the investing world like very few have, so I figured it deserved a second round.

With the understanding that buying cryptocurrency is nothing like buying stocks or bonds, I wanted to experience this phenomenon first-hand, so I purchased $750 of Bitcoin through Coinbase. If it goes up, great. If I lose it all, so be it. I have no expectations.

Even this nominal amount was difficult for me because it’s so counter-intuitive to the way we approach prudent investing. The purpose of this little experiment is just to share with you my personal experience, and to further discuss Bitcoin as it relates to investing and asset-class diversification.

My first article was very general and not intended to be an exhaustive study of the subject, and I will not attempt that here either (If you need a basic primer on the subject please refer to my first article). I am nowhere close to an expert on cryptocurrency and could not possibly do justice to an in-depth review.

Furthermore, you cannot delve deep into a discussion about Bitcoin without first understanding the revolutionary technology that makes it possible. I’m talking about Blockchain. If you’re interested, just Google the term and pick from dozens of articles.

“Regardless of what happens to Bitcoin, or any other cryptocurrency, I believe Blockchain technology may truly change the world as we know it. But that’s a conversation for another day.”

 

My Bitcoin Experience (Skip if this doesn’t interest you)

This past weekend, starting Friday, I attempted to open an account with Coinbase – one of the most widely-used cryptocurrency exchanges. This proved to be easier said than done. The user interface is good, and easy to follow, but their servers were simply overloaded.

Each time I tried, I received an error message that the system was experiencing heavy traffic and could not process my request. This is indicative of the current chaos surrounding Bitcoin. We’re at fever pitch. There have been hundreds of thousands of new accounts opened in the last few weeks.

Finally, after several attempts, I was able to open an account and link my bank account with Coinbase. Now they needed to verify my identity. I uploaded my driver’s license and a picture of myself right from my phone (I found their mobile app easier to use). I received an error message again that their identity verification was down due to heavy volume.

During heavy volume, Coinbase has been known to suspend transactions, so you may not be able to sell exactly when you want to.

I was told I would receive an email when their system was working again. On Sunday afternoon, my identity was verified and I made my $750 purchase. Even that took several attempts because the price of Bitcoin was moving so fast (by significant amounts) that my order needed to be confirmed again before they would proceed. I’ve never had such difficulty buying anything! And it cost me $25 in commissions and fees (3.33%), so my $750 quickly became $725.

At this very moment, my account is up to $762.59. But I’ve been up and down ten times already. Of course, fast price movement is common in the stock market too, but stocks have nothing on Bitcoin price gyrations!

Bitcoin Question and Answer

In the last couple of weeks, as Bitcoin has dominated financial headlines, I’ve been asked my opinion on the subject many times. I’d like to pose a few of those questions and my responses below:

  • Does Bitcoin belong in a diversified investment portfolio?

We don’t believe so. We invest in legitimate asset classes that have a significant historical track record, from which we can reasonably develop a long-term expected return and standard deviation profile. Bitcoin is just so new – there are investment scholars still debating how to even define it. What we do know is this.

“Bitcoin is not a company, so discussing its market cap is really not relevant. It has no earnings, dividends, or cash flow. It does not produce anything.”

 

We avoid highly speculative ventures which, at this point, is how we would classify Bitcoin. Buying Bitcoin, or any other cryptocurrency, is not investing; it’s speculating. That being said, there is absolutely nothing wrong with putting some money into it. I get it. It’s exciting, and if you only put in what you can truly afford to lose, then just have fun on the ride! Just be prepared, potentially, for volatility like you’ve never seen.

In the last few years, Bitcoin has lost 85% or more of its value on three separate occasions. Putting “play” money in it is one thing, but when you’re playing for keeps – stay away. Make no mistake, you could lose it all.

On the flip side, there are those that got in early and made a killing. And it could very well continue to climb higher and higher. It’s anyone’s guess at this point.

As of December 10, the first Bitcoin futures began trading on the CBOE exchange. So far, this has served to dampen its volatility. In the long-run this could be a very positive development as it attempts to mature into a mainstream “currency.”

One thing worth noting is that there are literally hundreds of cryptocurrencies. Most of these will not survive. As this space matures, one of these will emerge as the clear dominate player. Right now, it appears to be Bitcoin, but when the government decides to regulate this market they can pick winners and losers. That’s a risk for Bitcoin.

  • Is Bitcoin a currency?

In the traditional sense, it is not a currency. It is a peer-to-peer, decentralized, digital payment network. To qualify as a legitimate currency Bitcoin would have to satisfy two of the basic functions of money: a stable store of value and a widely adopted standard of exchange. Bitcoin cannot fulfill either.

For example, if I have $20 in my pocket, I’m confident that I can use those dollars in the next hour to purchase $20 worth of groceries at the store. I cannot say the same for Bitcoin. It is anything but stable. I would not be able to use the Bitcoin at my neighborhood grocery store either.

As it stands now, it simply does not meet the requirements of a currency. Now, that could all change in the near future. The world is evolving fast, and it’s taking our monetary system with it!

  • Is Bitcoin in a bubble?

As I said in my previous article, I have no idea if Bitcoin is in a bubble or not. The problem with bubbles, is that they are only certain in hindsight. We also have no way to appropriately analyze or price it at this point.

I would have no problem classifying this as an “investor mania,” however. When you overhear people in line at Starbucks, or posting to neighborhood message boards asking, “How can I buy Bitcoin?” – you may want to tread lightly.

Conclusion

I want to make a clear distinction between my cautious approach to buying Bitcoin and my thoughts on the revolutionary Blockchain technology, and cryptocurrency in general. I think the cryptocurrency market is here to stay, in one form or another. And as I said before, I think Blockchain technology is an incredible development that could forever change the way we transact and do business.

I can believe all of this and still not want to jump head first into buying a ton of Bitcoin. I love Amazon as a company, but I’m not going to buy it at 1,000 times earnings. Bitcoin’s price is currently around $16,500 and it’s gained over 1,600% this year alone, and no one can explain why. There is no way to value it.

Just proceed with caution.

Mike Minter

Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).

 
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