Updated: May 14
If I had a dollar for every time I have been asked about Bitcoin recently, well, I could actually buy a Bitcoin! What was once a fringe item not long ago has burst into the headlines and taken on the feel of a gold rush. My fourteen year old son has tinkered with it for a while, but now the general population is beginning to ask if they should be involved. Given the extreme interest in Bitcoin and other crypto-currencies, I’d like to share my thoughts from the perspective of a financial advisor whose focus is predominately on achieving long term client goals and retirement planning issues.
So, what exactly is a Bitcoin? Bitcoin and other crypto-currencies use a technology called blockchain. It’s basically a mathematical record keeping system that connects buyer and seller using encryption keys. Unlike a US Dollar or other national currencies, there is no physical aspect to crypto-currencies, it’s all anonymously recorded on a permanent digital record. No government, bank or other central authority has control over the creation or regulation of the digital currencies. Many crypto-currency supporters believe that this technology will gain wide acceptance and eventually replace traditional currencies in commerce. There are in fact, hundreds of competing currencies vying for market share and acceptance. Ultimately, if crypto holders cannot easily exchange their blockchain currency for real goods and services, there will be little to no value in owning it.
I will be the first to admit, I do not have a crystal ball to tell me which, if any, crypto-currency reaches acceptance and begins to behave as a real currency. I do know that the volatility that is present in the marketplace will have to die down before it has a chance of becoming a contender. After all, would you want to spend a unit of crypto currency today that might buy twice as many goods tomorrow, or conversely, would you want to sell your goods for a currency that might be worth half as much in short order. The current behavior of the crypto markets makes me believe they are not yet ready for the big leagues. I am not saying it will never be, it simply has many hurdles to clear first. Once again, if a currency fails to gain acceptance what would make it retain any value? The fact that it is impossible to predict with reasonable certainty the development of the crypto marker, makes it, in my opinion imprudent to place any of your serious money into these holdings.
I personally believe that the proper way to look at wealth and wealth creation is not in terms of dollar bills, bitcoin, or ounces of gold, but rather the ability to produce goods and services that people need and desire. Currencies, real or digital are not the basis of wealth. They are simply the way society has ultimately decided to efficiently trade goods and services with one another. A dollar bill has no value if it is not accepted for trade and neither does a bitcoin. If we look at wealth this way, we don’t need to get drawn into the crypto craze. If you focus on owning the companies that profitably produce the items people want, I believe that you will be in good shape no matter how society agrees to facilitate the trade. It’s a basic concept; invest in companies that produce profit and income and use that additional income to acquire more companies that produce profit and income. If you do this, you don’t need to guess if or which digital currency will gain acceptance. You will ultimately be able to acquire the currency in use by providing the goods and services society desires.
When a client comes to see me, it is frequently dealing with their retirement assets and planning future income needs. Volatile gambles have no place in your portfolio you plan on using it to draw your retirement income. Nearing retirement, you have had 30 years or more to build your nest egg. If you lose it, you are not provided a 30 year do-over to make it up. At my firm, Fourth Avenue Financial, we use risk based models designed to keep you diversified and stick to an unemotional discipline. I believe this is the best way to manage wealth and increase your probability of achieving your retirement goals. The outcome of this current blockchain mania is still to be determined, but that should not divert your focus from the real drivers of wealth.