We are in the midst of a financial revolution, featuring technological disruptions from the likes of bitcoin. The digital currency is seven years old now and in this short time-frame, it has been scrutinized, discussed, promoted, banned, checked, raided, accepted, traded, and much more. Given its volatile price movement, should you consider adding bitcoins to your portfolio? Perhaps.
All investors have to consider risk; so where does bitcoin fall on the risk/reward scale? Barry Silbert, during a MarketWatch Investing Insights event in 2014 said, “It is pretty much the highest-risk, highest-return investment that you can possibly make.”
While most people are dissuaded from buying bitcoins - given the vigilant regulatory eye on digital currencies and the wild swings it displays – bitcoins has some virtues which may be appealing to some investors. There is a preset cap on the maximum number of bitcoins which can come into circulation, thus the scarcity factor attached to bitcoins adds value to it, much like gold.
Bitcoins can be easily bought or sold on an exchange; they can alternatively be used as a medium of payment. Since bitcoins are out of the normal financial and economic system, they provide a way out of any impending economic or banking crisis, which would affect the regular portfolio of an investor. In the US, the Internal Revenue Service (IRS) treats virtual currencies like bitcoins as property for tax purposes.
Some industry-wide steps are making things around bitcoins more structured. In May 2015, the New York Stock Exchange (NYSE) launched a bitcoin index, the NYXBT with the aim to provide bitcoins’ value a global benchmark. Then there is the Bitcoin Investment Trust which “enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins.” BIT’s shares are the first publicly quoted (OTCQX) securities “solely invested in and deriving value from the price of bitcoin.” This provides a chance to even institutions to take exposure to the virtual currency.
Additionally, bitcoins companies have also been attracting huge funding, a bit of the money is said to be kept aside under defense funds.
Final Word
There is no escaping the risks that an investor gets exposed to while investing in bitcoins. But dedicating a nominal amount from your portfolio may not be a bad idea, maybe 0.5% - 1% depending on your resources and enthusiasm. It particularly makes sense for a young investor who can not only set aside a small amount, but also digest the sharp swings in its price. If you do plan to give it a try, have a clear exit plan. Cash out a small amount on a decent profit and invest back when there is opportunity. It would add not just diversification, but a new dimension to your portfolio.
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This slideshow takes a look at Bitcoin and its short history, as well as a few other virtual currencies that have left their marks in the world. .
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Bitcoin was <a href='http://www.newyorker.com/magazine/2011/10/10/the-crypto- currency' target='_blank'>invented in 2008 by Satoshi Nakamoto</a>. It was released as open-source software in 2009. Nakamoto, who claimed to be a 36-year old Japanese man, said he created bitcoin in response to the financial crisis at the time. .
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Bitcoin is a virtual currency (technically a cryptocurrency), and there are 21 million bitcoins which can be mined. As of August 2015, about 14,500,000 bitcoins have been mined. .
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A cryptocurrency is <a href='http://www.coindesk.com/bitcoin-digital- currency-virtual-one/' target='_blank'>based on the principles of cryptography</a> - namely, based on a peer-to-peer network. Most currency in the world can be held digitally (like gift cards); currency that's virtual, like bitcoin, exist only on the internet. Some financial analysts consider bitcoin a commodity. .
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At first, a single bitcoin was worth less than a penny; as of August 2015, a single bitcoin is worth about 215 U.S. dollars. .
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He announced in April 2011 that he was moving on from bitcoin, leaving that life behind. A highly controversial 2014 Newsweek article claimed to have identified Nakamoto, but the bitcoin creator came out of hibernation to <a href='http://www.cnbc.com/2014/03/07/real-bitcoin-creator-i-am-not-dorian-nak…; target='_blank'>say that he was not the person identified</a> in the Newsweek article. Newsweek Magazine cover.
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The blockchain is the heart of bitcoin. It's a public ledger that records all bitcoin transactions, open to all users. And it's incredibly secure, making tampering very difficult. The blockchain has drawn the interest of many financial companies. Even <a href='http://www.bloomberg.com/news/articles/2015-07-23/nasdaq-expects-to- be-first-exchange-to-use-bitcoin-technology' target='_blank'>Nasdaq is planning to incorporate blockchain technology</a>. .
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Bitcoin has faced its share of controversies. Due to anonymity, people can use bitcoin to fund illicit activities (see: <a href='http://www.bloomberg.com/news/articles/2013-10-03/fbi-snags-silk-road-b…- own-methods' target='_blank'>Silk Road</a>). Another major dustup occured during the <a href='https://www.nasdaq.com/article/a-480-million-mystery-the-saga-of-mt-gox…; target='_blank'>$480 million collapse of Mt. Gox</a>. .
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However, bitcoin is becoming widely accepted, with retailers like Microsoft and Baidu accepting bitcoins. It is by far the most well-known digital currency, but not the only one. .
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It was launched in 1996, and was the <a href='http://www.wired.com/2009/06/e-gold/' target='_blank'>first digitial currency to get widepsread usage</a>. It let people open accounts based on the value of gold, but was ultimately shut down by the U.S. Federal government after its founder pleaded guilty to money laundering- related crimes, and running an unlicensed money transmitting service. .
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In 2007, <a href='http://www.bankingtech.com/196932/virtual-currency-ven-takes-on-bitcoin…; target='_blank'>Ven was launched</a>. It is now seen as an alternative to bitcoin, based on currencies, commodities, and carbon futures, making it an environmentally conscious currency. It is listed on the London FX trading venue LMAX Exchange. .
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This digital currency, along with DopeCoin hopes to make it <a href='http://smallbusiness.foxbusiness.com/technology-web/2014/03/20/dopecoin…- problems/' target='_blank'>easier for marijuana businesses to process money</a>. PotCoin focuses on the legalized marijuana industry. .
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As mentioned earlier, bitcoin's blockchain technology has drawn a lot of interest, even to the point where some are saying that the <a href='http://www.forbes.com/sites/gregoryferenstein/2015/07/29/former-obama- tech-advisor-explains-how-bitcoin-could-transform-government-in-5-quotes/' target='_blank'>blockchain is actually more important than bitcoin itself</a>. .
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Regulation of bitcoin, however, remains a contentious issue. Bitcoin adherents don't believe in regulation - after all, that was why bitcoin was made in the first place, they argue. But others see that bitcoin's growth and ultimate mainstream adoption requires some regulation. <a href='http://fortune.com/2015/04/23/theres-big-pressure-on-new-yorks-bitcoin-…; target='_blank'>New York was the first state to roll out a policy</a>, but more could be coming soon. .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Prableen Bajpai
Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.
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