Ask the CFP

“There are no secrets that time does not reveal.”

Jean Racine (1639 - 1699), French Dramatist and Playwright.

Question: My adult children keep talking about bitcoin. Am I missing out on something?  

Answer: The answer is “it depends.” This summer I’ve had the privilege of spending a great deal of quality time with two of our grandchildren who are thirteen and fifteen years old. FOMO (fear of missing out), YOLO (you only live once), and my favorite - JOMO (joy of missing out) - are expressions we’ve used more than once this summer. FOMO is a powerful force and it’s difficult to ignore an asset like bitcoin that grabs headlines whenever mentioned by Tesla CEO Elon Musk and or Warren Buffett. When this topic comes up in discussions, the first thing we focus on is risk appetite.

Bitcoin is the most popular digital currency. They operate without central authority, banks, and aren’t backed by governments. In 2008, an anonymous programmer with the pseudonym Satoshi Nakamoto outlined the technology and code necessary for cryptocurrency in a whitepaper describing the process of “mining.” Mining creates a new supply of bitcoins with computers using algorithms to solve a series of calculations. Only 21 million bitcoins can be mined; as the supply grows, it becomes more difficult and time consuming to accomplish.

The volatility, in both directions, causes Bitcoin to gain attention. For instance, last spring, Bitcoin fell nearly 14% in one hour in response to rumors that U.S. authorities were planning to crack down on money laundering involving cryptocurrencies. Just a few days earlier, Coinbase went public causing Bitcoin and other cryptocurrencies to rise. Tweets from Tesla CEO Elon Musk also contribute to cryptocurrency volatility. In February, Musk vowed to accept Bitcoin as payment for Tesla vehicles, pushing the price up; then in May, reversed his stance causing Bitcoin to plummet. This caused the Securities and Exchange Commission (SEC) to issue a statement on May 11 cautioning investors to “focus on the level of risk they are taking on” and whether they’re comfortable with that risk. 

It’s easy to say how $100,000 invested in Bitcoin five years ago would be worth over $14 million today, but past results are not predictive of future performance. The extreme volatility of cryptocurrency is unlikely to match most investors risk appetite.

The risks are real: 

1. Bitcoin is impractical as a means of exchange from a resources standpoint. Bitcoin can only be mined using high-powered computer systems. According to the Bitcoin Electricity Consumption Index, the process requires so much computing power that crypto mining consumes roughly 0.60% of the world’s electricity; that’s more than used by the entire nation of Argentina. As the price of crypto rises, it’s more profitable for speculators to install these computers for mining operations, putting extreme strain on electricity consumption, much of which depends on a coal-based electricity supply, thereby, generating significant CO2 emissions.

2. Without controls, governments are unlikely to allow bitcoin to blossom. Cryptocurrency’s endgame is to replace sovereign currencies. If allowed to flourish, it could impact the ability of central banks and governments to set monetary policy and impose taxes on earnings and wealth. South Korea introduced legislation to regulate crypto to avoid money laundering and other criminal activities. China just introduced its own digital currency, and the U.S. could do the same with a digital Fed dollar. 

3. Because there’s no central authority overseeing cryptocurrency, there’s no help available if private digital keys are forgotten or if theft occurs. 

4. As with gold, there can be a “negative carry” associated with Bitcoin. This means that there’s no interest earned on these assets and there may even be cost associated with holding the asset. 

5. During the bear market of February and March 2020, cryptocurrency did not provide downside protection when equity markets fell. There was a rebound and run-up, yet it’s not a given that Bitcoin can or will always act as a hedge to equity markets.

On the plus side, Bitcoin did bring us blockchain technology that creates digital ledgers. These ledgers are shared via private or public networks and keep track of transactions approved by participants. The blocks of information are chained to previous transactions, hence the name blockchain which provides efficient ways to handle sensitive information. Blockchain technology is used by financial firms and also in the health-care sector. Whether cryptocurrency and Bitcoin are appropriate for an individual is a very personal decision. Behavior and risk appetite are so important when investing. Weighing the pros and cons of FOMO or JOMO is a good place to begin. Stay focused and plan accordingly.

The opinions expressed are those of the writer as of July 18, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Past performance does not guarantee future results. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.