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The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Columbine Wealth Planning, LLC (referred to as "CWP") disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement and suitability for a particular purpose. CWP does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice,  as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall CWP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if CWP or a CWP authorized representative has been advised of the possibility of such damages. In no event shall Columbine Wealth Planning, LLC have any liability to you for damages, losses and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

  • Jeff

Bitcoin: Manias, Panics, and...Utility?

Updated: Dec 12, 2017

I have no idea to whom the following quote should be attributed to, and it's quite possible that it was made up on the spot by a mentor of mine:

"Nothing makes a man or woman more prone to poor decision making than watching their neighbor grow rich." ~Unattributed

While I am far from an academic, my informal study of the human condition finds this to be a very true statement.


Back when I worked as a salesman for the Sector SPDR ETFs, I would occasionally get to speak at a seminar for the clients of other financial advisors. I was brought in as an "out of town expert" to discuss the art and science of investing (and pay for dinner and drinks). I always liked to open with that quote as the main reason that individual investors needed a plan before they started investing their hard earned money so they didn't make stupid mistakes.


Given the rise of Bitcoin and other cyrptocurrency assets over the last few months, I've been thinking a lot about that quote and I think I need to get a few thoughts out on virtual paper.


A Quick Primer


Before we go too far, I'd like to remind everyone that none of this should be constituted as advice or a recommendation to purchase or sell Bitcoin or any other cryptocurrency. I'm so adamant about this, I'm putting my disclaimer right here in my piece as well as at the end.


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.


Based on the questions I get about Bitcoin, my read on the temperature of the average investor is that they know it's value is up a lot this year -- perhaps they even know it's up over 1,000% this year and know what the current value is in US dollars -- but they have no idea how it works or what it's used for.


Doing the math on a 1,000% gain is pretty simple. I invest $1,000 at the beginning of the year, the investment increases by 1,000% in one year, and now I have $11,000. That was easy! If I invest $100,000 -- then I'm rich!


So that's generally how I get approached with the discussion on Bitcoin:


"Have you seen what Bitcoin is at now? Remember when we talked about it at <enter any date> and it was only <enter any value>? We should have done something then. How do I invest in it?"


Rinse and repeat. Watching your neighbor grow rich is difficult, whether real or metaphorical.


What Does Bitcoin Do?



Great question! The simple answer is that it's a digital currency that is decentralized -- meaning there is no single repository, bank, government, or administrator that supports it. It doesn't have a physical appearance, despite all of the pictures you see of it, and cannot be stored in a bank account.



Here's a good piece from the New York Times giving you some detail on how it works and is used.


Bitcoin can be transacted out to eight decimal places, so .00000001 is an actual amount you could use to buy something, as long as the person selling it to you takes Bitcoin payments. That eight decimal thingy is called a "Satoshi", named for the mysterious creator of Bitcoin, Satoshi Nakamoto. Just like the US Dollar and the various smaller denominations available for use (think quarters, dimes, nickels, and pennies), Bitcoin can also be dissected to smaller pieces.


Transactions are verified by a network of computers and programmers called the Blockchain, which is the technology backbone that supports cryptocurrencies and what generally gets the hearts and minds of business folks and government leaders behind it's future. Blockchain technology can be used to digitally store and protect almost any type of data.


In fact, the idea that cryptographic keys and shared ledgers can incentivize users to secure and formalize digital relationships has imaginations running wild. Everyone from governments to IT firms to banks is seeking to build this transaction layer. ~Coindesk

Unfortunately, however, transacting in Bitcoin has proven tedious (estimates of only 3 to 7 transactions can be processed per second worldwide) and the view of it becoming a true digital currency has faded recently. Most Bitcoin enthusiasts have migrated to calling it "digital gold". It is seen as an asset that can potentially store value free from currency manipulation of governments and central banks...someday.


What Other Cryptocurrencies Exist?


Bitcoin isn't the only cryptocurrency out there right now. There are many and it's hard to keep up with all of the "projects" that are coming online.


Ethereum, Litecoin, Filecoin, and Ripple are few other names you should know.


Josh Brown at The Reformed Broker put together a masterful piece that everyone interested in cryptocurrencies should read over and over again until you have it down cold.


Likewise, Patrick O'Shaugnessy has done remarkable work putting together his Podcast series called Hashpower. This is a must listen for anyone that wants a solid working knowledge of the movement, the different types of cryptocurrencies, and some of the experts behind it.


Coindesk has become the powerbroker for news on everything crypto and has been referred to as the Wall Street Journal for digital assets and blockchain technology.


If you want to purchase any of these digital assets, you'll need to use a digital wallet like Coinbase. There are more Coinbase accounts open worldwide now than active brokerage accounts at Charles Schwab!


OK, Jeff, this is Madness!


I agree! I've followed Bitcoin from a distance as a dutiful member of Wall Street for over five years, but still have the working knowledge on cryptocurrencies equivalent to a first grader.


It all sounds like a science fiction movie, and the more you learn, the more it looks like fantasyland. But so did the US dollar and the idea of "paper money" when it was invented.


I'm not sure where the utility of these different cryptocurrencies goes from here, but I believe the technology is here to stay and will shape a lot of what happens in the world of finance in the coming years. Many things should have crippled and destroyed Bitcoin -- the Mt. Gox scandal, the Silk Road scandal -- but it's still going strong.


There are so many things that haven't been solved and questions that haven't been answered. At it's very core, if Bitcoin is going to a be a "stable storage of value", then it simply cannot have the type of fluctuations we've seen this year and in the past. What is going to create that stability? Do you really want to put your money into Bitcoin for safety and have it drop 90% next week? Me neither.


Ben Carlson at A Wealth of Common Sense does a great job summarizing these questions that need to be addressed here.


The most important thing for me, as both a financial advisor, investor, and curious human being is to continue to learn and not let this wagon leave me behind. That doesn't constitute investment advice, but what I would qualify as simply "good human advice".


Additional Reading


How Does Bitcoin Mining Work? - Coindesk


Who is Satoshi Nakamoto? - Coindesk


How to Buy Bitcoin - Josh Brown, The Reformed Broker courtesy of CNBC


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.