Bitcoin: digital currency

By now you’ve probably heard about this new currency called “bitcoin”.  At the end of last year, one bitcoin was valued at US $29,111.52 (all bitcoin prices provided by coindesk.com).  It more than doubled, peaking at an intra-day high of $61,556.59 in March of this year and at the time of writing is priced around the US $56,500 mark. Since its inception bitcoin has been exceedingly volatile, at times rapidly losing more than a third of its value, yet in spite of its volatility it is now taken seriously enough that the Chicago Board Options Exchange (CBOE) has started trading futures contracts for it – much like trading in the US$, Euro, Yen and other established currencies.

What is Bitcoin?
Quite simply, it is a relatively new phenomenon known as a digital currency (often referred to as a cryptocurrency) not controlled by any one government or bank or company.  In that respect, it is like the internet of currency.  There are no physical bitcoin notes; it is digital only.  You can use it to buy things.  More and more vendors are accepting it for payment, but it’s still new so options to use it are limited.

There is a sense in which bitcoin is like a digital version of gold.  It doesn’t pay interest or a dividend.  No one company, government or other organization controls its production.  There is a limited supply.  It is produced through ‘mining’, so effort is required to produce it.  Unlike gold, though, it can be easily divided into small fractions and sent anywhere electronically, so it has the potential to more easily facilitate transactions between buyers and sellers just like a regular currency.

Bitcoin is not the only cryptocurrency out there right now, but it is the first and the most well-known.  Estimates from Cambridge University studies point to 101 million unique crypto asset users and while bitcoin usage relative to other crypto currencies has declined from 98% in 2017, it is still very high with about 90% of crypto transactions being in bitcoin.

How are Bitcoins mined?
Bitcoin miners are rewarded with a bitcoin if they are the first to successfully solve a complex equation.  These are the same equations that provide a digital ledger (or blockchain) of who owns what bitcoin.  Anyone can become a miner; however, mining is done mostly by firms with specialized computer farms that have dedicated equipment.  That said, it’s still possible for you to get in on the action now.  It’s just not as cheap and easy as it once was.  In the early days, you could set up your home computer to mine bitcoin using a high-end graphics card.  Today, it’s still possible, but the increased complexity of the transactions almost certainly means that you need to buy specialized equipment.  If the price of bitcoin continues to rise, it may be worth it, but no one knows what the price of bitcoin will be a year from now so it’s also possible that your investment in equipment will come to nothing.

What is blockchain?
A historical public record of bitcoin transactions and mathematical calculations form a blockchain.  The specialized computers mentioned above perform complex mathematical problems that incorporate information from each transaction involving bitcoin.  Others verify the equations.  If solved and verified, the solved equation is then added to the blockchain.

It’s this combination of public record keeping and collective confirmations of transactions that remove the need for a single centralized entity to control the currency. 

Other cryptocurrencies use different, albeit similar, methodologies to ensure that the owner of a bitcoin can only spend it once.

What’s the big deal?
Make no mistake.  Cryptocurrencies are a big deal.  As mistrust in governments and large institutions grows, so does the interest in alternate currencies.  A currency which is not based on trust in a centralized organization has a certain appeal to many.  Further, cryptocurrencies also allow individuals in countries with controlled or manipulated currencies to bypass that currency and make international transactions easier.  On the negative side, this could be an open door for the darker elements of society such as money launderers.

Is bitcoin here to stay?
One bitcoin was worth US $15 in 2013.  At the beginning of 2017, it was valued at US $1,000 and at the time of writing it’s dancing around the US $56,500 mark.  With no dividend payments or interest and being in such an early stage of development, there is no way to properly value the currency.  Also, the lack of any interest payments or dividends makes the only reason to hold it a hope that the value continues to rise.  It feels like a bubble to me, but there are those who believe that this is only the beginning – that the price will continue to sky-rocket.  It’s anyone’s guess what the price of bitcoin will be a year from now.  Having said that, a burst bubble won’t necessarily eliminate bitcoin.  It may simply make it worth less. 

At the end of the day, I think it’s fair to say that cryptocurrencies are here to stay.  And currently bitcoin has the advantage of being the first and the most well-known, but that’s no guarantee of success either.  

It may take a little more time, but I believe that the time will come when you will have the option to pay for your groceries using cash, your credit card or some type of cryptocurrency wallet.  The future is near. 

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Arnold is now accepting a limited number of invitations to speak for the 2021/22 calendar years.  If you are interested in having him speak to your congregation or other group (when gatherings are allowed to resume) regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.