6
0
Whenever I first learned of Bitcoin, a cryptocurrency, I had no idea that the world was now embracing a digital asset that operated on a new-age technology called “the blockchain.” I first heard about Bitcoin in late 2017. I didn’t know what to think. It was the hot topic on every financial platform at the time because its price was soaring, almost reaching $20,000 per token at one point. I had so many questions. What is it? Can I trust it? Is it a scam? Should I buy it? Who even created it?!? (Spoiler alert… the last question is still unknown)
My Initial Curiosity of Bitcoin
I asked my fellow coworker about it, perhaps one of the most incredible mentors I have in the finance realm today. He told me, “I wouldn’t mess with that… It’s a volatile asset, and there is no way to value it.” So, based on that, I considered it a dangerous investment and shoved the thought of putting money into it out of my head. While revisiting those words from that conversation seven years ago, I can tell you that I believe he was (and still is) 100% correct.
But today, after plenty of research, I have formulated a different opinion about cryptocurrency. I believe that Bitcoin and Blockchain technology can substantially impact the world as we know it. Maybe it is a part of the future, like A.I., and is it worth exchanging fiat currency for?
I know what you are thinking…
Now Brandon… As a financial professional, there is no way…
Are you trying to convince me that I should buy Bitcoin!?
You’re a scammer!!!
*I promise I’m not trying to scam you (or convince you to buy)! I’m just here to educate, so hear me out!!*
But before we get into the nitty gritty, I am inclined to put this disclaimer a little sooner in this post because of the nature of what we’re talking about… 😁
DISCLAIMER: The below references an opinion and is for informational purposes only. It is not intended to be investment advice. Do your research; this content is designed to be used and must be used for informational purposes. It is essential to do your analysis before making any investment based on your own circumstances.
For the sake of an introduction to cryptocurrencies (and trying not to bore you to death), this post will be very surface-level. This post will address the following points:
- What is Bitcoin?
- Including It in a Diversified Portfolio
- Bitcoin ETF Approvals
- Its Commodity-like Behavior
Now, Let’s get into it!!
What is Bitcoin?
Bitcoin (BTC) is a cryptocurrency, a type of virtual currency designed to act as a form of payment outside the control of any one person, group, or entity. It was the first of its kind and was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto.
The mechanics of Bitcoin’s functionality are interesting!
The first part of the word cryptocurrency, “crypto-,” comes from cryptography. Cryptography hides or codes information so only the intended recipient can read it. This essential safety measure in cryptocurrency transactions ensures security because there are no intermediaries involved—only peer-to-peer transactions.
Bitcoin transactions are verified through cryptography and recorded in a public distributed ledger, called a blockchain, without central oversight. This removes the need for trusted third-party involvement (e.g., a central bank or Financial Institution) in financial transactions. Because there is no central oversight, this is called Decentralized Finance, or DeFi for short.
Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.
An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
–IBM
Decentralized finance (DeFi) is an emerging financial technology that challenges the current centralized banking system. DeFi attempts to eliminate the fees banks and other financial service companies charge while promoting peer-to-peer transactions.
–Investopedia
As you can see from the definition above, blockchain technology has many use cases (specific situations in which the technology could potentially be used) besides cryptocurrencies. Bitcoin was specifically designed and built to be a store of value and nothing more.
It’s important to note that Bitcoin’s history as a store of value has been turbulent. Over its relatively short lifespan, it has undergone several boom and bust cycles. Despite this, it has become the world’s most well-known and most prominent cryptocurrency!!
2. Including It in a Diversified Portfolio
The Wealth Impact Journal provides tools and knowledge for creating wealth. Readers who have been around since WIJ’s inception know that it is not wise to put all your eggs in one basket. Holding only one asset (e.g., Bitcoin) would not be smart! If it tanks at any point, you’ll be sad, and I’ll be sorry for you.
A well-diversified portfolio should consist of a diverse selection of stocks and real estate if you have the capital. I believe that cryptocurrency makes up about 5% of my net worth. I will reveal I do not own a whole coin at this time. And honestly, you won’t need to hold an entire coin, only a fraction, if it performs as expected over the long term.
Wealth is built through asset acquisition. High income and savings alone will not lead you to true wealth. Planting seeds today to enjoy its fruits in the future is the name of the game!
I also must add that Crypto is a volatile asset and is not for everyone. For example, I would not encourage an individual in retirement or close to it to purchase an asset of this nature. Crypto is an emerging technology that will require more time to stabilize (although it has stabilized relatively recently). Bitcoin may be a more suitable investment for a younger individual with time and capital to take an educated risk.
3. Bitcoin ETF Approvals
What is a Bitcoin ETF
In early 2024, the SEC (Security Exchange Commission) made a long-awaited decision to approve Bitcoin ETFs. An ETF, or Exchange Traded Fund, is a vehicle that allows investors to buy a basket of assets managed by someone else. This approval was a significant win for the crypto community because it allowed retail and institutional investors a more accessible way to purchase Bitcoin. A retail investor is a regular person like you and me versus a company or organization. On the other end, the Bitcoin ETF approvals also enhanced the legitimacy of cryptocurrencies and attracted institutional investors.
Market Legitimacy and Accessibility
The way that you would purchase Bitcoin before this would be through an exchange such as Coinbase or Kraken. Most people who interact with these exchanges do so by mobile applications, and it would be a hassle to set up yet another app and link an account to it, especially if it is something you may not fully trust or be familiar with. So, for many, it would have just been a plain hassle.
But now that Bitcoin has an ETF, it is much easier for anyone to invest in it. Investors can purchase different ETFs, such as Bitwise BITB and iShares IBIT, to gain exposure. These two have fees on the lower end of the spectrum (less than .5), but some are over 1%, which is pretty high. If you ever decide to purchase, assess the fees before purchasing!
Recent Approvals and Market Impact
The approval gave plenty of confidence in Bitcoin’s long-term prospects. The highest price of 1 BTC in June 2023 was ~$30,000. As of the date of this post, a coin hovers around $70,000. The price is partly due to the approval of the ETFs. The approvals have increased interest in Bitcoin, but when you hold a Bitcoin ETF, you only buy exposure to it—not the Bitcoin itself. The fund managers maintain the actual coins. This custody is good if you don’t care too much about holding it for transactional purposes.
The best way to ensure your ownership of a coin (if you plan to use it for transactional purposes) is to purchase and store it in a hot or cold wallet. The Crypto community often uses the term “Not your keys, not your Crypto,” meaning if you don’t have the keys to the wallet holding the Crypto, you don’t own it!
3. Bitcoin Behaving Like a Commodity
Last but not least, the most potent thing about Bitcoin is that there will only ever be 21 million coins in circulation! This scarcity is what makes Bitcoin a precious commodity. Satoshi Nakamoto, the anonymous creator of the Bitcoin blockchain, established this limit based on scarcity, a fundamental concept of economics.
Unlike traditional currencies, this scarcity ensures that no one can ever manipulate Bitcoin. Ehh hmm… (This absolutely refers to the country that rhymes with YOU ESSAY). When a currency can be printed at will by any country, it can cause massive inflation because the currency will be worth less the more there is of it in circulation! This finite amount gives Bitcoin the effect of “digital gold.” Check out my post on inflation to learn more about how this affects your pockets.
The screenshot above shows how much money the U.S. Central Bank (the Federal Reserve) has printed. As you can see, in 2020, we ran out of ink from the amount of money printed!!! They had helicopters showering money on corporate America and breadcrumb stimulus checks for the people!!! I digress… However, I want to stress that printing money such as this can lead to dangerously inflated price levels in an economy.
At the time of this post, miners had extracted 94% of all Bitcoin. The Blockchain Council assumes the final 6% will be mined by 2140. This slow release of new coins, combined with expected capital inflows through ETFs and adoption by more countries (such as El Salvador), bodes well for Bitcoin’s future.
Conclusion
I was skeptical when I first learned about Bitcoin in 2017, considering it volatile and untrustworthy. However, my perspective has shifted after extensive research and seeing its potential. Bitcoin, with its secure blockchain technology, offers a unique investment opportunity. It has shown promise as a hedge against inflation, behaves like a commodity due to its fixed supply, and has gained legitimacy through Bitcoin ETF approvals. While it’s not without risks, Bitcoin could be a valuable part of a diversified portfolio, especially for those willing to embrace emerging technologies. Remember, always do your research before investing.
